Taxation 1 - San Beda Law

7/31/2019 Taxation 1 - San Beda Law

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San Beda College of Law1

MEMORYAIDIN TAXATION LAW

IKETAXATION LAW

I. GENERAL PRINCIPLES

POWER OF TAXATIONTAXATION power by which thesovereign through its law-making bodyraises revenue to defray the necessaryexpenses of government from amongthose who in some measure are privilegedto enjoy its benefits and must bear itsburdens.

Two Fold Nature of the Power of

Taxation1. It is an inherent attribute of sovereignty2. It is legislative in character

Extent of Taxing PowerSubject to constitutional and inherent

restrictions, the power of taxation isregarded as comprehensive, unlimited,plenary and supreme.

SCOPEOF LEGISLATIVE TAXING POWER1. Amount or rate of tax2. Apportionment of the tax

3. Kind of tax4. Method of collection

5. Purpose/s of its levy, provided it isfor public purpose

6. Subject to be taxed, provided it iswithin its jurisdiction

7. Situs of taxation

TAXES enforced proportionalcontributions from the persons andproperty levied by the law-making bodyof the State by virtue of its sovereignty insupport of government and for publicneeds.

CHARACTERISTICSOF TAXES1. forced charge;2. pecuniary burden payable in money;3. levied by the legislature;4. assessed with some reasonable rule

of apportionment; (see theoreticaljustice)

5. imposed by the State within itsjurisdiction;

6. levied for a public purpose.

REQUISITESOF A VALID TAX1. should be for a public purpose2. the rule of taxation shall be uniform3. that either the person or property

taxed be within the jurisdiction ofthe taxing authority

4. that the assessment and collection ofcertain kinds of taxes guaranteesagainst injustice to individuals,especially by way of notice andopportunity for hearing be provided

5. the tax must not impinge on the

inherent and Constitutionallimitations on the power of taxation

THEORIESAND BASESOF TAXATION1. Lifeblood Theory

Taxes are what we pay for civilizedsociety. Without taxes, the governmentwould be paralyzed for lack of the motivepower to activate and operate it. Hence,despite the natural reluctance tosurrender part of one's hard-earnedincome to the taxing authorities, everyperson who is able to must contribute his

share in the running of the government.(CIR v. Algue, Inc.)

2. Necessity TheoryThe power to tax is an attribute of

sovereignty emanating from necessity. Itis a necessary burden to preserve theState's sovereignty and a means to givethe citizenry an army to resist anaggression, a navy to defend its shoresfrom invasion, a corps of civil servants toserve, public improvements designed forthe enjoyment of the citizenry and those

which come within the State's territory,and facilities and protection which agovernment is supposed to provide. (Phil.Guaranty Co., Inc. v. CIR)

3. Benefits-Protection / ReciprocityTheoryTaxation is described as a symbiotic

relationship whereby in exchange of thebenefits and protection that the citizensget from the Government, taxes are paid.(CIR v. Algue, Inc.)

TAXATION LAW COMMITTEECHAIRPERSON: Charmaine Torres ASST. CHAIRPERSON: Rhohail Castro EDP : Rachelle Saya SUBJECT HEADS: Jemina

Sy, Casiano Ilagan, Jr., Ryan Co, Edwin Torres :MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera,JhundeeGuillermo


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Note: While taxes are intended forgeneral benefits, special benefits totaxpayers are not required. TheGovernment renders no special or

commensurate benefit to any particularperson or property.

ISTHE POWERTO TAXTHE POWERTO DESTROY?

1. Power to tax is the power todestroy (Marshall Dictum) refersto the unlimitedness and the degreeor vigor with which the taxing powermay be employed to raise revenue.

- the financial needs of the State mayoutrun any human calculation, so thepower to meet those needs by taxationmust not be limited even though taxes

become burdensome or confiscatory.

2. Power to tax is not the power todestroy while the Supreme Court sits(Holmes Dictum) the power to taxknows no limit except those expresslystated in the Constitution.

Marshall and Holmes Dictum ReconciledAlthough the power to tax is almost

unlimited, it must not be exercised in anarbitrary manner. If the abuse is sogreat so as to destroy the natural andfundamental rights of people, it is theduty of the judiciary to hold such an actunconstitutional.

PURPOSESAND OBJECTIVESOF TAXATION1. Revenue basically, the purpose of

taxation is to provide funds orproperty with which the Statepromotes the general welfare andprotection of its citizens.

2. Non-Revenue (Key: PR2EP)

a. Promotion of general welfare

b. Regulationc. Reduction of social inequality

d. Encourage economic growth

e. Protectionism

POWEROF JUDICIAL REVIEWIN TAXATIONAs long as the legislature, in imposing

a tax, does not violate applicableconstitutional limitations or restrictions,it is not within the province of the courtsto inquire into the wisdom or policy ofthe exaction, the motives behind it, the

amount to be raised or the persons,property or other privileges to be taxed.

The courts power in taxation islimited only to the application and

interpretation of the law.

Note: The principle of judicial non-interference extends to theadministrative realm.

ASPECTSOF TAXATION1. Levy or imposition of the tax (tax

legislation)2. Enforcement or tax administration

(tax administration)

BASIC PRINCIPLESOFA SOUND TAX SYSTEM (KEY:

FAT)1. Fiscal Adequacy sufficiency to

meet government expenditures andother public needs.

2. Administrative Feasibility/Convenience capability of beingeffectively enforced.

3. Theoretical Justice based on thetaxpayers ability to pay; must beprogressive. (Ability to Pay Theory)

TAXATIONPOLICE

POWER

EMINENT

DOMAIN1. PurposeTo raiserevenue

To promotepublicpurposethroughregulations

To facilitatethe Statesneed ofproperty forpublic use

2. Amount of ExactionNo limit Limited to the

cost ofregulation,issuance ofthe license orsurveillance

No exaction;but privateproperty istaken by theState forpublic purpose

3. Benefits ReceivedNo special ordirectbenefit isreceived bythetaxpayer;merelygeneralbenefit ofprotection

No directbenefit isreceived; ahealthyeconomicstandard ofsociety isattained

A directbenefit resultsin the form ofjustcompensationto thepropertyowner




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4. Non-impairment of ContractsContractsmay not beimpaired

Contracts maybe impaired

Contracts maybe impaired

5. Transfer of Property RightsTaxes paidbecome partof publicfunds

No transferbut onlyrestraint in itsexercise

Transfer iseffected infavor of theState

6. ScopeAll persons,property andexcises

All persons,property,rights andprivileges

Onlyupon aparticularproperty

SYSTEMSOF TAXATIONGlobal System Schedular System

A systememployed wherethe tax systemviews indifferentlythe tax base andgenerally treats incommon allcategories oftaxable income ofthe individual.

A system employedwhere the income taxtreatment varies and ismade to depend on thekind or category oftaxable income of thetaxpayer.

A system whichtaxes allcategories ofincome except

certain passiveincomes andcapital gains. Itprescribes aunitary butprogressive ratefor the taxableaggregate incomesand flat rates forcertain passiveincomes derivedby individuals.

A system whichitemizes the differentincomes and providesfor varied percentages

of taxes, to be appliedthereto.

EXAMPLES OF TAXES LEVIED WITH A REGULATORY

PURPOSE, ORCOMBINED EXERCISE OF POLICE POWERAND THE POWEROF TAXATION.

a. Motor vehicle registration fees arenow considered revenue or tax measures.(Pal v. Edu, G.R No. L-41383, August15,1988)

This case reversed the doctrinepreviously held in Republic v. PhilippineRabbit Bus Lines, Inc., 32 SCRA 211, tothe effect that motor vehicle registrationfees are regulatory exactions and notrevenue measures.

b. The tax imposed on videogram

establishments is not only regulatory buta revenue measure because the earnings

of such establishments have not beensubject to tax depriving the governmentof an additional source of income. (Tio v.Videogram Regulatory Board, 151 SCRA208)

c. The coconut levy funds were allraised under the states taxing and policepowers.

The states concern to make it astrong and secure source not only in thelivelihood of the significant segment ofthe population, but also of export

earnings, the sustained growth of whichis one of the imperatives of the economicgrowth. Philippine Coconut ProducersFederation, Inc. Cocofed v. PresidentialCommission on Good Government (178SCRA 236, 252)CONSTRUCTIONOF TAX LAWS1. Public purpose is always presumed.2. If the law is clear, apply the law in

accordance to its plain and simpletenor.

3. A statute will not be construed as

imposing a tax unless it does soclearly, expressly and unambiguously.

4. In case of doubt, it is construed moststrongly against the Government, andliberally in favor of the taxpayer.

5. Provisions of a taxing act are not tobe extended by implication.

6. Tax laws operate prospectivelyunless the purpose of the legislatureto give retrospective effect isexpressly declared or may be impliedfrom the language used.

