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I. General Principles
A. Definition and Concept of TaxationAs 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 way ofapportioning the costs of government among those who in some measures are privileged toenjoy its benefits and must bear its burdens.
As a power, taxation refers to the inherent power of the state to demand enforcedcontributions for public purpose or purposes.
Taxation is a symbiotic relationship, whereby in exchange for the protection that thecitizens get from the government, taxes are paid.1
B.Nature of Taxation1. It is an inherent attribute of sovereignty
2. It is legislative in character
C. Characteristics of Taxation1. 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 constitutionalconferment. Constitutional provisions do not give rise to the power to tax but merelyimpose limitations on what would otherwise be an invincible power. No attribute ofsovereignty is more pervading, and at no point does the power of government affect moreconstantly 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 objectof taxation, such power being exclusively vested in the legislature, except where theConstitution provides otherwise.3
The Congress may by law authorize the President to fix within specified limits, andsubject to such limitations and restrictions as it may impose, tariff rates, import and exportquotas, tonnage and wharfage dues, and other duties or imposts within the framework of thenational development program of the Government.
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 theCongress may provide, consistent with the basic policy of local autonomy. Such taxes, fees,and charges shall accrue exclusively to the local governments.4
1Commissioner of Internal Revenue vs. Allegre, Inc., et al., L-28896, Feb. 17, 19882Churchill and Tait v. Concepcion, 34 Phil 9693 Art. VI, Sec, 28 (2); Art. X, Sec. 5; Art. VI, Sec. 28. par. 2.4 Art. X, Sec. 5
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3. It is subject to Constitutional and inherent limitations; hence, it is not an absolutepower that can be exercised by the legislature anyway it pleases.
D. Power of Taxation Compared With Other Powers1. Police Power2. Power of Eminent Domain
Taxation Police Power Eminent DomainPurpose
Raising revenue Promote public welfarethru regulations
Taking of property forpublic use
Amount of exaction
No limit Limited to the cost ofregulations, issuance ofthe license or surveillance
No exaction,compensation paid by thegovernment
Benefits received
No special or direct benefitsreceived but the enjoyment of theprivileges of living in an organizedsociety
No direct benefits but ahealthy economic standardof society or damnumabsque injuriais attained
Direct benefit results inthe form of justcompensation
Non-impairment of contracts
The impairment rule subsist Contracts may beimpaired
Contracts may beimpaired
Transfer of property rights
Taxes paid become part of publicfunds
No transfer but onlyrestraint on the exercise ofproperty right exists
Property is taken by thegovt upon payment ofjust compensation
Scope
Affects all persons, property andexcise
Affects all persons,property, privileges, andeven rights
Affects only the particularproperty comprehended
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Basis
Public necessity Public necessity and theright of the state and thepublic to self-protection
and self-preservation
Public necessity, privateproperty is taken forpublic use
Authority which exercises the power
Only by the government orits political subdivisions
Only by the government orits political subdivisions
May be granted to publicservice, companies, or publicutilities
E. Purpose of Taxation1. Revenue-raising
To provide funds or property with which the State promotes the general welfare andprotection of its citizens.
2.Non-revenue/special or regulatory
Promotion of General Welfare Taxation may be used as an implement of police power inorder to promote the general welfare of the people.5
Regulation As in the case of taxes levied on excises and privileges likethose imposed in tobacco or alcoholic products oramusement places like night clubs, cabarets, cockpits, etc.6
Reduction of Social Inequality This is made possible through the progressive system oftaxation 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, forinstance, the purpose is to grant incentives or exemptionsin order to encourage investments and thereby promote
5 see Lutz vs. Araneta, 98 Phil 148 and Osmea vs. Orbos, G.R. No. 99886, Mar. 31, 19936 In the case ofCaltex 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 countrys economic growth.
e. Protectionism In some important sectors of the economy, as in the caseof foreign importations, taxes sometimes provide
protection to local industries like protective tariffs andcustoms
F. Principles of Sound Tax System1. Fiscal Adequacy
The sources of tax revenue should coincide with, and approximate the needs ofgovernment expenditure. Neither an excess nor a deficiency of revenue vis--vis the needs ofgovernment would be in keeping with the principle.
2. Administrative FeasibilityTax laws should be capable of convenient, just and effective administration
3. Theoretical JusticeThe 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 Taxation1. Lifeblood Theory
Taxes are the lifeblood of the government, being such, their prompt and certainavailability is an imperious need.8 Without taxes, the government would be paralyzed for lackof motive power to activate and operate it.
