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I. General Principles

A.

Definition and Concept of Taxation

As a process, it is a means by which the sovereign, through its law-making body,

raises revenue to defray the necessary expenses of the government. It is merely a wayof apportioning the costs of government among those who in some measures are

privileged to enjoy its benefits and must bear its burdens.

As a power, taxation refers to the inherent power of the state to demand

enforced contributions for public purpose or purposes.

Taxation is a symbiotic relationship, whereby in exchange for the protection that

the citizens get from the government, taxes are paid.1

B.

Nature of Taxation

1. It is an inherent attribute of sovereignty

2. It is legislative in character

C. Characteristics of Taxation

1. The power of taxation is an incident of sovereignty as it is inherent in the

State, belonging as a matter of right to every independent government. It does need

constitutional conferment. Constitutional provisions do not give rise to the power to tax

but merely impose limitations on what would otherwise be an invincible power. No

attribute of sovereignty is more pervading, and at no point does the power of

government affect more constantly and intimately all the relations of life than through

the exactions made under it.2

2. The power to tax is inherent in the State, and the State is free to select the

object of taxation, such power being exclusively vested in the legislature, except where

the Constitution provides otherwise.3

The Congress may by law authorize the President to fix within specified limits,

and subject to such limitations and restrictions as it may impose, tariff rates, import and

export quotas, tonnage and wharfage dues, and other duties or imposts within theframework of the national development program of the Government.

1Commissioner of Internal Revenue vs. Allegre, Inc., et al., L-28896, Feb. 17, 19882Churchill and Tait v. Concepcion, 34 Phil 9693Art. VI, Sec, 28 (2); Art. X, Sec. 5; Art. VI, Sec. 28. par. 2.

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Each local government unit shall have the power to create its own sources of

revenues and to levy taxes, fees, and charges subject to such guidelines and limitations

as the Congress may provide, consistent with the basic policy of local autonomy. Such

taxes, fees, and charges shall accrue exclusively to the local governments.4

3. It is subject to Constitutional and inherent limitations; hence, it is not an

absolute power that can be exercised by the legislature anyway it pleases.

D. Power of Taxation Compared With Other Powers

1. Police Power

2. Power of Eminent Domain

Taxation Police Power Eminent Domain

Purpose

Raising revenue Promote public welfarethru regulations Taking of property forpublic use

Amount of exaction

No limit Limited to the cost of

regulations, issuance of

the license or

surveillance

No exaction,

compensation paid by

the government

Benefits received

No special or direct benefits

received but the enjoyment of

the privileges of living in an

organized society

No direct benefits but a

healthy economic

standard of society or

damnum absque

injuria is attained

Direct benefit results in

the form of just

compensation

Non-impairment of contracts

The impairment rule subsist Contracts may be

impaired

Contracts may be

impaired

Transfer of property rights

4Art. X, Sec. 5

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Taxes paid become part of public

funds

No transfer but only

restraint on the exercise

of property right exists

Property is taken by the

govt upon payment of

just compensation

Scope

Affects all persons, property and

excise

Affects all persons,

property, privileges, and

even rights

Affects only the

particular property

comprehended

Basis

Public necessity Public necessity and theright of the state and the

public to self-protection

and self-preservation

Public necessity, privateproperty is taken for

public use

Authority which exercises the power

Only by the government or

its political subdivisions

Only by the government or

its political subdivisions

May be granted to public

service, companies, or

public utilities

E.

Purpose of Taxation

1. Revenue-raising

To provide funds or property with which the State promotes the general welfare

and protection of its citizens.

2.Non-revenue/special or regulatory

Promotion of General

Welfare

Taxation may be used as an implement of police power

in order to promote the general welfare of the people.5

5see Lutz vs. Araneta, 98 Phil 148 and Osmea vs. Orbos, G.R. No. 99886, Mar. 31, 1993

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Regulation As in the case of taxes levied on excises and privileges

like those imposed in tobacco or alcoholic products or

amusement places like night clubs, cabarets, cockpits,

etc.6

Reduction of Social Inequality This is made possible through the progressive system of

taxation where the objective is to prevent the under-

concentration of wealth in the hands of few individuals.

Encourage Economic Growth In the realm of tax exemptions and tax reliefs, for

instance, the purpose is to grant incentives or

exemptions in order to encourage investments and

thereby promote the countrys economic growth.

e. Protectionism In some important sectors of the economy, as in the

case of foreign importations, taxes sometimes provide

protection to local industries like protective tariffs and

customs

F.

Principles of Sound Tax System

1.

Fiscal Adequacy

The sources of tax revenue should coincide with, and approximate the needs of

government expenditure. Neither an excess nor a deficiency of revenue vis--vis the

needs of government would be in keeping with the principle.

2. Administrative Feasibility

Tax laws should be capable of convenient, just and effective administration

3.

Theoretical Justice

6In the case of Caltex Phils. Inc. vs. COA(G.R. No. 92585, May 8, 1992), it was held that taxes may also be

imposed for a regulatory purpose as, for instance, in the rehabilitation and stabilization of a threatened

industry which is affected with public industry like the oil industry.

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The tax burden should be in proportion to the taxpayers ability to pay7. The

1987 Constitution requires taxation to be equitable and uniform.

G. Theory and Basis of Taxation

1.

Lifeblood Theory

Taxes are the lifeblood of the government, being such, their prompt and certain

availability is an imperious need.8Without taxes, the government would be paralyzed

for lack of motive power to activate and operate it.

2. Necessity Theory

Taxes proceed upon the theory that the existence of the government is a

necessity; that it cannot continue without the means to pay its expenses; and that for

those means, it has the right to compel all citizens and properties within its limits to

contribute.9

3. Benefits-Protection Theory10

The basis of taxation is the reciprocal duty of protection between the state and

its inhabitants. In return for the contributions, the taxpayer receives the general

advantages and protection which the government affords the taxpayer and his property.