7. Tax laws are special laws and prevailover a general law.

NATUREOF TAX LAWS1. Not political in character2. Civil in nature, not subject to ex post

facto law prohibitions3. Not penal in character

TAXESAREPERSONALTOTHETAXPAYER

1. A corporations tax delinquencycannot be enforced against itsstockholders. (Corporate Entity

Doctrine)




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Exception: Stockholders may be heldliable for unpaid taxes of a dissolvedcorporation:a. if it appears that the corporate

assets have passed into theirhands or

b. when the stockholders haveunpaid subscriptions to thecapital of the corporation

2. Estate taxes are obligations thatmust be paid by the executor oradministrator out of the net assetsand cannot be assessed against theheirs.Exception: Ifpriorto the payment ofthe estate tax due, the properties of

the deceased are distributed to theheirs, then the latter is subsidiaryliable for the payment of suchportion of the estate tax as hisdistributive share bears to the totalvalue of the net estate. (Sec. 9, Rev.Regs. No. 2-2003; see CIR vs. PinedaG.R. No. L-22734. September 15,1967))

CLASSIFICATIONOF TAXES1. As to subject matter:

a.Personal Tax taxes are of fixedamount upon all persons of acertain class within thejurisdiction without regard toproperty, occupation or businessin which they may be engaged.

b. Property Tax assessed onproperty of a certain class

c. Excise Tax imposed on theexercise of a privilege

d. Customs Duties duties chargedupon the commodities on theirbeing imported into or exported

from a country.2. As to burden:

a. Direct Tax both the incidenceof or liability for the payment ofthe tax as well as the impact orburden of the tax falls on thesame person.

b. Indirect Tax - The incidence ofor liability for the payment ofthe tax falls on one person butthe burden thereof can beshifted or passed on to another.

3. As to purpose:

a. General Tax levied for thegeneral or ordinary purposes ofthe Government

b. Special Tax levied for special

purposes4. As to manner of computation:

a. Specific Tax the computationof the tax or the rates of the taxis already provided for by law.

b. Ad Valorem Tax tax upon thevalue of the article or thingsubject to taxation; theintervention of another party isneeded for the computation ofthe tax.

5. As to taxing authority:a. National Tax levied by the

National Governmentb. Local Tax levied by the local

government6. As to rate:

a. Progressive Tax rate or amountof tax increases as the amount ofthe income or earning to betaxed increases.

b. Regressive Tax tax ratedecreases as the amount ofincome to be taxed increases.

c. Proportionate Tax based on a

fixed proportion of the value ofthe property assessed.

IMPOSITIONS NOT STRICTLY CONSIDEREDAS TAXES

1. Toll amount charged for the costand maintenance of the propertyused.

2. Penalty punishment for thecommission of a crime.

3. Compromise Penalty amountcollected in lieu of criminalprosecution in cases of taxviolations.

4. Special Assessment levied only onland based wholly on benefitaccruing thereon as a result ofimprovements or public worksundertaken by government withinthe vicinity.

5. License or Fee regulatoryimposition in the exercise of thepolice power.

6. Margin Fee exaction designed tostabilize the currency.




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7. Debt a sum of money due uponcontract or one which is evidencedby judgment.

8. Subsidy a legislative grant of

money in aid of a private enterprisedeemed to promote the publicwelfare.

9. Customs duties and fees dutiescharged upon commodities on theirbeing transported into or exportedfrom a country.

10. Revenue a broad term thatincludes taxes and income fromother sources as well.

11. Impost in its general sense, itsignifies any tax, tribute or duty. In

its limited sense, it means a duty onimported goods and merchandise.

Tax SpecialAssessment

Imposed on persons,property and excises

Levied only on land

Personal liabilityattaches on theperson assessed incase of non-payment

Cannot be made apersonal liability ofthe person assessed

Not based on anyspecial or directbenefit

Based wholly onbenefit

Levied and paidannually

Exceptional both asto time and locality

Exemption grantedis applicable (Art.VI, Sec. 28(3) 1987Constitution)

Exemption does notapply.N.B. If property isexempt from RealProperty Tax, it isalso exempt fromSpecial Assessment.

Tax License Fee

Based on the powerof taxation

Emanates frompolice power

To generaterevenue

Regulatory

Amount is unlimited Amount is limited tothe cost of (1)issuing the license,and (2) inspectionand surveillance

Normally paid afterthe start of abusiness

Normally paidbeforecommencement ofbusiness

Taxes, being thelifeblood of theState, cannot besurrendered exceptfor lawfulconsideration

License fee may bewith or withoutconsideration

Non-payment doesnot make thebusiness illegal butmaybe a ground forcriminal prosecution

Non-payment makesthe business illegal

TESTINDETERMININGIFTHEIMPOSITIONISATAXORALICENSEFEE

If the purpose is primarily revenue orif revenue is, at least, one of the real andsubstantial purposes, then the exaction isa tax. If the purpose is regulatory innature, it is a license. (PAL v. Edu)

Tax Debt

An obligationimposed by law

Created by contract

Due to the

government in itssovereign capacity

May be due to the

government but inits corporatecapacity

Payable in money Payable in money,property or services

Does not drawinterest except incase of delinquency

Draws interest ifstipulated or delayed

Not assignable Assignable

Not subject to

compensation orset-off

Subject to

compensation or set-off

Non-payment ispunished byimprisonmentexcept in poll tax

No imprisonment incase of non-payment(Art. III, Sec. 201987 Constitution)

Imposed only bypublic authority

Can be imposed byprivate individual

TESTINDETERMININGIFTHEIMPOSITIONISATAXORALICENSEFEE

If the purpose is primarily revenue or

if revenue is, at least, one of the real and




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substantial purposes, then the exaction isa tax. If the purpose is regulatory innature, it is a license. (PAL v. Edu)

Tax Debt

An obligationimposed by law

Created by contract

Due to thegovernment in itssovereign capacity

May be due to thegovernment but inits corporatecapacity

Payable in money Payable in money,property or services

Does not draw

interest except incase of delinquency

Draws interest if

stipulated ordelayed

Not assignable Assignable

Not subject tocompensation orset-off

Subject tocompensation orset-off

Non-payment ispunished byimprisonmentexcept in poll tax

No imprisonment incase of non-payment (Art. III,Sec. 20 1987 Constitution)

Imposed only bypublic authority

Can be imposed byprivate individual

COMPENSATIONORSET-OFFGeneral Rule: Taxes cannot be thesubject of compensation or set-off.

Reasons:1. lifeblood theory2. taxes are not contractual

obligation but arise out of duty tothe government

3. the government and the taxpayer

are not mutually creditors anddebtors of each other. (Franciav. IAC)

Exception: When both obligations aredue and demandable as well as fullyliquidated and all the requisites for avalid compensation are present,compensation takes place by operation oflaw. (Domingo v. Garlitos)

DOCTRINE OF EQUITABLE RECOUPMENT NOTFOLLOWEDINTHE PHILIPPINES

A tax presently being assessed againsta taxpayer which has prescribed may notbe recouped or set-off against anoverpaid tax the refund of which is also

barred by prescription. It is against publicpolicy since both parties are guilty ofnegligence.

Tax Toll

Enforced proportionalcontributions frompersons and property

A sum of money forthe use of something,a considerationwhich is paid for theuse of a propertywhich is of a publicnature; e.g. road,bridge

A demand of sovereignty

A demand of proprietorship

No limit as to theamount of tax

Amount of tolldepends upon thecost of constructionor maintenance ofthe publicimprovement used

Imposed only by theState

May be imposed by:(1) Government(2) Private

individuals or

entities

Tax Penalty

Enforcedproportionalcontributions frompersons andproperty

Sanction imposed asa punishment forviolation of a lawor acts deemedinjurious; violationof tax laws may giverise to imposition ofpenalty

Intended to raise

revenue

Designed to regulate

conduct

May be imposedonly by thegovernment

May be imposed by:(1) Government(2) Privateindividuals orentities

Tax Tariff

All embracing termto include variouskinds of enforced

contributions upon

A kind of taximposed on articleswhich are traded

internationally




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persons for theattainment of publicpurposes

TAXPAYERS

SUIT

A case where the act complained ofdirectly involves the illegal disbursementof public funds derive from taxation(Justice Melo, dissenting in Kilosbayan,Inc vs Guingona, Jr.)

TAXPAYERS AND PUBLIC OFFCIALS HAVE LOCUS STANDIREQUISITESFORTAXPAYERS SUIT

a. The tax money is being extractedand spent in violation of specificconstitutional protections against

abuses of legislative power.b. That public money is beingdeflected to any improper purpose(Pascual vs Secretary of PublicWorks)c. That the petitioner seeks torestrain respondents from wastingpublic funds through the enforcementof an invalid or unconstitutional law

LIMITATIONS ON THE TAXINGPOWER

A. INHERENT LIMITATIONS (KEY: SPINE)1. Territoriality or Situs of taxation2. Public purpose of taxes3. International comity

4. Non-delegability of the taxing power5. Tax Exemption of the government

(1) TESTSIN DETERMINING PUBLIC PURPOSEA. Duty Test whether the thing to be

furthered by the appropriation ofpublic revenue is something, whichis the duty of the State, as agovernment, to provide.

B. Promotion of General Welfare Test whether the proceeds of the taxwill directly promote the welfare ofthe community in equal measure.