2. Necessity TheoryTaxes 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, ithas the right to compel all citizens and properties within its limits to contribute. 9
7 ability-to-pay principle8Collector of Internal Revenue vs. Goodrich International Rubber Co., Sept. 6, 19659 In 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
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3. Benefits-Protection Theory10The 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 andprotection which the government affords the taxpayer and his property.
4. Jurisdiction over subject and objectsRules:
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.
d) If a law is passed by Congress, it must always see to it that the object or subject oftaxation is within the territorial jurisdiction of the taxing authority.
H. Doctrines in Taxation
1. Prospectivity of tax lawsGeneral Rule Exception
Taxes must only be imposed prospectively. The language of the statute clearly demandsor express that it shall have a retroactiveeffect.
2. ImprescriptibilityGeneral Rule Exception
Taxes are imprescriptible. When provided otherwise by the tax lawitself.11
government is supposed to provide (Phil. Guaranty Co., Inc. vs Commissioner of Internal Revenue, 13 SCRA
775)10 Symbiotic Relationship11 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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3. Double taxation
a. Strict senseReferred 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
b. Broad senseReferred 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 taxationUnlike 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 theconstitutional precepts of equal protection and uniformity in taxation.12
12 The argument against double taxation may not be invoked where one tax is imposed by the State and
the other is imposed by the city, it being widely recognized that there is nothing inherently obnoxious in
the requirement that license fees or taxes be exacted with respect 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)
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d. Modes of eliminating double taxationTwo (2) methods of relief:13
Exemption method The income or capital which is taxable at the state of source orsitus is exempted at the state of residence, although in someinstances it may be taken into account in determining the rateof tax applicable to the taxpayers remaining income or capital
Credit method Although the income or capital which is taxed in the state ofsource is still taxable in the state of residence, the tax paid inthe former is credited against the tax levied in the latter. Thebasic difference between the two methods is that in theexemption method, the focus is on the income or capital,whereas the credit method focuses upon the tax.
13 A 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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4. Escape from taxation
a. Shifting of tax burden141) Ways of shifting the tax burden
a. Forward shifting When the burden of the tax is transferred from a factor ofproduction through the factors of distribution until it finallysettles on the ultimate purchaser or consumer.15
b. Backward shifting When the burden of the tax is transferred from the consumeror purchaser through the factors of distribution to the factorsof production.16
c. Onward shifting When the tax is shifted two or more times either forward orbackward.17
2) Taxes that can be shifted
Only indirect taxes may be shifted;18 direct taxes19 cannot be shifted.
14 The 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 tax15 Example:
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 consumer16 Example:
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 producer17 Example:
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.18 e.g. VAT19 e.g. Income tax
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3) Meaning of impact and incidence of taxation
Impact of taxation Incidence of taxation
The point on which a tax is originallyimposed. In so far as the law is concerned,the taxpayer is the person who must pay thetax to the government. He is also termed asthe statutory taxpayer-the one on whom thetax is formally assessed. He is the subject ofthe tax.
The point on which the tax burden finallyrests or settle down. It takes place whenshifting has been effected from the statutorytaxpayer to another.
b. Tax avoidance20
The exploitation of the taxpayer of legally permissible alternative tax rates ormethods 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 thepayment of tax.
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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5. Exemption from taxation
a. Meaning of exemption from taxation
It is the grant of immunity to particular persons or corporations or to persons orcorporations of a particular class from a tax which persons and corporations generally withinthe same state or taxing district are obliged to pay. It is an immunity or privilege; it isfreedom from a financial charge or burden to which others are subjected.22
b. Nature of tax exemption
1) It is a mere personal privilege of the grantee.
2) It is generally revocable by the government unless the exemption is founded on acontract which is contract which is protected from impairment.
3) It implies a waiver on the part of the government of its right to collect what
otherwise would be due to it, and so is prejudicial thereto.
4) It is not necessarily discriminatory so long as the exemption has a reasonablefoundation or rational basis.
5) It is not transferable except if the law expressly provides so.
c. Kinds of tax exemption
1) Express23
When certain persons, property or transactions are, by express provision, exempted
from all certain taxes, either entirely or in part.
2) Implied24
When a tax is levied on certain classes of persons, properties, or transactions withoutmentioning the other classes.25
22 Exemption is allowed only if there is a clear provision therefor.
It is not necessarily discriminatory as long as there is a reasonable foundation or rational basis.