4. Jurisdiction over subject and objects

Rules:

a) Tax laws cannot operate beyond a States territorial limits.

b) The government cannot tax a particular object of taxation which is not within

its territorial jurisdiction.

c) Property outside ones jurisdiction does not receive any protection of the

State.

7ability-to-pay principle8Collector of Internal Revenue vs. Goodrich International Rubber Co., Sept. 6, 19659In a case, the Supreme Court held that:

Taxation is a power emanating from necessity. It is a necessary burden to preserve the States

sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores

from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the

citizenry and those which come with the States territory and facilities, and protection which a

government is supposed to provide (Phil. Guaranty Co., Inc. vs Commissioner of Internal Revenue, 13 SCRA

775)10Symbiotic Relationship

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d) If a law is passed by Congress, it must always see to it that the object or

subject of taxation is within the territorial jurisdiction of the taxing authority.

H. Doctrines in Taxation

1.

Prospectivity of tax laws

General Rule Exception

Taxes must only be imposed prospectively. The language of the statute clearly

demands or express that it shall have a

retroactive effect.

2. Imprescriptibility

General Rule Exception

Taxes are imprescriptible. When provided otherwise by the tax law

itself.11

3. Double taxation

a. Strict sense

Referred to as direct duplicate taxation, it means:

1. Taxing twice;

2. by the same taxing authority;

3. within the same jurisdiction or taxing district;

4. for the same purpose;

5. in the same year or taxing period;

6. some of the property in the territory

11 Example: NIRC provides for statutes of limitation in the assessment and collection of taxes therein

imposed.

The law on prescription, being a remedial measure, should be liberally construed to afford protection as

a corollary, the exceptions to the law on prescription be strictly construed. ( CIR vs CA. G.R. No. 104171,

Feb. 24, 1999)

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b.

Broad sense

Referred to as indirect double taxation, it is taxation other than direct duplicate

taxation. It extends to all cases in which there is a burden of two or more impositions.

c. Constitutionality of double taxation

Unlike in the United States Constitution, our Constitution does not prohibit

double taxation.

However, while it is not forbidden, it is something not favored. Such taxation

should, whenever possible, be avoided and prevented.

In addition, where there is direct double taxation, there may be a violation of the

constitutional precepts of equal protection and uniformity in taxation.12

d.

Modes of eliminating double taxation

Two (2) methods of relief:13

Exemption method The income or capital which is taxable at the state of

12The argument against double taxation may not be invoked where one tax is imposed by the State and

the other is imposed by the city, it being widely recognized that there is nothing inherently obnoxious in

the requirement that license fees or taxes be exacted with respect to the same occupation, calling, or

activity by both the State and a political subdivision thereof. And where the statute or ordinance in

question, there is no infringement of the rule on equality ( City of Baguio v. De Leon, 25 SCRA 938)13A tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of

source or situs and of the state of residence with r ega rd to cer tai n cla sse s of inc om e or cap ita l. In

some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other

items of income or capital, both states are given the right to tax, although the amount of tax that may be

imposed by the state of source is limited. The second method for the elimination of double taxation

applies whenever the state of source is given a full or limited right to tax together with the

state of residence. In this case, the treaties make it incumbent upon the state of residence to allow

relief on order to avoid double taxation.

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source or situs is exempted at the state of residence,

although in some instances it may be taken into account in

determining the rate of tax applicable to the taxpayers

remaining income or capital

Credit method Although the income or capital which is taxed in the state

of source is still taxable in the state of residence, the tax

paid in the former is credited against the tax levied in the

latter. The basic difference between the two methods is

that in the exemption method, the focus is on the income

or capital, whereas the credit method focuses upon the tax.

4. Escape from taxation

a.

Shifting of tax burden14

1) Ways of shifting the tax burden

14The transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or

imposed to someone else.

Process by which such tax burden is transferred from statutory taxpayer to another without violating

the law.

What is transferred is not the payment of the tax, but the burden of the tax

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a. Forward shifting When the burden of the tax is transferred from a factor of

production through the factors of distribution until it finally

settles on the ultimate purchaser or consumer.15

b. Backward shifting When the burden of the tax is transferred from the

consumer or purchaser through the factors of distribution

to the factors of production.16

c. Onward shifting When the tax is shifted two or more times either forward

or backward.17

2) Taxes that can be shifted

Only indirect taxes may be shifted;18direct taxes19cannot be shifted.

3) Meaning of impact and incidence of taxation

Impact of taxation Incidence of taxation

The point on which a tax is originally

imposed. In so far as the law is concerned,

The point on which the tax burden finally

rests or settle down. It takes place when

15Example:

Manufacturer or producer may shift tax assessed to wholesaler, who in turn shifts it to the retailer, who

also shifts it to the final purchaser or consumer16Example:

Consumer or purchaser may shift tax imposed on him to retailer by purchasing only after the price is

reduced, and from the latter to the wholesaler, or finally to the manufacturer or producer17Example:

Thus, a transfer from the seller to the purchaser involves one shift; from the producer to the

wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to the purchaser by the

retailer, we have three shifts in all.18e.g. VAT19e.g. Income tax

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the taxpayer is the person who must pay

the tax to the government. He is also

termed as the statutory taxpayer-the one

on whom the tax is formally assessed. He

is the subject of the tax.

shifting has been effected from the

statutory taxpayer to another.

b. Tax avoidance20

The exploitation of the taxpayer of legally permissible alternative tax rates or

methods of assessing taxable property or income in order to avoid or reduce tax liabilit

c. Tax evasion21

The use by the taxpayer of illegal or fraudulent means to defeat or lessen the

payment of tax.

5. Exemption from taxation

a. Meaning of exemption from taxation

20also known as tax minimization; it is not punished by law21also known as tax dodging; it is punishable by law

Elements of tax evasion:

1. The end to be achieved, i.e. payment of less than that known by the taxpayer to be legally due, or

paying no tax when it is shown that tax is due

2. An accompanying state of mind which is described as being evil, in bad faith, willful, or

deliberate and not accidental

3. A course of action (or failure of action) which is unlawful

Indicia of fraud in tax evasion:

1. Failure to declare for taxation purposes true and actual income derived from business for two (2)

consecutive years; or

2. Substantial under declaration of income tax returns of the taxpayer for four (4) consecutive years

coupled with unintentional overstatement of deductions

Evidence to prove tax evasion:

Since fraud is a state of mind, it need not be proved by direct evidence but may be proved from the

circumstances of the case.