(2) NON-DELEGABILITYOFTHE TAXING POWERGeneral Rule: The power of taxation ispeculiarly and exclusively exercised bythe legislature. (See Scope of LegislativeTaxing Power, supra)- refers to tax legislation

Exceptions to Non-delegability:

1. Flexible Tariff Clause: Authority ofthe President to fix tariff rates,import and export quotas, tonnageand wharfage dues, and other duties

or imposts. (Art. VI, Sec.28(2), 1987Constitution)

2. Power of local government units tolevy taxes, fees, and charges. (Art.

X, Sec. 5, 1987 Constitution)3. Delegation to administrative agencies

for implementation and collection.- merely refers to tax administration or

implementation

(3) SITUSORTERRITORIALITYOF TAXATIONThe power to tax is limited only to

persons, property or businesses within

the jurisdiction or territory of the taxingpower.

FACTORSTHAT DETERMINETHE SITUS:a. Kind or classification of the taxbeing leviedb. Situs of the thing or propertytaxedc. Citizenship of the taxpayerd. Residence of the taxpayere. Source of the income taxedf. Situs of the excise, privilege,business or occupation being taxed

APPLICATIONOF SITUSOF TAXATIONKind of Tax Situs

Personal orCommunity tax

Residence ordomicile of thetaxpayer

Real property tax Location of property(Lex rei sitae)

Personal propertytax

-tangible: where it isphysically located or

permanently kept(Lex rei sitae)-intangible: subjectto Sec. 104 of theNIRC and theprinciple of mobiliasequuntur personam

Business tax Place of business

Excise or Privilegetax

Where the act isperformed or whereoccupation is

pursued




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Sales tax Where the sale isconsummated

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

Transfer tax Residence orcitizenship of thetaxpayer or locationof property

Franchise Tax State which grantedthe franchise

SITUS OF TAXATION OF INTANGIBLE PERSONALPROPERTYGeneral Rule: Domicile of the ownerpursuant to the principle of the mobiliasequuntur personam or movables followthe person.Exceptions:1. When the property has acquired a

business situs in another jurisdiction;2. When an express provision of the

statute provide for another rule.Illustration: For purposes of estateand donors taxes, the following

intangible properties are deemedwith a situs in the Philippines:(1) franchise which must be

exercised in the Philippines;(2) shares, obligations or bonds

issued by any corporationorganized or constituted in thePhilippines in accordance with itslaws;

(3) shares, obligations or bonds byany foreign corporation eighty-five percent (85%) of the businessof which is located in the

Philippines;(4) shares, obligations or bonds

issued by any foreign corporationif such shares, obligations orbonds have acquired a businesssitus in the Philippines; and

(5) shares or rights in anypartnership, business or industryestablished in the Philippines.(Sec. 104, 1997 NIRC).

(4) EXEMPTIONOFTHE GOVERNMENT

As a matter of public policy, propertyof the State and of its municipalsubdivisions devoted to government usesand purposes is deemed to be exempt

from taxation although no expressprovision in the law is made therefor.

General Rule: The Government is taxexempt.- However, it can also tax itself.

RULES:1. Administrative Agencies

A. Governmental function - taxexempt unless when the lawexpressly provides for tax. (Sec.32 B7)

B. Proprietary function taxableunless exempted by law. (Sec.27C)

2. GOCCsGeneral Rule: Income is taxable atthe rate imposed upon corporationsor associations engaged in a similarbusiness, industry, or activity.Exception: GSIS, SSS, PHIC, PCSO andPAGCOR. (Sec. 27(C), NIRC)

3. Government Educational InstitutionsA. Property or real estate tax

property actually, directly and

exclusively used for educationalpurposes exempt butincome ofwhatever kind and characterfrom any of their properties, realor personal, regardless of thedisposition, is taxable. (Sec. 30,last par., NIRC)

B. Income received by them as suchare exempt from taxes.However, their income from anyof their activities conducted forprofit regardless of thedisposition, is taxable. (Sec. 30,last par., NIRC)

4. Income derived from any publicutility or from the exercise of anyessential governmental functionaccruing to the Government of thePhilippines or to any politicalsubdivision thereof is not included ingross income and exempt fromtaxation. (Sec. 32(B)(7)(b), NIRC)

5. Donations in favor of governmentalinstitutions are considered as incomeon the part of the donee. However,

it is not considered as taxable income




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because it is an exclusion from thecomputation of gross income.(Sec.32 (B)(3), NIRC)

6. The amount of all bequests, legacies,

devises or transfers to or for the useof the Government or any politicalsubdivision for exclusively publicpurposes is deductible from the grossestate. (Sec.86 (A)(3), NIRC)

7. Gifts made to or for the use of theNational Government or any entitycreated by any of its agencies whichis not conducted for profit, or to anypolitical subdivision of the saidGovernment are exempt fromdonors tax. (Sec. 101(A)(2), NIRC)

8. Local government units are expressly

prohibited by the LGC from levyingtax upon National Government, itsagencies, and instrumentalities, andlocal government units. [Sec. 133 (o),LGC]

9. Unless otherwise provided in theLocal Government Code (LGC), taxexemptions granted to all persons,whether natural or juridical,including GOCC, except local waterdistricts, cooperatives duly registeredunder RA No. 6938, non-stock andnon-profit institutions, are

withdrawn upon effectivity of theLGC. (Sec. 193, LGC)

10. Real property owned by the Republicof the Philippines or any of itspolitical subdivisions except whenthe beneficial use thereof has beengranted, for consideration orotherwise, to a taxable person shallbe exempt from payment of realproperty tax. (Sec. 234, LGC)

(5) INTERNATIONAL COMITYThese principles limit the authority of

the government to effectively imposetaxes on a sovereign state and itsinstrumentalities, as well as on itsproperty held and activities undertakenin that capacity. Even where one entersthe territory of another, there is animplied understanding that the formerdoes not thereby submit itself to theauthority and jurisdiction of the other.

B. CONSTITUTIONAL LIMITATIONSA. GENERAL OR INDIRECT

CONSTITUTIONAL LIMITATIONS

1. Due Process Clause (Art. III, Sec. 1,1987 Constitution)Requisites:

A.The interests of the public asdistinguished from those of aparticular class require theintervention of the State.(Substantive limitation)

B.The means employed must bereasonably necessary to theaccomplishment of the purpose andnot unduly oppressive. (Procedurallimitation)

The constitutionality of a legislativetaxing act questioned on the ground ofdenial of due process requires the

existence of an actual case orcontroversy.

2. Equal Protection Clause (Art. III,Sec. 1, 1987 ConstitutionRequisites of a Valid Classification:

a. based upon substantialdistinctions

b. germane to the purposes of thelaw

C. not limited to existing conditionsonly

d. apply equally to all members of

the class

3. Freedom Of Speech And Of ThePress (Art. III, Sec. 4, 1987Constitution)

There is curtailment of pressfreedom and freedom of thought andexpression if a tax is levied in orderto suppress this basic right andimpose a prior restraint. (Tolentinovs. Secretary of Finance, GR No.115455, August 25, 1994)

4. Non-Infringement Of ReligiousFreedom And Worship (Art. III, Sec.5, 1987 Constitution)

A license tax or fee constitutes acurtailment of religious freedom ifimposed as a condition for itsexercise. (American Bible Society vs.City of Manila, GR No. L-9637, April30, 1957)

5. Non-Impairment Of Contracts (Art.III, Sec. 10, 1987 Constitution)




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No law impairing the obligation ofcontract shall be passed. (Sec. 10,

Art. III, 1987 Constitution)The rule, however, does not

apply to public utility franchises orright since they are subject toamendment, alteration or repeal bythe Congress when the public interestso requires. (Cagayan Electric &Light Co., Inc. v. Commissioner, GRNo. 60216, September 25, 1985)

RULES:A. When the exemption isbilaterallyagreed upon between thegovernment and the taxpayer itcannot be withdrawn without

violating the non-impairment clause.B. When it is unilaterally granted by

law, and the same is withdrawn byvirtue of another law no violation.

C. When the exemption is grantedunder a franchise it may bewithdrawn at any time thus, not aviolation of the non-impairment ofcontracts

6. Presidential power to grantreprieves, commutations andpardons and remit fines and

forfeitures after conviction (ART.VII, SEC. 19, 1987 CONSTITUTION)Due

ProcessEqual

ProtectionUniformity

Taxpayermay notbedeprivedof life,liberty orpropertywithoutdueprocess oflaw.Noticemust,therefore,be givenin case offailure topay taxes

Taxpayersshall betreated alikeunder likecircumstancesand conditionsboth in theprivilegesconferred andliabilitiesimposed.

Taxablearticles, orkinds of property ofthe sameclass, shallbe taxed atthe samerate. Thereshouldtherefore,be no directdoubletaxation

B. SPECIFIC OR DIRECTCONSTITUTIONAL LIMITATIONS

1. Non-Imprisonment For Debt Or Non-Payment Of Poll Tax (Art. III, Sec.20, 1987 Constitution)

2. Rule Requiring That Appropriations,Revenue And Tariff Bills ShallOriginate Exclusively From TheHouse Of Representatives (Art. VI,Sec. 24, 1987 Constitution)

3. Uniformity, Equitability AndProgressivity Of Taxation (Art. VI,Sec. 28(1), 1987 Constitution)Uniformity all taxable articles orkinds of property of the same class aretaxed at the same rate.Equitability the burden falls to those

who are more capable to pay.Progressivity rate increases as thetax base increases.