Exemptions are not presumed, but when public property is involved, exemption is the rule and taxation
is the exemption.23or affirmative exemption24 or exemption by omission
No tax exemption by implication
It must be expressed in clear and unmistakable language25Every tax statute makes exemptions because of omissions.
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3) Contractual
Agreed to by the taxing authority in contracts lawfully entered into by them underenabling laws.
d. Rationale/grounds for exemption
Rationale for granting tax exemptions Grounds for granting tax exemptions
Its avowed purpose is some public benefit orinterests which the lawmaking body considerssufficient to offset the monetary loss entailed inthe grant of the exemption.The theory behind the grant of tax exemptionsis that such act will benefit the body of the
people. It is not based on the idea of lesseningthe burden of the individual owners ofproperty.
1) May be based on contract.26
2) May be based on some ground ofpublic policy.27
3) May be based on grounds of
reciprocity or to lessen the rigors ofinternational double or multipletaxation.28
e. Revocation of tax exemptionIt 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, theexemption 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.28 Equity 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 thetaxpayer are not creditors and debtors oreach other. Obligations in the nature ofdebts are due to the government in itscorporate capacity, while taxes are due to thegovernment in its sovereign capacity.31
Where both the claims of the government
and the taxpayer against each other havealready become due and demandable as wellas fully liquated.32
7. Compromise
A contract whereby the parties, by reciprocal concessions, avoid litigation or put anend to one already commenced.33
8. Tax amnesty
a. Definition
A general pardon or intentional overlooking by the State of its authority to imposepenalties on persons otherwise guilty of evasion or violation of a revenue to collect whatotherwise would be due it and, in this sense, prejudicial thereto.34
30 Requisites 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, and3. 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 62232 see Domingo vs. Garlitos, supra33 Art. 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.34 Tax amnesty, like tax exemption, is never favored nor presumed in law and if granted by statute must
be construed strictly against the taxpayer, who must show compliance with the law.
The government is not estoppedfrom questioning the tax liability even if amnesty tax payments were
already received
Erroneous application and enforcement of the law by public officers do not block subsequent correct
application of the statute. The government is never estoppedby mistakes or errors by its agents.
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b. Distinguished from tax exemption
Tax amnesty Tax exemption
Partakes of an absolute forgiveness or waiver
by the Government of its right to collectwhat otherwise would be due it and, in thissense, prejudicial thereto, particularly to taxevaders who wish to relent and are willing toreform are given a chance to do so andtherefore become a part of the society with aclean slate.
The grant of immunity to particular persons
or corporations of a particular class from atax of which persons and corporationsgenerally within the same state or taxingdistrict are obliged to pay.
Immunity from all criminal, civil andadministrative liabilities arising from non-payment of taxes
Immunity from civil liability only
Applies only to past tax periods, henceretroactive application
Prospective application
There is revenue loss since there was actuallytaxes due but collection was waived by thegovernment.
None, because there was no actual taxes dueas the person or transaction is protected bytax exemption.
Never favored nor presumed in law, and is granted by statute. The terms of the amnesty orexemption must be strictly construed against the taxpayer and liberally in favor of thegovernment.
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9. Construction and Interpretation of:
a. Tax laws
General Rule Exception
Tax laws are liberally interpreted in favor ofthe taxpayer and strictly against thegovernment.
Liberal interpretation does not apply to taxexemptions which should be construed instrictissimi jurisagainst the taxpayer.35
b. Tax exemption and exclusion
General Rule Exceptions
In the construction of tax statutes,exemptions are not favored and areconstrued strictissimi juris against thetaxpayer.36 The fundamental theory is that alltaxable property should bear its share in thecost and expense of the government.
Taxation is the rule and exemption. He whoclaims exemption must be able to justify hisclaim or right thereto by a grant express interms too plain to be mistaken and toocategorical to be misinterpreted. If not
expressly mentioned in the law, it must be atleast within its purview by clear legislativeintent.
1. The law itself expressly provides for aliberal construction thereof.
2. In cases of exemptions granted toreligious, charitable and educationalinstitutions or to the government or itsagencies or to public property because thegeneral rule is that they are exempted fromtax.
35 Reason: Lifeblood doctrine36 Strict interpretation does not apply to the government and its agencies
Petitioner cannot invoke the rule ofstrictissimi 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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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 fortheir violation.
The purpose of tax laws in imposing penalties for delinquencies is to compel thetimely 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 thelegislative intent. But a tax law should not be given retroactive application when it would beharsh and oppressive.