Failure of the taxpayer to declare for taxation purposes his true and actual income derived from his

business for two (2) consecutive years is an indication of his fraudulent intent to cheat the government of

its due taxes. (Republic vs. Gonzales, 13 SCRA 638)

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Agreed to by the taxing authority in contracts lawfully entered into by them

under enabling laws.

d. Rationale/grounds for exemption

Rationale for granting tax exemptions Grounds for granting tax exemptions

Its avowed purpose is some public benefit or

interests which the lawmaking body

considers sufficient to offset the monetary

loss entailed in the grant of the exemption.

The theory behind the grant of tax

exemptions is that such act will benefit the

body of the people. It is not based on theidea of lessening the burden of the individual

owners of property.

1) May be based on contract.26

2) May be based on some ground of

public policy.27

3) May be based on grounds of

reciprocity or to lessen the rigors ofinternational double or multiple

taxation.28

e.

Revocation of tax exemption

It is an act of liberality which could be taken back by the government unless

there are restrictions. Since taxation is the rule and taxation therefrom is the exception,

the exemption may be withdrawn by the taxing authority.29

26 In such a case, the public, which is represented by the government is supposed to receive a full

equivalent therefor, i.e. charter of a corporation.27 i.e., to encourage new industries or to foster charitable institutions. Here, the government need not

receive any consideration in return for the tax exemption.28Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear provision therefor.29Mactan Cebu International Airport Authority vs., Marcos, 261 SCRA 667.

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6. Compensation and Set-off30

General Rule Exception

Taxes are not subject to set-off or legal

compensation. The government and the

taxpayer are not creditors and debtors or

each other. Obligations in the nature of

debts are due to the government in its

corporate capacity, while taxes are due to

the government in its sovereign capacity.31

Where both the claims of the government

and the taxpayer against each other have

already become due and demandable as

well as fully liquated.32

7. Compromise

A contract whereby the parties, by reciprocal concessions, avoid litigation or put

an end to one already commenced.33

8. Tax amnesty

a. Definition

A general pardon or intentional overlooking by the State of its authority to

impose penalties on persons otherwise guilty of evasion or violation of a revenue to

collect what otherwise would be due it and, in this sense, prejudicial thereto.34

30Requisites of Compensation in taxation

1. The tax assessed and the claim against the government be fully liquidated.

2. The tax assessed and the claim against the government is due and demandable, and

3. The government had already appropriated funds for the payment of the claim ( Domingo v. Garlitos,

L-18904, June 29, 1963)31Philex Mining Corp. vs. CIR, 294 SCRA 687; Republic vs. Mambulao Lumber Co., 6 SCRA 62232see Domingo vs. Garlitos, supra33Art. 2028, New Civil Code

Requisites:

1. Taxpayer must have a tax liability.

2. There must be an offer by taxpayer or CIR, of an amount to be paid by taxpayer.

3. There must be acceptance of the offer in settlement of the original claim.

When taxes may be compromised:

1. A reasonable doubt as to the validity if the claim against the taxpayer exists;

2. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.

3. Criminal violations, except:

a. Those already filed in court

b. Those involving fraud.

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9. Construction and Interpretation of:

a. Tax laws

General Rule Exception

Tax laws are liberally interpreted in favor

of the taxpayer and strictly against the

government.

Liberal interpretation does not apply to tax

exemptions which should be construed in

strictissimi jurisagainst the taxpayer.35

b. Tax exemption and exclusion

General Rule Exceptions

In the construction of tax statutes,

exemptions are not favored and are

construed strictissimi juris against the

taxpayer.36The fundamental theory is that

all taxable property should bear its share

in the cost and expense of the

government.

Taxation is the rule and exemption. He

who claims exemption must be able to

justify his claim or right thereto by a grantexpress in terms too plain to be mistaken

1. The law itself expressly provides for a

liberal construction thereof.

2. In cases of exemptions granted to

religious, charitable and educational

institutions or to the government or its

agencies or to public property because the

general rule is that they are exempted

from tax.

35Reason: Lifeblood doctrine36Strict interpretation does not apply to the government and its agencies

Petitioner cannot invoke the rule of strictissimi juris with respect to the interpretation of statutes

granting tax exemptions to the NPC. The rule on strict interpretation does not apply in the case of

exemptions in favor of a political subdivision or instrumentality of the government [Maceda v. Macaraig]

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and too categorical to be

misinterpreted.If not expressly

mentioned in the law, it must be at least

within its purview by clear legislative

intent.

c. Tax rules and regulations

1) General rule only

They shall not be given retroactive application if the revocation, modification or

reversal will be prejudicial to the taxpayers.37

d. Penal provisions of tax laws

Tax laws are civil and not penal in nature, although there are penalties provided

for their violation.

The purpose of tax laws in imposing penalties for delinquencies is to compel the

timely payment of taxes or to punish evasion or neglect of duty in respect thereof.

e. Non-retroactive application to taxpayers

1) Exceptions

A statute may operate retroactively provided it is expressly declared or is clearly

the legislative intent. But a tax law should not be given retroactive application when it

would be harsh and oppressive.

I. Scope and Limitation of Taxation

1. Inherent Limitations

37Sec. 246

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a. Public Purpose38

The tax must be used:

1) for the support of the state or

2) for some recognized objects of governments or

3) directly to promote the welfare of the community39

b. Inherently Legislative

1) General Rule

Taxation is purely legislative, Congress cannot delegate the power to others. This

limitation arises from the doctrine of separation of powers among the three branches of

government.