Q: Is a tax law adopting a regressivesystem of taxation valid?

A: Yes. The Constitution does notreally prohibit the imposition of indirecttaxes which, like the VAT, are regressive.The Constitutional provision means simplythat indirect taxes shall be minimized.The mandate to Congress is not toprescribe, but to evolve, a progressive

tax system. (EVAT En Banc Resolution,Tolentino, et al vs Secretary of Finance,October 30, 1995)

4. Limitations On The CongressionalPower To Delegate To ThePresident The Authority To FixTariff Rates, Import And ExportQuotas, Etc. (Art. VI, Sec. 28(2),1987 Constitution)

5. Tax Exemption Of PropertiesActually, Directly And ExclusivelyUsed For Religious, Charitable AndEducational Purposes. (Art. VI, Sec.28(3) 7, 1987 Constitution)

The constitutional provision(above cited) which grants taxexemption applies only to property orrealty taxes assessed on suchproperties used actually, directlyexclusively for religious, charitableand educational purposes. (Lladoc vs.Commissioner, GR No. L-19201, June16, 1965)




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The present Constitution requiredthat for the exemption of lands,buildings and improvements, theyshould not only be exclusively but

also actually and directly usedfor religious and charitable purposes.(Province of Abra vs. Hernando, GRNo. L-49336, August 31, 1981)

The test of exemption fromtaxation is the use of the propertyfor the purposes mentioned in theConstitution. (Abra Valley CollegeInc. vs. Aquino, GR No. L-39086, June15, 1988)

EXCLUSIVE BUT NOT ABSOLUTE USEThe term exclusively used does

not necessarily mean total or absoluteuse for religious, charitable andeducational purposes. If the property isincidentally used for said purposes, thetax exemption may still subsist. (AbraValley College Inc. vs. Aquino, Gr No. L-39086, June 15, 1988)

Corollarily, if a property, althoughactually owned by a religious, charitableand educational institution is used for anon- exempt purpose, the exemptionfrom tax shall not attach

ART. XIV,SEC 4(3)

ART. VI,SEC 28(3)

Grantee Non- stock,non profiteducationalinstitution

Religious,educational,charitableinstitutions

Taxescovered

Income taxCustomDutiesProperty tax(DECS OrderNo. 137-187)

Property tax

6. Voting Requirement In ConnectionWith The Legislative Grant Of TaxExemption (Art. VI, Sec. 28(4),1987 Constitution)

7. Non-Impairment Of The JurisdictionOf The Supreme Court In Tax Cases(Art. VIII, Sec. 2 And 5(2)(B), 1987Constitution)

8. Exemption From Taxes Of TheRevenues And Assets Of EducationalInstitutions, Including Grants,Endowments, Donations And

Contributions. (Art. XIV, Sec. 4(3)And (4), 1987 Constitution)

OTHER SPECIFIC TAX PROVISIONS IN THE

CONSTITUTION1. Power of the President to veto any

particular item or items in anappropriation, revenue, or tariff bill.(Art VI, Sec. 27(2), 1987 Constitution)

2. Necessity of an appropriation beforemoney may be paid out of the publictreasury. (Art. VI, Sec. 29 (1), 1987Constitution)

3. Non-appropriation of public money orproperty for the use, benefit, orsupport of any sect, church, or

system of religion. (Art. VI, Sec. 29(2), 1987 Constitution)

4. Treatment of taxes levied for aspecial purpose. (Art. VI, Sec. 29 (3),1987 Constitution)

5. Internal revenue allotments to localgovernment units. (Art. X, Sec. 6,1987 Constitution)

DOUBLE TAXATION

DOUBLE TAXATION taxing the same property

twice when it should be taxed but once.

ISDOUBLETAXATIONPROHIBITEDINTHE PHILIPPINES?No. There is no constitutional

prohibition against double taxation. It isnot favored but permissible. (Pepsi ColaBottling Co. v. City of Butuan, 1968).

KINDSOF DOUBLE TAXATION(1) Direct Duplicate Taxation /

Obnoxious double taxation in theobjectionable or prohibited sense.This constitutes a violation ofsubstantive due process.

Elements:a. the same property or subjectmatter is taxed twice when it shouldbe taxed only once.b. both taxes are levied for thesame purposec. imposed by the same taxingauthorityd. within the same jurisdictione. during the same taxing period




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f. covering the same kind orcharacter of tax.(Villanueva vs. City of Iloilo)

(2) Indirect Duplicate Taxation notlegally objectionable. The absenceof one or more of the above-mentioned elements makes thedouble taxation indirect.

(3) Domestic- this arises when the taxesare imposed by the local or nationalgovernment (within the same state)

(4) International- refers to theimposition of comparable taxes intwo or more states on the sametaxpayer in respect of the samesubject matter and for identicalperiods.

REMEDIESOF DOUBLE TAXATION1. Tax Sparing Rule same dividend

earned by a NRFC within the Phil. isreduced by imposing a lower rate of15% (in lieu of the 35%), on thecondition that the country to whichthe NRFC is domiliced shall allow acredit against the tax due from theNRFC, taxes deemed to have been

paid in the Phil. (Sec.28 B 5b) (CIR vsProcter & Gamble) (GR No. 66838,Dec. 2, 1991)

2. Tax deductionsExample: vanishing deduction underSection 86(A)(2), NIRC

3. Tax creditsInstances under the NIRC:

For VAT purposes, the tax on inputsor items that go into the manufactureof finished products (which areeventually sold) may be creditedagainst or deducted from the output

tax or tax on the finished product. Foreign income taxes may becredited against the Phil. Income tax,subject to certain limitations, bycitizens, including members ofgeneral professional partnerships orbeneficiaries of estates or trusts (prorata), as well as domesticcorporations.

A tax credit is granted for estate

taxes paid to a foreign country on theestate of citizens and resident aliens

subject to certain limitations.

The donors tax imposed upon a

citizen or a resident shall be creditedwith the amount of any donors taximposed by the authority of a foreign

country, subject to certainlimitations.

Tax ExemptionsPrinciple of ReciprocityTreaties with other states

METHODS RESORTED TO BY A TAX TREATY INORDER TO ELIMINATE DOUBLE TAXATION

FIRST METHOD: The tax treaty sets outthe respective rights to tax by the stateof source or situs and by the state ofresidence with regard to certain classesof income or capital. In some cases, anexclusive right to tax is conferred in oneof the contracting states; however, forother items of income or capital, bothstates are given the right to tax althoughthe amount of tax that may be imposedby the state of source is limited.SECOND METHOD: The state of source isgiven a full or limited right to taxtogether with the state of residence. Inthis case, the treaty makes it incumbentupon the state of residence to allow

relief in order to avoid double taxation.

TWOMETHODSOFRELIEFAREUSEDUNDERTHESECONDMETHOD:

1. The exemption method- the incomeor capital which is taxable in thestate of source or situs is exemptedin the state of residence, although insome instances it may be taken intoaccount in determining the rate oftax applicable to the tax payersremaining income or capital.(This

may be done using the tax deductionmethod which allows foreign incometaxes to be deducted from grossincome, in effect exempting thepayment from being further taxed.)

2. The credit method- although theincome or capital which is taxed inthe state of source is still taxable inthe state of residence. The tax paidin the former is credited against thetax, levied in the latter.(Commissioner of Internal Revenue




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v. S.C Johnson and Son, Inc. et al.,G.R No. 127105, June 25, 1999)

Exemption

MethodCredit Method

Focus is on theincome or capitalitself

Focus is on the tax

NOTE: Computational illustrationbetween a tax deduction and a taxcredit:Tax deduction method

Gross incomeLess: allowable deductionsincluding

foreign taxes paidIncome subject to taxMultiplied by rateIncome tax due

Tax credit methodGross incomeLess: allowable deductionsexcludingforeign taxes paidIncome subject to taxMultiplied by rateIncome tax due

Less: foreign taxes paidNet income tax due

FORMS OF ESCAPE FROMTAXATION

(1) SHIFTING the process by which the taxburden is transferred from thestatutory taxpayer (impact oftaxation) to another (incident oftaxation) without violating the law.

IMPACT OF TAXATION point on which tax isoriginally imposed.

INCIDENCE OF TAXATION point on which thetax burden finally rests or settles down.Illustration: Value added tax. The selleris required by law to pay tax, but theburden is actually shifted or passed on tothe buyer.