I. Scope and Limitation of Taxation
1. Inherent Limitations
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
37 Sec. 24638 Test in determining Public Purposes in tax:
a. Duty Test whether 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.
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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 ofgovernment.
2) Exceptions
a) Delegation to local governments40
The power of local government units to impose taxes and fees is always subject tothe limitations which the Congress may provide, the former having no inherent power totax.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 valid delegationbut pursuant to direct authority conferred by Section 5,42 Article X of the1987 Constitution,subject to guidelines and limitations which Congress may provide which must be consistentwith the basic policy of local autonomy.43
b) Delegation to the President44
The power granted to Congress under this constitutional provision to authorize thePresident to fix within specified limits and subject to such limitations and restrictions as itmay impose, tariff rates and other duties and imposts include tariffs rates even for revenuepurposes 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
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.39 taxation as an implement of police power40 Art. 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
with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local
governments.43MCIAA v. Marcos, 261 SCRA 66744 Art.VI, Sec. 28(2)45Garcia vs. Executive Secretary, et. al., G.R. No. 101273, July 3, 199246 Example: assessment and collection
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c. Territorial
1) Situs of Taxation47
a) MeaningLiterallymeans the place of taxation.
The place or the authority that has the right to impose and collect taxes.48 It ispremised upon the symbiotic relation between the taxpayer and the State.
b) Situs of Income Tax
1) From sources within thePhilippines
2) From sources without thePhilippines
Determined by the nationality, residence of the taxpayer and source of income.49
3) Income partly within and partlywithout the Philippines
Allocated or apportioned to sources within or without the Philippines.50
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 taxesc) 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.48Commissioner vs. Marubeni, G.R. No. 137377, Dec.18, 200149 Sec. 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
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c) Situs of Property Taxes
(1) Taxes on Real Property
The place where the property is located. The applicable concept is lex situsor 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 anotherjurisdiction.52
The place where the owner is located. Theapplicable concept is mobilia sequunturpersonam.53
d) Situs of Excise Tax
(1) Estate Tax(2) Donors Tax
Determined by the nationality and residence of the taxpayer and the place where theproperty is located.
(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.51 We can only impose property tax on the properties of a person whose residence is in the Philippines.52 51 Am Jur. 46753 movables follow the owner or domicile of the owner
Exceptions:
1. When the property has acquired a business situs in another jurisdiction;
2. When an express provision of the statute provide for another rule.
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e) Situs of Business Tax
The place where the act or business is performed or occupation is engaged in.54
(1) Sale of Real Property
The place or location of the real property.55
(2) Sale of Personal Property
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
54 where the transaction is performed because it is that place that gives protection
The power to levy an excise upon the performance of an act or the engaging in an occupation does not
depend upon the domicile of the person subject to the exercise, nor upon the physical location of the
property or in connection with the act or occupation taxed, but depends upon the place on which the act
is performed or occupation engaged in.
Thus, the gauge of taxability does not depend on the location of the office, but attaches upon the place
where the respective transaction is perfected and consummated (Hopewell vs. Com. of Customs)55 So, if the property sold is situated within the Phils., the income derived from such sale is considered as
income within.56 Comity is the respect accorded to other sovereign nations.57 The 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 states
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f. Exemption of Government Entities, Agencies, andInstrumentalities
i. Agencies performing governmental functions - tax exempt58
ii. Agencies performing proprietary functions - subject to tax.
2. Constitutional Limitations
a. Provisions Directly Affecting Taxation
1) Prohibition against imprisonment for non-payment of polltax
No person shall be imprisoned for debt or non-payment of poll tax.59
2) Uniformity and equality of taxation
The rule of taxation shall be uniform and equitable. The Congress shall evolve aprogressive system of taxation.60
58 The 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
59 Sec. 20, Art. III
The only penalty for delinquency in payment is the payment of surcharge in the form of interest at the
rate of 24% per annum which shall be added to the unpaid amount from due date until it is paid. (Sec.
161, LGC)
The prohibition is against imprisonment for non-payment of poll tax. Thus, a person is subject to
imprisonment for violation of the community tax law other than for non-payment of the tax and for non-
payment of other taxes as prescribed by law.
The non-imprisonment rule applies to non-payment of poll tax which is punishable only by a surcharge,
but not to other violations like falsification of community tax certificate or non-payment of other taxes.60 Sec. 28(1), Art. VI
Uniformity (equality or equal protection of the laws) means all taxable articles or kinds or property of
the same class shall be taxed at the same rate. A tax is uniform when the same force and effect in every
place where the subject of it is found.