2) Exceptions

a) Delegation to local governments40

The power of local government units to impose taxes and fees is always subject

to the limitations which the Congress may provide, the former having no inherent

power to tax.41

The power to tax is primarily vested in the Congress, however, in our jurisdiction,

it may be exercised by local legislative bodies, no longer merely by virtue of a validdelegation but pursuant to direct authority conferred by Section 5,42 Article X of

38Test in determining Public Purposes in tax:

a. Duty Testwhether the thing to be threatened by the appropriation of public revenue is something

which is the duty of the State, as a government.

b. Promotion of General Welfare Test whether the law providing the tax directly promotes the

welfare of the community in equal measure.

The term public purpose is synonymous with governmental purpose; a purpose affecting the

inhabitants of the state or taxing district as a community and not merely as individuals.

A tax levied for a private purpose constitutes a taking of property without due process of law.

The purposes to be accomplished by taxation need not be exclusively public. Although private

individuals are directly benefited, the tax would still be valid provided such benefit is only incidental.

The test is not as to who receives the money, but the character of the purpose for which it is expended;

not the immediate result of the expenditure but rather the ultimate.

In the imposition of taxes, public purpose is presumed.39taxation as an implement of police power40Art. X. Sec. 541Basco v. PAGCOR42 Each local government unit shall have the power to create its own sources of revenues and to levy

taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent

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the1987 Constitution, subject to guidelines and limitations which Congress may provide

which must be consistent with the basic policy of local autonomy.43

b) Delegation to the President44

The power granted to Congress under this constitutional provision to authorizethe President to fix within specified limits and subject to such limitations and

restrictions as it may impose, tariff rates and other duties and imposts include tariffs

rates even for revenue purposes only. Customs duties which are assessed at the

prescribed tariff rates are very much like taxes which are frequently imposed for both

revenue-raising and regulatory purposes.45

c) Delegation to administrative agencies

With respect to aspects of taxation not legislative in character.46

c. Territorial

1) Situs of Taxation47

a)

Meaning

Literally means the place of taxation.

The place or the authority that has the right to impose and collect taxes.48 It is

premised upon the symbiotic relation between the taxpayer and the State.

with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local

governments.43MCIAA v. Marcos, 261 SCRA 66744Art.VI, Sec. 28(2)45Garcia vs. Executive Secretary, et. al., G.R. No. 101273, July 3, 199246Example: assessment and collection

Certain aspects of the taxing process that are not really legislative in nature are vested in

administrative agencies. In these cases, there really is no delegation, to wit:

a) power to value property

b) power to assess and collect taxes

c) power to perform details of computation, appraisement or adjustments.

For the delegation to be constitutionally valid, the law must be complete in itself and must set forth

sufficient standards.47 It is an inherent mandate that taxation shall only be exercised on persons, properties, and excise

within the territory of the taxing power because:

1. Tax laws do not operate beyond a countrys territorial limit.

2. Property which is wholly and exclusively within the jurisdiction of another state receives none of

the protection for which a tax is supposed to be compensation.

However, the fundamental basis of the right to tax is the capacity of the government to provide

benefits and protection to the object of the tax. A person may be taxed, even if he is outside the taxing

state, where there is between him and the taxing state, a privity of relationship justifying the levy.

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b) Situs of Income Tax

1) From sources within the

Philippines

2)

From sources without thePhilippines

Determined by the nationality, residence of the taxpayer and source of income.49

3) Income partly within and partly

without the Philippines

Allocated or apportioned to sources within or without the Philippines.50

c) Situs of Property Taxes

(1) Taxes on Real Property

The place where the property is located. The applicable concept is lex situs or lex

rei sitae.51

(2) Taxes on Personal Property

Tangible personal property Intangible personal property

Where the property is physically locatedalthough the owner resides in another

jurisdiction.52

The place where the owner is located. Theapplicable concept is mobilia sequuntur

personam.53

48Commissioner vs. Marubeni, G.R. No. 137377, Dec.18, 200149Sec. 42

Theories:

1. Domicillary theory - the location where the income earner resides is the situs of taxation

2. Nationality theory - the country where the income earner is a citizen is the situs of taxation

3. Source rule - the country which is the source of the income or where the activity that produced the

income took place is the situs of taxation.50 For the purpose of computing the taxable income therefrom, where items of gross income are

separately allocated to sources within the Philippines, there shall be deducted:

(a) the expenses, losses and other deductions properly apportioned or allocated thereto, and

(b) a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to

some items or classes of gross income. The remainder, if any, shall be included in full as taxable income

from sources within the Philippines.51We can only impose property tax on the properties of a person whose residence is in the Philippines.5251 Am Jur. 46753movables follow the owner or domicile of the owner

Exceptions:

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The place of sale.

(3) VAT

Where the goods, property or services are destined, used or consumed.

d. International Comity56

The property of a foreign state or government may not be taxed by another.57

f.

Exemption of Government Entities, Agencies, and

Instrumentalities

i. Agencies performing governmental functions - tax exempt58

ii. Agencies performing proprietary functions - subject to tax.

2. Constitutional Limitations

a. Provisions Directly Affecting Taxation

56Comity is the respect accorded to other sovereign nations.57The grounds for the above are:

1. sovereign equality among states

2. usage among states that when one enter into the territory of another, there is an implied

understanding that the power does not intend to degrade its dignity by placing itself under the

jurisdiction of the latter

3. foreign government may not be sued without its consent so that it is useless to assess the tax since it

cannot be collected

4. reciprocity among states58The exemption applies only to governmental entities through which the government immediately and

directly exercises its sovereign powers.

Tax exemption of property owned by the Republic of the Philippines refers to the property owned by

the government and its agencies which do not have separate and distinct personality (NDC vs. Cebu City)

Those created by special charter (incorporated agencies) are not covered by the exemption

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

institutions

All revenues and assets of non-stock, non-profit educational institutions used

actually, directly, and exclusively for educational purposes shall be exempt from taxes

and duties.63

6) Majority vote of Congress for grant of tax exemption

No law granting any tax exemption shall be passed without the concurrence of a

majority of all the members of the Congress.64

7) Prohibition on use of tax levied for special purpose

All money collected or any tax levied for a special purpose shall be treated as a

special fund and paid out for such purpose only. If the purpose for which a special fund

was created has been fulfilled or abandoned the balance, if any, shall be transferred to

the general funds of the government.65

62Sec. 4(4), Art. XIV.