KINDS OF SHIFTING

A. Forward shifting- when burden of

tax is transferred from a factor of

production through the factors ofdistribution until it finally settles onthe ultimate purchaser or consumer

B. Backward shifting- when burden is

transferred from consumer throughfactors of distribution to the factorsof production

C. Onward shifting- when the tax isshifted 2 or more times eitherforward or backward

(2) CAPITALIZATION a mere increase in thevalue of the property is not incomebut merely an unrealized increase incapital. No income until after theactual sale or other disposition ofthe property in excess of its original

cost.EXCEPT: if by reason of appraisal, the costbasis of property increased and theresultant basis is used as the new taxbase for purposes of computing theallowable depreciation expense, the netdifference between the original cost basisand new basis is taxable under theeconomic benefit principle. (BIR RulingNo. 029, March 19, 1998)

(3) TRANSFORMATION the manufacturer orproducer upon whom the tax has

been imposed, fearing the loss of hismarket if he should add the tax tothe price, pays the tax andendeavors to recoup himself byimproving his process of production,thereby turning out his units at alower cost.

(4) TAX AVOIDANCE the exploitation by thetaxpayer of legally permissiblealternative tax rates or methods ofassessing taxable property orincome, in order to avoid or reducetax liability.

Example: estate planning (conveyanceof property to a family corporation forshares) (Delpher Trades Corp. vs. IAC,157 SCRA 349)(5) TAX EVASION use by the taxpayer of

illegal or fraudulent means to defeator lessen the payment of the tax.

FACTORSINTAX EVASION1. the end to be achieved, i.e. payment

of less than that known by the

taxpayer to be legally due, or paying




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no tax when it is shown that the taxis due;

2. an accompanying state of mind whichis described as being evil, in bad

faith, willful, or deliberate and notcoincidental; and

3. a course of action which is unlawful.

INDICIA OF FRAUD IN TAX EVASION1. Failure to declare for taxation

purposes true and actual incomederived from business for 2consecutive years (Republic vsGonzales, L-17962)

2. Substantial under-declaration ofincome tax returns of the taxpayerfor 4 consecutive years coupled with

intentional overstatement ofdeductions (CIR vs Reyes, 104 PHIL1061)

TAXAVOIDANCE

TAXEVASION

Validity Legal and notsubject tocriminal penalty

Illegal andsubject tocriminalpenalty

Effect Minimization oftaxes

Almostalwaysresults inabsence oftax payments

(6) TAX EXEMPTION a grant of immunityto particular persons or corporationsfrom the obligation to pay taxes.

LEGAL BASIS: No law granting any taxexemption shall be passed without theconcurrence of a majority of all themembers of Congress (ART VI. SEC 28(4) OFTHE1987CONSTITUTION)

KINDSOFTAX EXEMPTION1. As to source

A. Constitutional immunities fromtaxation that originate from theconstitution.

B. Statutory those which emanatefrom legislation

Examples of Statutory ExemptionsSec. 27, NIRCSec. 105 Tariff and Customs CodeSec. 234 Local Government Code

Special Laws, such as theOmnibus Investment Code of 1987(EO 226), Philippine OverseasShipping Act (RA 1407 as amended),

Fertilizer Industry Act (RA 3050, asamended), Mineral ResourcesDevelopment Decree of 1974 (PD 463as amended), Cottage Industry Act(RA 318, as amended) andexemptions in Housing for LowIncome Group (PD 1205, asamended)C. Contractual- agreed to by the

taxing authority in contractslawfully entered into by themunder enabling laws

d. Treaty

e. Licensing Ordinance2. As to form

(1) Express expressly granted byorganic or statute law

(2) Implied when particularpersons, property or excises aredeemed exempt as they falloutside the scope of the taxingprovision itself.

3. As to extent(1) Total absolute immunity(2) Partial one where a collection

of a part of the tax is dispensed

with4. As to object

(1) Personal granted directly infavor of certain persons

(2) Impersonal granted directly infavor of a certain class ofproperty

PRINCIPLES GOVERNING TAX EXEMPTIONA. Exemptions from taxation are highly

disfavored in law and are notpresumed.

B. He who claims as exemption must beable to justify his claim by theclearest grant of organic or statutelaw by words too plain to bemistaken. If ambiguous, there is noexemption.

C. He who claims exemption shouldprove by convincing proofthat he isexempted.

D. Taxation is the rule; tax exemptionis the exception.

E. Tax exemption must be strictlyconstrued against the taxpayer and




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liberally in favor of the taxingauthority.

f. Tax exemptions are not presumed.G. Constitutional grants of tax

exemption are self-executing.H. Tax exemptions are personal.

THE FOLLOWING PARTAKE THE NATURE OF TAXEXEMPTION1. Deductions for income tax purposes2. Claims for refund3. Tax amnesty4. Condonation of unpaid tax liabilitiesNOTE: must be strictly construed againstthe taxpayer

WHEN EXEMPTIONS ARE CONSTRUED LIBERALLY IN

FAVOROF GRANTEE1. When the law so provides for such

liberal construction.2. Exemptions from certain taxes,

granted under special circumstancesto special classes of persons.

3. Exemptions in favor of thegovernment, its political subdivisionsor instrumentalities.

4. Exemptions to traditional exemptees,such as those in favor of religious andcharitable institutions.

5. If exemptions refer to the public

property

Q: May a tax exemption be revoked?A: Yes. It is an act of liberality whichcould be taken back by the governmentunless there are restrictions. Sincetaxation is the rule and exemptiontherefrom is the exception, theexemption may be withdrawn by thetaxing authority. (Mactan CebuInternational Airport Authority vs.Marcos, 261 SCRA 667)

RESTRICTIONS ON REVOCATION OF TAX EXEMPTIONSA. Non impairment clause. Where the

exemption was granted to privateparties based on materialconsideration of a mutual nature,which then becomes contractual andis covered by the non-impairmentclause of the Constitution.

B. Adherence to form- if the taxexemption is granted by theConstitution, its revocation may beeffected through Constitutional

amendment only

C. Where the tax exemption grant is inthe form of a special law and not bya general law even if the terms of thegeneral act are broad enough to

include the codes in the general lawunless there is manifest intent torepeal or alter the special law(Province of Misamis Oriental vsCagayan Electric Power and Light Co.Inc)

NATURE OF TAX AMNESTY1. General or intentional overlooking by

the state of its authority to imposepenalties on persons otherwise guiltyof evasion or violation of a revenue ortax law.

2. Partakes of an absolute forgiveness ofwaiver of the government of its rightto collect.

3. To give tax evaders, who wish torelent and are willing to reform achance to do so.

RULES ON TAX AMNESTY

1. Tax amnestya) like tax exemption, it is never

favored nor presumedb) construed strictly against the

taxpayer (must show complete

compliance with the law)

2.Government not estopped fromquestioning the tax liability even ifamnesty tax payments were alreadyreceived.

Reason: Erroneous application andenforcement of the law by publicofficers do not block subsequentcorrect application of the statute. Thegovernment is never estopped bymistakes or errors of its agents.Basis: Lifeblood Theory

3.Defense of tax amnesty, like insanity, isa personal defense.Reason: Relates to the circumstances ofa particular accused and not thecharacter of the acts charged in theinformation.

Tax amnesty Tax exemption

Immunity from allcriminal, civil andadministrative

Immunity from civilliability only




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liabilities arisingfrom non paymentof taxes

Applies only to pasttax periods, henceretroactiveapplication

Prospectiveapplication

DOCTRINE OF IMPRESCRIPTIBILTYAs a rule, taxes are imprescriptible as

they are the lifeblood of the government.However, tax statutes may provide forstatute of limitations.

The rules that have been adopted areas follows:a.) National Internal Revenue Code

The statute of limitation forassessment of tax if a return is filed iswithin three (3) years from the last dayprescribed by law for the filling of thereturn or if filed after the last day,within three years from date of actualfilling. If no return is filed or the returnfiled is false or fraudulent, the period toassess is within ten years from discoveryof the omission, fraud or falsity.

The period to collect tax is withinthree years from date of assessment. Inthe case, however, of omission to file or

if the return filed is false or fraudulent,the period to collect is within ten yearsfrom discovery without need of anassessment.

b.) Tariff and customs codeIt does not express any general

statute of limitation; it provided,however, that when articles haveentered and passed free of duty or finaladjustment of duties made, withsubsequent delivery, such entry and

passage free of duty or settlement ofduties will, after the expiration of one(1) year, from the date of the final

payment of duties, in the absence offraud or protest, be final and conclusiveupon all parties, unless the liquidationof import entry was merely tentative.(Sec 1603,TCC)

c.) Local Government CodeLocal Taxes, fees, or charges shall be

assessed within five (5) yearsfrom thedate they became due. In case of fraud

or intent to evade the payment of taxes,

fees or charges the same may beassessed within ten (10) years fromdiscovery of the fraud or intent to evade

payment. They shall also be collected

either by administrative or judicialaction withinfive (5) yearsfrom date ofassessment (Sec. 194. LGC)

TAX ENFORCEMENT ANDADMINISTRATION

SOURCESOF TAX LAWS (Key: SPEC2TRA BLT)1. Statutes2. Presidential Decrees3. Executive Orders4. Constitution

5. Court Decisions6. Tax Codes7. Revenue Regulations8. Administrative Issuances9. BIR Rulings10. Local Tax Ordinance11. Tax Treaties and Conventions

REQUISITESOF TAX REGULATIONS1. Reasonable2. Within the authority conferred3. Not contrary to law4. Must be published

NOTE: Administrative regulations mustalways be in harmonywith the provisionsof the law. In case of discrepancybetween the basic law and theimplementing rule or regulation, theformer prevails.