Equitable means fair, just, reasonable and proportionate to ones ability to pay.
Progressive system of Taxation places stress on direct rather than indirect taxes, or on the taxpayers
ability to pay
Inequality which results in singling out one particular class for taxation or exemption infringes no
constitutional limitation. (see Commissioner vs. Lingayen Gulf Electric, 164 SCRA 27)
The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly
attainable.
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3) Grant by Congress of authority to the President to imposetariff rates
The Congress may, by law, authorize the President to fix tariff rates, import andexport quotas, tonnage and wharfage dues, and other duties or imposts within the
framework of the national development program of the government.
61
4) Prohibition against taxation of religious, charitable entities,and educational entities
Subject to the conditions prescribed by law, all grants, endowments, donations orcontributions used actually, directly and exclusively for educational purposes shall be exemptfrom tax.62
5) Prohibition against taxation of non-stock, non-profitinstitutions
All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from taxes andduties.63
6) Majority vote of Congress for grant of tax exemption
No law granting any tax exemption shall be passed without the concurrence of amajority of all the members of the Congress.64
61 Art. 28 (2), Art. VI62 Sec. 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-profit63 Sec. 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%)64 Sec. 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.
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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 aspecial fund and paid out for such purpose only. If the purpose for which a special fund wascreated has been fulfilled or abandoned the balance, if any, shall be transferred to the general
funds of the government.
65
8) Presidents veto power on appropriation, revenue, tariffbills
The President shall have the power to veto any particular item or items in anAppropriation, Revenue or Tariff bill but the veto shall not affect the item or items to whichhe 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 jurisdictionover cases enumerated in Sec. 567 hereof.
65 Sec. 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)66 Sec. 27(2), Art. VI67 The 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 perpetua or 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)
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10) Grant of power to the local government units to create itsown sources of revenue
Each local government unit has the power to create its own revenue and to levytaxes, fees and charges subject to such guidelines and limitations as the Congress may
provide.
68
11) Flexible tariff clause
This clause provides the authority given to the President to adjust tariff rates underSection 40169 of 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 andexclusively used for religious, charitable or educational purposes shall be exempt from
taxation.71
68 Sec 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.
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)
69 In the interest of national economy, general welfare and/or national security, the President upon therecommendation 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)71 Sec. 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)
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13) No appropriation or use of public money for religiouspurposes
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 otherreligious teacher or dignitary as such except when such priest, preacher, minister or dignitaryis assigned to the armed forces or to any penal institution, or government orphanage orleprosarium.72
b. Provisions Indirectly Affecting Taxation
1) Due processNo person shall be deprived of life, liberty or property without due process of law73
x x x.
2) Equal protectionxxx nor shall any person be denied the equal protection of the laws.74
3) Religious freedomNo 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
72 Sec. 29(2), Art. VI
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.73 Sec. 1, Art. III74 Ibid.75 Sec. 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)76 Sec. 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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J. Stages of Taxation
1. Levy
Determination of the persons, property or excises to be taxed, the sum or sums to be
raised, the due date thereof and the time and manner of levying and collecting taxes.
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 remediesas may be legally available.
4. Refund
The recovery of any tax alleged to have been erroneously or illegally assessed orcollected, or of any penalty claimed to have been collected without authority, or of any sumalleged to have been excessively, or in any manner wrongfully collected.
K. Definition, Nature, and Characteristics of Taxes
Definition Taxes are the enforced proportional contributions from
persons and property levied by the law-making body of theState by virtue of its sovereignty for the support ofgovernment and for public needs.
Nature They are not arbitrary exactions but contributions levied byauthority of law, and by some rule of proportion which isintended to ensure uniformity of contribution and a justapportionment 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
77 This includes payment by the taxpayer and is referred to as tax administration78 The power to tax is a legislative power which under the Constitution only Congress can exercise through
the enactment of laws. Accordingly, the obligation to pay taxes is a statutory liability.79 A tax is not a voluntary payment or donation. It is not dependent on the will or contractual assent,
express or implied, of the person taxed. Taxes are not contracts but positive acts of the government.
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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 thepersons or property.84
L. Requisites of a valid tax
1) It should be for a public purpose2) The rule of taxation should be uniform3) 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 clause5) 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 ofseveral kinds of merchandise with the corresponding duties to be paid for the same.
b. Duties payable on goods imported or exported.86
c. The system or principle of imposing duties on the importation/exportation ofgoods.