The exemption granted to non-stock, non-profit educational institution covers income, property, and

donors taxes, and custom duties.

To be exempt from tax or duty, the revenue, assets, property or donation must be used actually,

directly and exclusively for educational purpose.

In the case or religious and charitable entities and non-profit cemeteries, the exemption is limited to

property tax.

The said constitutional provision granting tax exemption to non-stock, non-profit educational institution

is self-executing.Tax exemptions, however, of proprietary (for profit) educational institutions require prior legislative

implementation. Their tax exemption is not self-executing.

Lands, Buildings, and improvements actually, directly, and exclusively used for educational purposed

are exempt from property tax, whether the educational institution is proprietary or non-profit63Sec. 4 (3), Art. XIV

Proceeds of the sale of real property by the Roman Catholic church is exempt from income tax because

the transaction was an isolated one (Manila Polo Club vs. CTA)

Income derived from the hospital pharmacy, dormitory and canteen was exempt from income tax

because the operation of those entities was merely incidental to the primary purpose of the exempt

corporation (St. Paul Hospital of Iloilo vs. CIR)

Where the educational institution is private and non-profit (but a stock corporation), it is subject to

income tax but at the preferential rate of ten percent (10%)64Sec. 28(4), Art. VI

The provision requires the concurrence of a majority, not of attendees constituting a quorum, but of all

members of the Congress.65Sec. 29(3), Art. VI

An example is the Oil Price Stabilization Fund created under P.D. 1956 to stabilize the prices of

imported crude oil. In a decide case, it was held that where under an executive order of the President, this

special fund is transferred from the general fund to a trust liability account, the constitutional mandate

is not violated. The OPSF, according to the court, remains as a special fund subject to COA audit ( Osmea

vs Orbos, et al., G.R. No. 99886, Mar. 31, 1993)

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8) Presidents veto power on appropriation, revenue, tariff

bills

The President shall have the power to veto any particular item or items in an

Appropriation, Revenue or Tariff bill but the veto shall not affect the item or items to

which he does not object.66

9) Non-impairment of jurisdiction of the Supreme Court

The Congress shall have the power to define, prescribe, and apportion the

jurisdiction of the various courts but may not deprive the Supreme Court of its

jurisdiction over cases enumerated in Sec. 567hereof.

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

its own sources of revenue

Each local government unit has the power to create its own revenue and to levy

taxes, fees and charges subject to such guidelines and limitations as the Congress may

provide.68

66Sec. 27(2), Art. VI67The Supreme Court shall have the following powers:

1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers and consuls,

and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus.

2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may

provide, final judgments and orders of lower courts in:

a. All cases in which the constitutionality or validity of any treaty, international or executive

agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in

question.b. All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in

relation thereto.

c. All cases in which the jurisdiction of any lower court is in issue.

d. All criminal cases in which the penalty imposed is reclusion perpetuaor higher.

e. All cases in which only an error or question of law is involved.

3. Assign temporarily judges of lower courts to other stations as public interest may require. Such

temporary assignment shall not exceed six months without the consent of the judge concerned.

4. Order a change of venue or place of trial to avoid a miscarriage of justice.

5. Promulgate rules concerning the protection and enforcement of constitutional rights, pleading,

practice, and procedure in all courts, the admission to the practice of law, the integrated bar, and legal

assistance to the under-privileged. Such rules shall provide a simplified and inexpensive procedure for the

speedy disposition of cases, shall be uniform for all courts of the same grade, and shall not diminish,

increase, or modify substantive rights. Rules of procedure of special courts and quasi-judicial bodies shall

remain effective unless disapproved by the Supreme Court.

6. Appoint all officials and employees of the Judiciary in accordance with the Civil Service Law. (Art. VIII)68Sec 5, Art. X

Local government units have no power to further delegate said constitutional grant to raise revenue,

because what is delegated is not the enactment or the imposition of a tax, it is the administrative

implementation.

The power of local government units to impose taxes and fees is always subject to the limitations

which Congress may provide, the former having no inherent power to tax.

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11) Flexible tariff clause

This clause provides the authority given to the President to adjust tariff rates

under Section 40169of the Tariff and Customs Code.70

12) Exemption from real property taxes

Charitable institutions, churches and parsonages or convents appurtenant

thereto, mosques, non-profit cemeteries, and all lands, building, and improvements

actually, directly and exclusivelyused for religious, charitable or educational purposes

shall be exempt from taxation.71

13) No appropriation or use of public money for religious

purposes

No public money or property shall be appropriated, applied, paid or employed,

directly or indirectly for the use, benefit, support of any sect, church, denomination,sectarian institution, or system of religion or of any priest, preacher, minister, or other

religious teacher or dignitary as such except when such priest, preacher, minister or

dignitary is assigned to the armed forces or to any penal institution, or government

orphanage or leprosarium.72

Municipal corporations are mere creatures of Congress which has the power to create and abolish

municipal corporations. Congress therefore has the power to control over local government units. If

Congress can grant to a municipal corporation the power to tax certain matters, it can also provide for

exemptions or even take back the power (Basco vs. PAGCOR)69In the interest of national economy, general welfare and/or national security, the President upon the

recommendation of the National Economic and Development Authority is empowered:1) To increase, reduce or remove existing protective rates of import duty, provided that the increase

should not be higher than 100% ad valorem

2) To establish import quota or to ban imports of any commodity

3) To impose additional duty on all imports not exceeding 10% ad valorem.70Garcia v. Executive Secretary, G.R. No. 101273, July 3, 1992)71Sec. 28(3), Art. VI

Lest of the tax exemption: the use and not ownership of the property

To be tax-exempt, the property must be actually, directly and exclusively used for the purposes

mentioned.