NON-RETROACTIVITYOF BIR RULINGSGeneral Rule: Rulings are not retroactiveif they are prejudicial to the taxpayer.(Sec. 246, NIRC)

Exceptions:1. Where the taxpayer deliberatelymisstates or omits material factsfrom his return or any documentrequired of him by the BIR.

2. Where the facts subsequentlygathered by the BIR is materiallydifferent from the facts on which theruling is based.

3. Where the taxpayer acted in badfaith.




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PRINCIPLE OF LEGISLATIVE APPROVAL OF ANADMINISTRATIVE INTERPRETATION THROUGHREENACTMENT

Where a statute is susceptible of the

meaning placed upon it by a ruling of thegovernment agency charged with itsenforcement and the legislaturethereafter reenacts the provision withoutsubstantial change, such action is tosome extent confirmatory that the rulingcarries out the legislative purpose.

RULEOF NO ESTOPPELAGAINSTTHE GOVERNMENTGeneral Rule: The Government is notestopped by the mistakes or errors of itsagents; erroneous application andenforcement of law by public officers do

not bar the subsequent correctapplication of statutes. (E. Rodriguez,Inc. vs. Collector, L-23041, July 31,1969)Exception: In the interest of justice andfair play, as where injustice will result tothe taxpayer. (see CIR vs. CA, GR No.117982, Feb. 6, 1997; CIR vs. CA, GR No.107135, Feb. 3, 1999)

AGENCIESINVOLVEDIN TAX ADMINISTRATION1. Bureau of Internal Revenue

internal revenue taxes

Agents of the CIRa. Commissioner of Customs withrespect to taxes on imported goodsb. head of the appropriategovernment office with respect toenergy taxc. banks duly accredited by the CIR

(Sec. 12, 1997 NIRC)2. Bureau of Customs customs law

enforcement3. Provincial, city and municipal

assessors and treasurers local andreal property taxes

ORGANIZATION AND FUNCTION OF THEBUREAU OF INTERNAL REVENUE (BIR)

BIR shall be under the supervisionand control of the Dept. of Finance (Sec.2, NIRC)

POWERSAND DUTIESOFTHE BIRAssessment and collection of all

national internal revenue taxes, fees, andcharges

1. Enforcement of all forfeitures,penalties, and fines connectedtherewith

2. Execution of judgments in all cases

decided in its favor by the Court ofTax Appeals (CTA) and the ordinarycourts

3. Give effect to and administer thesupervisory and police powersconferred to it by the Code or otherlaws

ASSESSMENT a finding by the taxingauthority that the taxpayer has not paidthe correct taxes. It is also a writtennotice to a taxpayer to the effect thatthe amount stated therein is due as a tax

and containing a demand for the paymentthereof.General rule: Taxes are self-assessingand thus, do not require the issuance ofan assessment notice in order to establishthe tax liability of a taxpayer.

Exceptions:

1. Tax period of a taxpayer isterminated [Sec. 6(D), NIRC]

2. Deficiency tax liability arising from atax audit conducted by the BIR [Sec.

56(B), NIRC]3. Tax lien [Sec. 219, NIRC]

4. Dissolving corporation [Sec. 52(c),NIRC]

SIGNIFICANCEOF ASSESSMENTa. In the proper pursuit of judicial and

extrajudicial remedies to enforcetaxpayer liabilities and certainmatters that relate to it, such as theimposition of surcharges andinterests,

b. In the application of statute of

limitations,c. In the establishment of tax liens, and

d. In estimating the revenues that maybe collected by government in thecoming year. (Mamalateo, Victorino.Reviewer on Taxation, 2004)

KINDS

1. SELF- ASSESSMENT- one in which the tax isassessed by the taxpayer himself

2. DEFICIENCY ASSESSMENT- made by the tax

assessor himself whereby the correct




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amount of the tax is determinedafter an examination or investigationis conducted. The liability isdetermined and assessed for the

following reason:a. amount ascertained exceeds that

which is shown as the tax by thetaxpayer in his return

b. no amount of tax is shown in thereturn

c. taxpayer did not file any returnat all

3. ILLEGAL AND VOID ASSESSMENT-assessment wherein tax assessor hasno power to assess at all

4. ERRONEOUS ASSESSMENT- assessor haspower to assess but errs in theexercise thereof

BURDENOF PROOFIN PRE-ASSESSMENT PROCEEDINGSThere is apresumption of correctness

and good faith on the part of the CIR;thus, the burden lies on the taxpayer.Otherwise, the finding of the CIR will beconclusive and he will assess thetaxpayer. The same is true even if theCIR is wrong, if the taxpayer does notcontrovert. (Cagayan Robina SugarMilling Co. vs. Court of Appeals, GR. No.

122451, October 12, 2000)Reasons: a. lifeblood theoryb. presumption of regularity in

performance of publicfunctions

NOTE: Assessments by the BIR must haveon its face the law and facts upon whichthe presumption is made.

PRINCIPLES GOVERNING TAX ASSESSMENTS1. Assessments are prima faciepresumed correct and made in goodfaith.

2. It should be based on actualfacts.3. It is discretionary on the part ofthe Commissioner.

4. The authority of theCommissioner to assess taxes may bedelegated, except the power to makefinal assessments.5. It must be directed to the right

party.

Authority of a Revenue Officer -pursuant to a Letter of Authority issuedby the Regional Director

a. To examine taxpayers withinthe jurisdiction of the district inorder to collect the correctamount of tax;

b. To recommend the assessment ofany deficiency tax due in the samemanner that the said acts couldhave been performed by theRevenue Regional Director.

General Rule: income tax returns areconfidential.Exception: inquiry into income taxreturns may be authorized-

1. inspection is authorized upon writtenorder of the President of thePhilippines;

2. inspection is authorized underFinance Regulations No. 33 of theSecretary of Finance;

3. production of the tax return ismaterial evidence in a criminal casewherein the government is interestedin the result; or

4. production or inspection thereof isauthorized by the taxpayer himself.

Networth Method- inventory method ofincome tax verification.

Applies the accounting principle:assets liabilities = networth

Condition for its use:1. taxpayers books do not clearly

reflect his income or the taxpayerhas no books, or if he has books, herefuses to produce them;

2. there is evidence of possible sourceor sources of income to account forincreases in networth;

3. there is a fixed starting point oropening networth; and

4. there must be proper adjustments toconform with the income tax laws.

POWERSAND DUTIESOFTHE COMMISSIONERI. SECTION 4 (power to interpret tax lawand decide tax cases)




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1. Interpret provisions of this Code andother tax laws subject to review of theSecretary of Finance(Quasi-legislative)

2. Decide: (Quasi-judicial)a) disputed assessmentb) refunds of internal

revenue taxes, fees and chargesc) penalties imposed in

relation thereto

d) other matters arisingfrom this Code or other laws orportions thereof administered by theBIR subject to the exclusiveappellate jurisdiction of the CTA(Sec. 4)

II. SECTION 5 (power to obtaininformation, summon, examine and taketestimony of persons)

3. For the Commissioner toascertain:

(a) correctness of any return or inmaking a return where none hasbeen made

(b) liability of any person for anyinternal revenue tax or incorrecting such liability

(c) tax compliance

The Commissioner is authorized:1. to Examine any relevant Book, paper,

record or other data2. to Obtain any information (costs,

volume of production, receipts, sales,gross income, etc), on a regular basisfrom:i. any person other than the person

under investigation orii. any office or officer of the

national/local government, govtagencies and instrumentalities(Bangko Sentral, govt owned andcontrolled corporations) (e.g. LTO,Register of Deeds)

3. to Summoni. the person liable for tax or required

to file a return orii. any officer or employee of such

person oriii. any person having in his

possession/custody/care-- the books of accounts,-- accounting records of entries

relating to the business of the

person liable for tax or any otherperson-- to produce such books, papers,records, and other data and to

give testimony4. to take the Testimony of the person

concerned, under oath as may berelevant to the inquiry

5. to cause revenue officers andemployees to make a Canvass of anyrevenue district or region

Nothing in Section 5 shall beconstrued as granting the Commissionerthe authority to inquire into bankdeposits other than as provided for undersec. 6 (F) of the Code.

III. SECTION 6 (power to makeassessments, prescribe additionalrequirements for tax administrationand enforcement)

4. Examination of returns anddetermination of tax dueA. After a return has been filed the

Commissioner or hisrepresentative may authorizei.the Examination of any taxpayer

andii.the Assessment of the correct

amount of tax;B. F

ailure to file a return shall notprevent the commissioner fromauthorizing the examination ofany taxpayer;* Any tax or deficiency tax so

assessed shall be paid uponnotice and demand from theCommissioner or his

representative* Any return, statement or

declaration filed in anyauthorized office shall not bewithdrawn; but within threeyears from date of filing, thesame may be modified,changed or amended; providedthat no notice for audit orinvestigation of such return,has in the meantime, beenactually served upon thetaxpayer.