80 Tax is a pecuniary burden an exaction to be discharged alone in the form of money which must be in
legal tender, unless qualified by law, such as R.A. 304 which allows backpay certificates as payment of
taxes.81It is ordinarily based on the taxpayers ability to pay.82 A tax may also be imposed on acts, transactions, rights or privileges.83 Taxation involves, and a tax constitutes, a burden to provide income for public purposes.84 The persons, property or service to be taxed must be subject to the jurisdiction of the taxing state.85 Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. But
their collection should not be tainted with arbitrariness86 P.D. No. 230
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2. Toll
Sum of money for the use of something, generally applied to the consideration whichis 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 constructionor maintenance of the public improvementused
Imposed only by the government Imposed by the government or privateindividuals or entities
3. License fee
A charge imposed under the police power for the purposes of regulation.87
Tax License/Permit Fee
Enforced contribution assessed by sovereignauthority to defray public expenses
Legal compensation or reward of an officerfor specific purposes
For revenue purposes For regulation purposes
87 Three 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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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 peculiarlybenefited 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 personassessed, i.e. his liability is limited only to theland involved
Based on necessity as well as on benefitsreceived
Based wholly on benefits
General application89 Exceptional both as time and place
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.89 seeApostolic Prefect vs Treas. Of Baguio, 71 Phil 547
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5. Debt
Debt is based upon juridical tie, created by law, contracts, delicts or quasi-delictsbetween 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 orcompensation
May be subject to set-off or compensation
Imprisonment is a sanction for non-paymentof tax except poll tax
No imprisonment for non-payment of debt
Governed by special prescriptive periodsprovided for in the Tax Code
Governed by the ordinary periods ofprescriptions
Does not draw interest except only when
delinquent
Draws interest when so stipulated, or in case
of default
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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 amountimposed on persons residingwithin a specified territory,whether citizens or not,without regard to theirproperty or the occupationor business in which theymay be engaged.90
Tax imposed on property,real or personal, inproportion to its value or inaccordance with some otherreasonable method ofapportionment.
A charge imposed upon theperformance of an act, theenjoyment of privilege, orthe engaging in anoccupation.
2. As to burden or incidence
Direct Indirect
Demanded from the person who alsoshoulders the burden of the tax. It is a taxwhich the taxpayer is directly or primarilyliable and which he or she cannot shift toanother.
Demanded from a person in the expectationand intention that he or she shall indemnifyhimself or herself at the expense of another,falling finally upon the ultimate purchaser orconsumer. A tax which the taxpayer can shiftto another.
3. As to tax rates
Specific Ad valorem Mixed
The computation of the taxor the rates of the tax isalready provided for by law.
Tax upon the value of thearticle or thing subject totaxation; the intervention ofanother party is needed forthe computation of the tax.
Tax rates are partlyprogressive and partlyregressive.
90 i.e. community tax.
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4. As to purposes
General or fiscal Special, regulatory, or sumptuary
Imposed for the purpose of raising publicfunds for the service of the government.
Imposed primarily for the regulation ofuseful or non-useful occupation orenterprises and secondarily only for thepurpose of raising public funds.
5. As to scope or authority to imposeNationalinternal revenue taxes Localreal property tax, municipal tax
Imposed by the National Government. Imposed by the municipal corporations orlocal government units.
6. As to graduation
Progressive Regressive Proportionate
Rate or amount of taxincreases as the amount ofthe income or earning to betaxed increases.
Tax rate decreases as theamount of income to betaxed increases.
Tax based on a fixedpercentage of the amount ofthe property receipts orother basis to be taxed.91
91 Example: real estate tax.
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2. Features of the Philippine Income Tax Law
Direct tax Progressive Comprehensive Semi-schedular orsemi-global taxsystem94
One assessed uponthe property, person,business income, etc.of those who paythem.
The tax ratesincrease as the taxbase increases. Incertain cases,however, final taxesare imposed onpassive income.95
The PhilippineIncome tax lawadopted the so-calledcomprehensive taxsitus comprehensive inthe sense that itpractically applies allpossible rules of taxsitus.
3. Criteria in Imposing Philippine Income Tax
Citizenship Principle Residence Principle Source Principle
A citizen of the Philippines issubject to Philippine incometax
(a) on his worldwide income,if he resides in the
Philippines, or
(b) only on his income fromsources within thePhilippines, if he qualifies asnonresident citizen.