The word exclusively means primarily.

The exemption is not limited to property actually indispensable but extends to facilities which are

incidental to and reasonably necessary for the accomplishment of said purposes.

The constitutional exemption applies only to property tax.

However, it would seem that under existing law, gifts made in favor or religious charitable and

educational organizations would nevertheless qualify for donors gift tax exemption. (Sec. 101(9)(3), NIRC)

The constitutional tax exemptions refer only to real property that are actually, directly and exclusively

used for religious, charitable or educational purposes, and that the only constitutionally recognized

exemption from taxation of revenues are those earned by non-profit, non-stock educational institutions

which are actually, directly and exclusively used for educational purposes. (Commissioner of Internal

Revenue v. Court of Appeals, et al., 298 SCRA 83)72Sec. 29(2), Art. VI

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b. Provisions Indirectly Affecting Taxation

1) Due process

No person shall be deprived of life, liberty or property without due process oflaw73x x x.

2)

Equal protection

xxx nor shall any person be denied the equal protection of the laws.74

3)

Religious freedom

No law shall be made respecting an establishment of religion or prohibiting the

free exercise thereof. The free exercise and enjoyment of religious profession and

worship, without discrimination or preference, shall be forever allowed.75

4) Non-impairment of obligations of contracts

No law impairing the obligation of contract shall be passed.76

J. Stages of Taxation

1. Levy

Determination of the persons, property or excises to be taxed, the sum or sumsto be raised, the due date thereof and the time and manner of levying and collecting

taxes.

Public property may be leased to a religious group provided that the lease will be totally under the

same conditions as that to private persons (amount of rent).

Congress is without power to appropriate funds for a private purpose.73Sec. 1, Art. III74Ibid.75Sec. 5 Art. III

License fees/taxes would constitute a restraint on the freedom of worship as they are actually in the

nature of a condition or permit of the exercise of the right.

However, the Constitution or the Free Exercise of Religion clause does not prohibit imposing a generally

applicable sales and use tax on the sale of religious materials by a religious organization. (see Tolentino vs

Secretary of Finance, 235 SCRA 630)76Sec. 10, Art. III

A law which changes the terms of the contract by making new conditions, or changing those in the

contract, or dispenses with those expressed, impairs the obligation.

The non-impairment rule, however, does not apply to public utility franchise since a franchise is subject

to amendment, alteration or repeal by the Congress when the public interest so requires.

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2. Assessment and Collection

The manner of enforcement of the obligation on the part of those who are

taxed.77

The two processes together constitute the taxation system.

3. Payment

The act of compliance by the taxpayer, including such options, schemes or

remedies as may be legally available.

4. Refund

The recovery of any tax alleged to have been erroneously or illegally assessed or

collected, or of any penalty claimed to have been collected without authority, or of any

sum alleged to have been excessively, or in any manner wrongfully collected.

K. Definition, Nature, and Characteristics of Taxes

Definition Taxesare the enforced proportional contributions from

persons and property levied by the law-making body of

the State by virtue of its sovereignty for the support of

government and for public needs.

Nature They are not arbitrary exactions but contributions levied

by authority of law, and by some rule of proportion

which is intended to ensure uniformity of contribution

and a just apportionment of the burdens of government.

Characteristics 1. It is levied by the law-making body of the State.78

2. It is an enforced contribution.79

3. It is generally payable in money.80

77This includes payment by the taxpayer and is referred to as tax administration78The power to tax is a legislative power which under the Constitution only Congress can exercise through

the enactment of laws. Accordingly, the obligation to pay taxes is a statutory liability.79A tax is not a voluntary payment or donation. It is not dependent on the will or contractual assent,

express or implied, of the person taxed. Taxes are not contracts but positive acts of the government.

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4. It is proportionate in character.81

5. It is levied on persons or property.82

6. It is levied for public purpose or purposes.83

7. It is levied by the State which has jurisdiction over the

persons or property.84

L. Requisites of a valid tax

1) It should be for a public purpose

2)

The rule of taxation should be uniform

3) Either the person or property taxed be within the jurisdiction of the taxing

authority

4) The assessment and collection be in consonance with the due process clause

5)

The tax must not infringe on the inherent and constitutional limitations of

the power of taxation.85

M. Tax as distinguished from other forms of exactions

1. Tariff

May be used in three (3) senses:

a. A book of rates drawn usually in alphabetical order containing the names of

several kinds of merchandise with the corresponding duties to be paid for the same.

b. Duties payable on goods imported or exported.86

80Tax is a pecuniary burdenan exaction to be discharged alone in the form of money which must be in

legal tender, unless qualified by law, such as R.A. 304 which allows backpay certificates as payment of

taxes.81It is ordinarily based on the taxpayers ability to pay.82A tax may also be imposed on acts, transactions, rights or privileges.83Taxation involves, and a tax constitutes, a burden to provide income for public purposes.84The persons, property or service to be taxed must be subject to the jurisdiction of the taxing state.85Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. But

their collection should not be tainted with arbitrariness86P.D. No. 230

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c. The system or principle of imposing duties on the importation/exportation of

goods.

2. Toll

Sum of money for the use of something, generally applied to the considerationwhich is paid for the use of a road, bridge of the like, of a public nature.

Tax Toll

Demand of sovereignty Demand of proprietorship

Paid for the support of the government Paid for the use of anothers property

Generally, no limit as to amount imposed Amount depends on the cost of

construction or maintenance of the public

improvement used

Imposed only by the government Imposed by the government or private

individuals or entities

3. License fee

A charge imposed under the police power for the purposes of regulation.87

Tax License/Permit Fee

87Three kinds of licenses are recognized in the law:

1. Licenses for the regulation of useful occupations.

2. Licenses for the regulation or restriction of non-useful occupations or enterprises

3. Licenses for revenue only

Importance of the distinctions between tax and license fee:

1. Some limitations apply only to one and not to the other, and that exemption from taxes may not

include exemption from license fees.