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5.Failure to submit required returns andother documentsIf a person

i. fails to file a required return orreport at the time prescribed orii. willfully or otherwise files a

false or fraudulent return,The Commissioner shall Make orAmend the return from

i. his own knowledge orii. from such

information as he can obtainthrough testimony or otherwisewhich shall be prima faciecorrect and sufficient for alllegal purposes

6.Inventory-taking, Surveillance,Presumptive Gross SalesA. Commissioner may, at any time

during the taxable year(a) order the inventory taking of

goods of any taxpayer or

(b) may place the businessoperations of any person(natural/juridical) underobservation or Surveillance,

if there is reason to believethat such is not declaring his

correct income, sales orreceipts for tax purposes.

The findings may be usedas basis for assessing the taxesand shall be deemed primafacie correct.

B. Commissioner may prescribe aMinimum amount of grossreceipts, sales and taxable base(taking into account the sales andincome of other persons engagedin similar business):

i. When a person has failed toissue receipts as required bysec.113 (Invoice requirementsfor VAT-registered persons)and Sec. 237 (Issuance ofReceipts or CommercialInvoices) or

ii. When the books of accounts orrecords do not correctlyreflect the declarations madeor required to be made in areturn,

Such minimum amount shallbe considered correct.

Terminate taxable period

Commissioner shall declare the tax

period of a taxpayer Terminated andsend notice to the taxpayer of suchdecision with a request for immediatepayment of the tax when it has come tothe knowledge of the Commissioner:

a) that a taxpayer is retiring frombusiness subject to tax or

b) is intending to leave the Phils. orc) to remove his property therefrom

ord) to hide or conceal his property

ore) is performing any act tending to

obstruct the proceedings for thecollection of tax

8. Prescribe Real Property ValuesThe Commissioner is authorized to:a. Divide the Phils. into different

zones or areas andb. Determine the fair market value of

real properties located in eachzone or area

For tax purposes, the value ofthe property shall be whichever is

higher of:a) Fair market value as

determined by theCommissioner; or

b) Fair market value as shown inthe schedule of values of the

provincial and city assessors.

9. Authority to Inquire into Bank Deposit

Notwithstanding R.A. 1405 (BankSecrecy Law) the Commissioner isauthorized to inquire into the Bankdeposits of:

(a) a decedent to determine his grossestate

(b) a taxpayer who has filed anapplication to compromisepayment of tax liability by reasonof financial incapacity

The taxpayers application forcompromise shall not be consideredunless he waives in writing his

privilege under RA 1405 and othergeneral or special laws. Such waiver




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shall authorize the Commissioner toinquire into his bank deposits.

10. Authority to Register tax agents

(a)The Commissioner shall accredit

and Register, individuals andgeneral professional partnershipsand their rep. who prepare andfile tax returns and other papersor who appear before the BIR

(b)The Commissioner shall createnational and regionalaccreditation boards.

Those who are denied accreditation may appeal the sameto the Sec. Of Finance who shall ruleon the appeal within 60 days from

receipt of such appeal. Failure to doso within the prescribed period shallbe deemed as approval foraccreditation.

11. Authority to Prescribe AdditionalRequirements

The Commissioner may prescribethe manner of compliance with anydocumentary or proceduralRequirement for the submission orpreparation of financial statementsaccompanying tax returns.

IV.SECTION7 (Authority to Delegate Power)

12. The Commissioner may delegate thepowers vested in him to

- subordinate officials with rankequivalent to Division Chief or higher,subject to limitations/restrictionsimposed under the rules andregulations

EXCEPT, (the following powersshall NOT be delegated)a) power to Recommend the

promulgation of rules andregulations by the Sec. ofFinance

b) power to Issue rulings of firstimpression or to Reverse, revokemodify any existing rule of theBIR

c) power to Compromise or Abateany tax liability

provided however that theregional evaluation board may

compromise:1. assessments issued by

regional offices involvingdeficiency taxes of P500,000or less and

2. minor criminal violations asmay be determined by therules and regulations

3. discovered by regional anddistrict officials

Regional Evaluation Board iscomposed of:

i. Regional Director as Chairmanii. Asst. Regional Directoriii. Heads of the Legal, Assessment

and Collection Div.iv. Revenue District Officer having

jurisdiction over the taxpayer

d) power to Assign or reassigninternal revenue officers toestablishments wherearticles subject to excise taxare kept.

V. SECTIONS 8, 14, 15, 16, 17 (OtherPowers)

13. Duty to ensure the provision anddistribution of forms, receipts,certificates, and appliances, and theacknowledgment of payment of taxes(Sec. 8)

14. Authority to administer oathsand totake testimony (Sec. 14)

15. Authority to make arrests and

seizures(Sec. 15)

16. Authority to employ, assign orreassign internal revenue officersinvolved in excise tax functions toestablishments where articlessubject to excise tax are produced orkept (Sec. 16)

17. Authority to assign or reassigninternal revenue officers andemployees of the BIR to other orspecial duties connected with the




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enforcement or administration of therevenue laws (Sec. 17)

ARE LEGAL OFFICERS OF THE BIR AUTHORIZED TO

INSTITUTE APPEAL PROCEEDINGS WITHOUT THEPARTICIPATION OF THE SOLICITOR GENERAL?

NO. The institution orcommencement before a proper court ofcivil and criminal actions and proceedingsarising under the Tax Reform Act whichshall be conducted by legal officers ofthe BIR is not in dispute. An appeal fromsuch court, however, is not a matter ofright. It is still the Solicitor General whohas the primary responsibility to appearfor the government in appellateproceedings. (Commissioner vs. La

Suerte Cigar and Cigarette Factory, GRNo. 144942, July 4, 2002)

SOURCES OF REVENUEThe following taxes, fees and charges

are deemed to be national internalrevenue taxes. (Sec. 21, NIRC)1. Income tax2. Estate and donor's taxes3. Value-added tax4. Other percentage taxes5. Excise taxes6. Documentary stamp taxes

7. Such other taxes as are or hereaftermay be imposed and collected by theBureau of Internal Revenue.

II. NATIONAL TAXATION

A. INCOME TAXATION

DEFINITIONSINCOME TAX tax on all yearly profits

arising from property, possessions,

trade or business, or as a tax on apersons income, emoluments,profits and the like (61 CJS 1559)

tax on income, whethergross or net. (27 Am. Jur. 308)

INCOME all wealth, which flows into thetaxpayer other than as a merereturn of capital.

CAPITAL resource of person, which can beused in producing goods andservices.

Income Capital

All wealth, whichflows into the

taxpayer other thanas a mere return ofcapital.

Fund or propertywhich can be used

in producing goodsor services

Flow of Wealth Fund or property

Source of wealth Wealth

REQUISITES FOR INCOME TO BE TAXABLE1. There must be a gain or profit.2. The gain must be realized or

received.3. The gain must not be excluded by law

or treaty from taxation.

TESTS ON TAXABILITY OF INCOME

1. Flow of Wealth Test Thedetermining factor for theimposition of income tax iswhether any gain was derivedfrom the transaction.

1. Realization Test - unless theincome is deemed "realized,"there is no taxable income.

2. Economic-Benefit PrincipleTest-flow of wealth realized is taxableonly to the extent that thetaxpayer is economicallybenefited.

CRITERIAIN IMPOSING INCOME TAX1. CitizenshipPrinciple A citizen of thePhilippines is subject to Philippineincome tax (a.) on his worldwide income,if he resides in the Philippines, or (b.)only on his income from sources withinthe Philippines, if he qualifies asnonresident citizen.2. Residence Principle resident alien isliable to pay income tax on his incomefrom sources within the Philippines butexempt from tax on his income fromsources outside the Philippines.3. Source Principle An alien is subjectto Philippine income tax because hederives income from sources within thePhilippines. Thus, a nonresident alien isliable to pay Philippine income tax on hisincome from sources within thePhilippines such as dividend, interest,




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rent, or royalty, despite the fact that hehas not set foot in the Philippines.

CLASSIFICATION OF TAXPAYERS

Individualsa. citizens

(1) resident citizens (RC)

(2) non-resident citizens (NRC)b. aliens

(1) resident aliens (RA)

(2) non-resident aliens (NRA)

(a) engaged in trade orbusiness within the Phils.(NRAETB)

(b) not engaged in trade orbusiness within the

Philippines (NRANETB)

Corporations

a. Domestic (DC)b. Foreign

(1) resident foreigncorporation (RFC)

(2) non-resident foreigncorporation (NRFC)

EstatesTrustsPartnerships

A. INDIVIDUALS

WHO ARE TAXABLE?1. Resident Citizen2. Non-resident Citizen

A non-resident citizenmeans, aFilipino citizen:a. who establishes to the

satisfaction of the Commissionerthe fact of his physical presenceabroad with a definite intentionto reside therein;

b. who leaves the Philippines duringthe taxable year to resideabroad, either as an immigrant orfor employment on a permanentbasis;

c. who works and derives incomefrom abroad and whoseemployment thereat requires himto be physically present abroadmost of the time during thetaxable year;

d. who is previously considered as a

non-resident and who arrives in

the Philippines at anytime duringthe taxable year to residethereat permanently shall beconsidered non-resident for the

taxable year in which he arrivesin the Philippines with respect tohis income derived from sourcesabroad until the date of hisarrival [Sec.22 (E), NIRC]

NOTE: An overseas contract worker(OCW) is taxable only on incomederived from sources within thePhilippines. [Sec. 23 (B)(C)]

A seaman is considered as anOCW provided the followingrequirements are met:

1. receives compensation for servicesrendered abroad as a member ofthe complement of a vessel; and

2. such vessel is engaged exclusivelyin international trade.