A resident alien is liable topay income tax on hisincome from sources withinthe Philippines but exemptfrom tax on his income fromsources outside the
Philippines.
An alien is subject toPhilippine income taxbecause he derives incomefrom sources within thePhilippines. Thus, anonresident alien is liable to
pay Philippine income tax onhis income from sourceswithin the Philippines96despite the fact that he hasnot set foot in thePhilippines.
94 supra95 The individual income tax system, in the main, is progressive in nature96 such as dividend, interest, rent, or royalty
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4. Types of Philippine Income Tax
Presumptive Income Tax Composite Tax Unitary Income Tax
A scale of income taxes is
imposed in relation to agroup of persons actualexpenditure and thepresumed income.
A tax consisting of a series
of separate quasi-personaltaxes, assessed on theparticular source of incomewith a superimposedpersonal tax on the incomeas a whole.
Incomes are arranged
according to source. Theseparate items are addedtogether and the rate appliedto the resulting total income.
5. Taxable Period
Calendar Period Fiscal Period Short Period
A period of twelve (12)months commencing fromJanuary 1 and endingDecember 31.
An accounting period of 12months ending on the lastday of any month other thanDecember.97
A period of less than twelve(12) months.
97 ex. Feb. 1 to Jan. 31
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6. Kinds of Taxpayers
a. Individual Taxpayers
1) Citizens
a) Resident citizens98
Citizens of the Philippines who are residing therein.
b) Non-resident citizens99
1. A citizen of the Philippines who establishes to the satisfaction of theCommissioner 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 whoseemployment thereat requires him to be physically present abroad most of the time during thetaxable year.
4. A citizen who has been previously considered as non-resident citizen and whoarrives in the Phils. at any time during the taxable year to reside permanently in thecountry.100
5. A citizen who shall have stayed outside the Phils. for 183 days or more by the end
of the year.101
98 Taxable for income derived from all sources based on taxable (i.e., net) income99 Taxable for income derived within the Philippines based on taxable (i.e., net) income100 He 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.101 Sec. 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]
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2) Aliens102
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
102 What 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
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 180days or less during the calendar year, he shall be deemed a non-resident alien not doing business in the
Philippines, 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)103 Sec. 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.105 Sec. 22 (G), id.106 Sec. 25 [A], NIRC
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(2) Not engaged in trade or business
An alien who stays in the Philippines for 180 days or less.107
(3) Special Class of Individual Employees
a) Minimum wage earner
A worker in the private sector paid the statutory minimum wage, or to an employeein the public sector with compensation income of not more than the statutory minimumwage 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 thepayment 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) ResidentEngaged in trade or business112 within the Phils.
107 Sec. 25 [B], id.
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.108 Sec. 22 (HH), id. as amended by R.A. 9504109 They 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. 110 The 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)111 liable 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 Corporation BOAC case 149 SCRA 395)
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(2) Non-resident
Not engaged in trade or business within the Phils.
c. Partnerships113
Partnership is a contract whereby two or more persons bind themselves to contributemoney, property, or industry to a common fund with the intention of dividing the profitsamong themselves.114
d. General Professional Partnerships
Formed by persons for the role purpose of exercising their common profession, nopart 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 obligationsleft behind by the decedent upon his death.116
An arrangement created by will or co-agreement under which title to property ispassed to another for conservation orinvestment with the income therefrom andultimately the corpus117 to be distributed inaccordance with the directions of the creatoras expressed in the governing instrument.118
113 An 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 areconsidered as dividends.114 Partnerships, 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]115 Sec. 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.117 principal118 Two (2) Kinds of Trust :
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f. Co-ownerships119
It is created whenever the ownership of an undivided thing or right belongs todifferent persons.
7. Income Taxation
a. Definition
A tax on all yearly profits arising from property, profession, trade or business, or atax 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.
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 corpus of
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 fromsources within and without the Philippines.
2. A non-resident citizen is taxable only on income derived from sources within thePhilippines.
3. An individual citizen of the Philippines, who is working and deriving income fromabroad as an overseas contract worker, is taxable only on income derived from sourceswithin the Philippines. Provided, that a seaman who is a citizen of the Philippines and whoreceives compensation for services rendered abroad as a member of the complement of avessel engaged exclusively in international trade shall be treated as an overseas contractworker.
4. An alien individual, whether or not a resident of the Philippines, is taxable only onincome derived from sources within the Philippines.