2. The power to regulate as an exercise of police power does not include the power to impose fees for

revenue purposes. (seeAmerican Mail Line vs City of Butuan, L-12647, May 31, 1967 and related cases)

3. An extraction, however, maybe considered both a tax and a license fee.

4. But a tax may have only a regulatory purpose.

5. The general rule is that the imposition is a tax if its primary purpose is to generate revenue and

regulation is merely incidental; but if regulation is the primary purpose, the fact that incidentally revenue

is also obtained does not make the imposition of a tax. (see Progressive Development Corp. vs Quezon

City, 172 SCRA 629)

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Enforced contribution assessed by

sovereign authority to defray public

expenses

Legal compensation or reward of an officer

for specific purposes

For revenue purposes For regulation purposes

An exercise of the taxing power An exercise of the police power

Generally no limit in the amount of tax to

be paid

Amount is limited to the necessary

expenses of inspection and regulation

Imposed also on persons and property Imposed on the right to exercise privilege

4. Special assessment

An enforced proportional contribution from owners of lands especially or

peculiarly benefited by public improvements.88

Tax Special Assessment

Imposed on persons, property and excise Levied only on land

Personal liability of the person assessed Not a personal liability of the person

assessed, i.e. his liability is limited only to

the land involved

Based on necessity as well as on benefits

received

Based wholly on benefits

88 Since special assessments are not taxes within the constitutional or statutory provisions on tax

exemptions, it follows that the exemption under Sec. 28(3), Art. VI of the Constitution does not apply to

special assessments.

However, in view of the exempting proviso in Sec. 234 of the Local Government Code, properties which

are actually, directly and exclusively used for religious, charitable and educational purposes are not

exactly exempt from real property taxes but are exempt from the imposition of special assessments as

well. (see Aban)

The general rule is that an exemption from taxation does not include exemption from special

assessment.

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General application89 Exceptional both as time and place

5. Debt

Debt is based upon juridical tie, created by law, contracts, delicts or quasi-delicts

between parties for their private interest or resulting from their own acts or omissions.

Tax Debt

Based on law Based on contracts, express or implied

Generally, cannot be assigned Assignable

Generally payable in money May be paid in kind

Generally not subject to set-off or

compensation

May be subject to set-off or compensation

Imprisonment is a sanction for non-

payment of tax except poll tax

No imprisonment for non-payment of debt

Governed by special prescriptive periods

provided for in the Tax Code

Governed by the ordinary periods of

prescriptions

Does not draw interest except only whendelinquent

Draws interest when so stipulated, or incase of default

89seeApostolic Prefect vs Treas. Of Baguio, 71 Phil 547

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N. Kinds of Taxes

1. As to object

Personal, capitation, or poll

tax

Property tax Privilege tax

Tax of a fixed amount

imposed on persons

residing within a specified

territory, whether citizens

or not, without regard to

their property or the

occupation or business inwhich they may be

engaged.90

Tax imposed on property,

real or personal, in

proportion to its value or in

accordance with some

other reasonable method

of apportionment.

A charge imposed upon the

performance of an act, the

enjoyment of privilege, or

the engaging in an

occupation.

2. As to burden or incidence

Direct Indirect

Demanded from the person who also

shoulders the burden of the tax. It is a tax

which the taxpayer is directly or primarilyliable and which he or she cannot shift to

another.

Demanded from a person in the

expectation and intention that he or she

shall indemnify himself or herself at theexpense of another, falling finally upon the

ultimate purchaser or consumer. A tax

which the taxpayer can shift to another.

90i.e. community tax.

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There are different tax rates There is a single tax rate

There are different categories of taxable

income

There is no need for classification as all

taxpayers are subjected to a single taxrate.

Usually used in the income taxation of

individuals

Usually applied to corporations.

c. Semi-schedular or semi-global tax system93

A system where the compensation, business or professional income, capital gainand passive income not subject to final tax, and other income are added together to

arrive at the gross income, and after deducting the sum of allowable deductions from

business or professional income, capital gain and passive income not subject to final tax,

and other income, in the case of corporations, as well as personal and additional

exemptions, in the case of individual taxpayers, the taxable income is subjected to one

set of graduated tax rates; method of taxation under the law.

2. Features of the Philippine Income Tax Law

Direct tax Progressive Comprehensive Semi-schedular or

semi-global tax

system94

One assessed upon

the property,

person, business

income, etc. of

those who pay

them.

The tax rates

increase as the tax

base increases. In

certain cases,

however, final taxes

are imposed onpassive income.95

The Philippine

Income tax law

adopted the so-

called

comprehensive tax

situs comprehensive in

the sense that it

practically applies

93approach used in the Philippines94supra95The individual income tax system, in the main, is progressive in nature

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all possible rules of

tax situs.

3. Criteria in Imposing Philippine Income Tax

Citizenship Principle Residence Principle Source Principle

A citizen of the Philippines

is subject to Philippine

income tax

(a) on his worldwide

income, if he resides in the

Philippines, or

(b) only on his income from

sources within the

Philippines, if he qualifies

as nonresident citizen.

A resident alien is liable to

pay income tax on his

income from sources within

the Philippines but exempt

from tax on his income

from sources outside the

Philippines.

An alien is subject to

Philippine income tax

because he derives income

from sources within the

Philippines. Thus, a

nonresident alien is liable

to pay Philippine income

tax on his income fromsources within the

Philippines96 despite the

fact that he has not set foot

in the Philippines.

4. Types of Philippine Income Tax

Presumptive Income Tax Composite Tax Unitary Income Tax

A scale of income taxes is

imposed in relation to a

group of persons actualexpenditure and the

presumed income.

A tax consisting of a series

of separate quasi-personal

taxes, assessed on theparticular source of income

with a superimposed

personal tax on the income

as a whole.

Incomes are arranged

according to source. The

separate items are addedtogether and the rate

applied to the resulting

total income.

96such as dividend, interest, rent, or royalty

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5. Taxable Period

Calendar Period Fiscal Period Short Period

A period of twelve (12)months commencing from

January 1 and ending

December 31.