Based on the above provisions,there are three (3) types of nonresidentcitizens, namely: (1) immigrants; (2)employees of a foreign entity on apermanent basis; and(3) overseas contract workers.Immigrants and employees of a foreign

entity on a permanent basis are treatedas nonresident citizens from the timethey depart from the Philippines.However, overseas contract workersmust be physically present abroad mostof the time during the calendar year toqualify as nonresident citizens.

3. Resident alien - means an individualwhose residence is within thePhilippines and who is not a citizenthereof. [Sec.22 (F, NIRC)]

4. Non-resident alien engaged in tradeor business within the Philippines.(NRAETB)

A non-resident alien means anindividual whose residence is notwithin the Philippines and who is nota citizen thereof. [Sec.22 (G)]

The term trade or businessincludes the performance of thefunctions of a public office. [Sec. 22(S)]

The term trade, business orprofession shall not includeperformance of services by the




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taxpayer as an employee. [Sec. 22(CC)]

A non-resident alien individualwho shall come to the Philippines and

stay therein for an aggregate periodof more than 180 days during anycalendar year shall be deemed a non-resident alien doing business in thePhilippines Section 22(G)notwithstanding [Sec. 25(A)(1)]

5. Non-resident alien not engaged intrade or business within thePhilippines. (NRANETB)

ONLY RESIDENT CITIZENS are taxable forincome derived from sources within andwithout the Philippines. All other

individual income taxpayers are taxableonly for income derived from sourceswithin the Philippines.

Tax Rates: Please refer to Annex A.

B. CORPORATIONS

WHO ARE TAXABLE?1. Domestic Corporation created or

organized in the Phils. or under itslaw [Sec. 22(C), NIRC]

2. Resident Foreign Corporation engaged in trade or business withinthe Philippines [Sec. 22(H), NIRC]

3. Non-resident Foreign Corporation not engaged in trade or businesswithin the Philippines [Sec. 22(I),NIRC]

A Corporation Includes:1. Partnerships, no matter

how created or organized;2. Joint-stock companies;3. Joint accounts (cuentas

en participacion)

4. Associations; or5. Insurance companies[Sec. 22(B), NIRC].

Excludes:1. General professional

partnerships;2. Joint venture or

consortium formed for the purpose ofundertaking construction projects orengaging in petroleum, coal,geothermal and other energyoperations pursuant to an operating

or consortium agreement under a

service contract with theGovernment.

CORPORATIONS EXEMPT FROM INCOME TAXATION

(FORINCOME REALIZED AS SUCH) UNDER NIRC1. Those enumerated under Sec. 30.

Exempt corporations are subjectto income tax on their income fromany of their properties, real orpersonal, or from any other activitiesconducted for profit, regardless ofthe disposition made of such income.

2. With respect to GOCCs, the generalrule is that these corporations aretaxable as any other corporationexcept:

a. GSIS

b. SSSc. PHICd. PCSOe. PAGCOR [Sec. 27 (C)]

3. Regional or Area Headquartersunder Sec. 22 (DD) not subject toincome tax

Regional operating headquartersunder Sec. 22(EE) shall pay a tax of10% of their taxable income.

ONLY DOMESTIC CORPORATIONS are

taxable for income derived from sourceswithin and without the Philippines. Allother corporate income taxpayers aretaxable only for income derived fromsources within the Philippines.

Tax Rates: Please refer to Annex B.

C. ESTATES AND TRUSTS

ESTATE refers to the mass of propertiesleft by a deceased person.

RULES ON TAXABILITY OF ESTATEWhen a person who owns property

dies, the following taxes are payableunder the provisions of the income taxlaw:

1. Income tax forindividual under Sec. 24 and 25 (tocover the period beginning January tothe time of death);2. Estate income taxunder Sec. 60 if the estate is underadministration or judicial settlement.




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ESTATES UNDER JUDICIAL SETTLEMENTA. During the Pendency of the

SettlementGeneral Rule: An estate underjudicial settlement is subject toincome tax in the same manner asindividuals. Its status is the same asthe status of the decedent prior tohis death.Exceptions:1. The entitlement to personal

exemption is limited only toP20,000.

2. No additional exemption isallowed.

3. The distribution to the heirsduring the taxable year of estateincome is deductible from thetaxable income of the estate.Such distributed income shallform part of the respective heirstaxable income.

Where no suchdistribution to the heirs is madeduring the taxable year that theincome is earned, and suchincome is subjected to incometax payment by the estate, the

subsequent distribution thereof isno longer taxable on the part ofthe recipient.

B. TERMINATION OF THE JUDICIAL SETTLEMENT(WHERE THE HEIRS STILL DO NOT DIVIDE THEPROPERTY)1. If the heirs contribute to the

estate money, property, orindustry with intention to dividethe profits between/amongthemselves, an unregisteredpartnership is created and theestate becomes liable for thepayment of corporate incometax. (Evangelista vs. Collector,GR No. L-9996, October 15,1957; Oa vs. Commissioner, GRNo. L-19342, May 25, 1972)

2. If the heirs, without contributingmoney, property or industry toimprove the estate, simply dividethe fruits thereof between/among themselves, aco-ownership is created, and

individual income tax is imposed

on the income received by eachof the heirs, payable in theirseparate and individual capacity.(Pascual vs. Commissioner, GR

No. L-78133, October 18, 1988;Obillos vs. Commissioner, GR No.L-68118, October 29, 1985)

ESTATESNOTUNDER JUDICIAL SETTLEMENTPending the extrajudicial

settlement, either of the followingsituations may arise:1. If the heirs contribute money,

property, or industry to the estatewith the intention of dividing theprofits between/among themselves,an unregistered partnership is

created and the estate becomesliable for the payment of corporateincome tax; or

2. If the heirs, without contributingmoney, property or industry to theestate, simply divide the fruitsthereof between/among themselves,a co-ownership is created and incometax is imposed on the incomereceived by each of the heirs,payable in their separate andindividual capacity.

TRUST A right to the property, whetherreal or personal, held by one person forthe benefit of another.

WHEN TRUSTS ARE TAXABLE ENTITIES1. A trust, the income of which is to be

accumulated2. A trust in which the fiduciary may, at

his discretion, either distribute oraccumulate the income.

RULES ON TAXABILITY OF THE INCOME OF A TRUST

1. The income of the trust for thetaxable year which is to bedistributed to the beneficiaries

filing and payment of tax lie on thebeneficiaries.

2. The income of the trust which isto be accumulated or held for futuredistribution whether consisting ofordinary income or gain from the saleof assets included in the "corpus" ofthe estate filing of return and

payment of tax become the burdenof the trustee or fiduciary.




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Exceptions:a. In the case of a revocable trust,

the income of the trust will bereturned by the grantor.

b. In a trust where the income isheld for the benefit of thegrantor, the income of the trustbecomes income to the grantor.

c. In the case of trustadministered in a foreigncountry, the income of the trust;undiminished by any amountdistributed to the beneficiariesshall be taxed to the trustee.

IRREVOCABLE TRUSTS (irrevocable both as tocorpus and as to income)

Trust itself, through the trustee orfiduciary, is liable for the payment ofincome tax. Taxed exactly in the sameway as estates under judicial settlementand its status as an individual is that ofthe trustor. It is entitled to the minimumpersonal exemption (P20,000) anddistribution of trust income during thetaxable year to the beneficiaries isdeductible from the trusts taxableincome.

REVOCABLE TRUSTS the trustor, not thetrust itself, is subject to the payment ofincome tax on the trust income.

EXEMPTION OF EMPLOYEES TRUSTProvided:1. the employees trust must be part of

a pension, stock bonus or profitsharing plan of the employer for thebenefit of some or all of hisemployees;

2. contributions are made to the trust

by such employer, or suchemployees, or both;3. such contributions are made for the

purpose of distributing to suchemployees both the earnings andprincipal of the fund accumulated bythe trust, and

4. that the trust instrument makes itimpossible for any part of the trustcorpus or income to be used for, ordiverted to, purposes other than theexclusive benefit of such employees.(Sec. 60B, NIRC)

Tax exemption is likewise to beenjoyed by the income of the pensiontrust; otherwise, taxation of thoseearnings would result in a diminution of

accumulated income and reducewhatever the trust beneficiaries wouldreceive out of the trust fund.(Commissioner vs. Court of Appeals,Court of Tax Appeals and GCLRetirement Plans, GR No. 95022, March23, 1992)

D. PARTNERSHIPS

KINDS OF PARTNER

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Taxation 1 - San Beda Law

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