5. A domestic corporation is taxable on all income derived from sources within andwithout the Philippines.
6. A foreign corporation, whether engaged or not in trade or business in thePhilippines, 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, whetheras payment for services, interest or profit from investment. It covers gain derived fromcapital, from labor, or from both combined, including gain from sale or conversion of capitalassets.121
b. Nature
All wealth which flows to the taxpayer other than a mere return of capital.
It is an amount of money coming to a person/corporation within a specified time,whether as payment for services, interest or profit from investment. Unless otherwise
specified, it means cash or its equivalent. Income can also be thought of as a flow of thefruits of one's labor.122
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.122Conwi v. Court of Tax Appeals
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Income includes earnings, lawfully or unlawfully acquired, without consensualrecognition, express or implied, of an obligation to repay and without restriction as theirdisposition.
c. When income is taxable
1) Existence of income
There must be gaina value received in the form of cash or its equivalent as a resultof rendition of service or earnings in excess of capital invested.123
2) Realization of income
a) Tests of Realization
Unless income is deemed realized, then there is no taxable income.
Revenue is generally recognized when both conditions are met:
a. The earning process is complete or virtually complete; and
b. An exchange has taken place.124
b) Actual vis--vis Constructive receipt
Actual receipt Constructive receipt
Income may be actual receipt or physicalreceipt.
When money consideration or its equivalentis placed at the control of the person who
rendered the service without restrictionby the payor.125
123 A mere expectation of profits is not an income
A transaction whereby nothing of exchangeable value comes to or is received by the taxpayer does not
give rise to or create taxable income.
Items or amounts received which do not add to the taxpayers net worth or redound to his benefits
such as amounts merely deposited or entrusted to him are not considered as gains (CIR vs. Tours
Specialist, 183 SCRA 402).
Gain need not be necessarily in cash. It may be in form of payment, reduction or cancellation of Ts
indebtedness, or gain from exchange of property.124Manila Mandarin Hotels, Inc. v. CIR 125 Sec. 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 partnership
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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 expensedependent on inflow or outflow of cash.126
Gains and profits are included in grossincome when earned whether received ornot, and expenses are allowed as deductions
when incurred, although not yet paid. It isthe right to receive and not the actual receiptthat determines the inclusion of the amountin gross income
b) Installment payment vis--vis Deferredpayment vis-visPercentage completion127
Installment payment Deferred payment Percentage completion
Appropriate whencollections extend overrelatively long periods oftime and there is a strongpossibility that full collectionwill not be made.
Initial payments exceed 25%of the gross selling price andsuch transaction shall betreated as cash sale whichmakes the entire selling pricetaxable in the month of sale.
Persons whose gross incomeis derived from long-termcontracts shall report suchincome upon the basis ofpercentage of completion.
126 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 expense127 in long term contracts
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d. Tests in determining whether income is earned for taxpurposes
1) Realization test
No taxable income until there is a separation from capital of something ofexchangeable value, thereby supplying the realization or transmutation which would result inthe 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 allegedgain 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 ofthat 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 revenuelaws is the taxation of income to those who earn or otherwise create the right to receive itand enjoy the benefit of it when paid.
3) Economic benefit test, Doctrine of proprietaryinterest
Income realized is taxable only to the extent that the taxpayer is economicallybenefited.
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 somethingwhich is of exchangeable value129 thereby supplying the realization or transmutation whichwould result in the receipt of income. Thus, income is not taxable unless separated orsevered 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 notdemand that the amount of income or liability be known absolutely, only that a taxpayer hasat 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
128 There must be separation from capital of something of exchangeable value (e.g., sale of asset)129Eisner vs. Macomer, 252 US 189
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unchangeable; the test is satisfied where a computation may be unknown, but is not as muchas 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,131 including the following items:
1. Gross income derived from the conduct of trade or business or the exercise of aprofession.
2. Rents
3. Interests
4. Prizes and winnings
5. Compensation for services in whatever form paid, including, but not limitedto fees, salaries, wages, commissions, and similar items
6. Annuities
7. Royalties
8. Dividends
9. Gains derived from dealings in property
10. Pensions11. Partner's distributive share from the net income of the general professional
partnership.132
130CIR vs. Isabela Cultural Corp., G.R. No. 172231, February 12, 2007131 As 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.132 The 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.
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b. Concept of income from whatever source derived
Implies the inclusion of all income under the law, irrespective of the voluntary orinvoluntary 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 theincome.134
c. Gross Income vis--vis Net Income vis--vis TaxableIncome
Gross Income Net Income or Taxable IncomeAs to deductions