An accounting period of 12months ending on the last

day of any month other

than December.97

A period of less than twelve(12) months.

6. Kinds of Taxpayers

a. Individual Taxpayers

1) Citizens

a) Resident citizens98

97ex. Feb. 1 to Jan. 3198Taxable for income derived from all sources based on taxable (i.e., net) income

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Citizens of the Philippines who are residing therein.

b) Non-resident citizens99

1. A citizen of the Philippines who establishes to the satisfaction of the

Commissioner of Internal Revenue (CIR) the fact of his physical presence abroad with adefinite intention to reside therein.

2. A citizen of the Phils. who leaves the country during the taxable year to reside

abroad, either as immigrant or for employment or on permanent basis.

3. A citizen of the Phils. who works and derives from abroad and whose

employment thereat requires him to be physically present abroad most of the time

during the taxable year.

4. A citizen who has been previously considered as non-resident citizen and who

arrives in the Phils. at any time during the taxable year to reside permanently in the

country.100

5. A citizen who shall have stayed outside the Phils. for 183 days or more by the

end of the year.101

2) Aliens102

99Taxable for income derived within the Philippines based on taxable (i.e., net) income100He shall be considered a NRC for the taxable year in which he arrives in the Phils. with respect to his

income derived from sources abroad until the date of his arrival in the Phils.101Sec. 22 (E)

The continuity of residence abroad is not essential. If physical presence is established, such physical

presence for the calendar year is not interrupted by reasons of travels to the Phils. (Rev. Regs. No. 9-73,

November 26, 1973)

An overseas contract worker is taxable only on income from sources within the Philippines. (Sec.

23 (c).

A seaman who is a Filipino citizen and who receives compensation for services rendered abroad as

member of the complement of a vessel engaged exclusively in international trade is treated as an

overseas contract worker.

Length of stay is indicative of intention. A citizen of the Philippines who shall have stayed outside

the Philippines for 183 days or more by the end of the year is a non-resident citizen. His presence

abroad, however, need not be continuous. [RR1-79]102What makes an alien a resident or non-resident alien is his intention with regard to the length and

nature of his stay. Thus:

a. One who comes to the Philippines for a definite purpose which in its very nature may

be promptly accomplished is not a resident citizen.

b. One who comes to the Philippines for a definite purpose which in its very nature would

require an extended stay, and to that end, makes his home temporarily in the Philippines, becomes a

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a) Resident aliens

Those whose residence are within the Philippines but who are not citizens

thereof.103

b) Non-resident alien104

Those not residing in the Phils. and who are not citizens thereof.105

(1) Engaged in trade or business

An alien who stays in the Philippines for more than 180 days.106

(2) Not engaged in trade or business

An alien who stays in the Philippines for 180 days or less.107

resident, though it may be his intention at all times to return to his domicile abroad when the purpose

for which he came has been consummated or abandoned. (Sec. 5, RR 2)

Length of stay is indicative of intention.

An alien who shall have stayed in the Philippines for more than one (1) year by the end of the

taxable year is a resident alien

An alien who shall come to the Philippines and stay for an aggregate period of more than one hundred

eighty (180) days during a calendar year shall be considered a non-resident alien in business, or in the

practice of profession, in the Philippines. [Sec. 25(A)(1)] Thus, if an alien stays in the Philippines for 180

days or less during the calendar year, he shall be deemed a non-resident alien not doing business in thePhilippines, regardless of whether he owns

1. Stock in trade of the taxpayer, or other property of a kind which would properly be included in an

inventory of a taxpayer if on hand at the end of the taxable year (example: Raw Materials Inventory, Work

in Process Inventory, Office Supplies Inventory)

2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade

or business (example: Merchandise Inventory)

3. Property used in the trade or business which is subject to the allowance for depreciation

(example: Office Equipment) actually engages in trade or business therein. (Mamalateo)103Sec. 22 [F], NIRC

A mere floating intention, indefinite as to time, to return to another country is not sufficient to

constitute him a transient.

For tax purposes, a resident alien is;

1. An alien who lives in the Phils. with no definite intention to stay as a resident.

2. One who comes in the Phils. for definite purposes which in its very nature would require an

extended stay and to that end, makes his home temporarily in the Phils.

3. An alien who stay within the Phils. for more than 12 months from the date of his arrival in the Phils.104A non-resident alien individual who came to the Phils. and stayed therein for an aggregate period of

more than 180 days during any calendar year shall be deemed a NRA doing business in the Phils.105Sec. 22 (G), id.106Sec. 25 [A], NIRC107Sec. 25 [B], id.

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(3) Special Class of Individual Employees

a) Minimum wage earner

A worker in the private sector paid the statutory minimum wage, or to anemployee in the public sector with compensation income of not more than the statutory

minimum wage in the non-agricultural sector where he/she is assigned.108

By virtue of the passage of R.A. 9504, minimum wage earners are exempted

from the payment of the net income tax.109

b) Corporations110

1) Domestic corporations

Created or organized in the Phils. or under its laws.111

2) Foreign corporations

Created, organized or existing under any laws other than those of the Phils.

(1)Resident

Engaged in trade or business112within the Phils.

(2) Non-resident

It is the length of stay in the Philippines that determines whether or not he is engaged in trade or

business. The number of transaction he entered into is immaterial.108Sec. 22 (HH), id. as amended by R.A. 9504109They are not required to file an income tax return

Thus: xxx, That minimum wage earners shall be exempt from the payment of income tax on their

taxable income: Provided, further, that the holiday pay, overtime pay, night shift differential pay and

hazard pay received by such minimum wage earners shall likewise be exempt from income tax. 110The term shall include partnership, no matter how created or organized, joint stock companies, joint

accounts, or insurance companies, but does not include general professional partnerships and a joint

venture or consortium formed for the purpose of undertaking construction projects or engaging in

petroleum, coal, geothermal and other energy operations pursuant to operating or consortium

agreement under a service contract with the government. (Sec. 24(b), id)111liable for income from sources within and without the Philippines (Sec 22[C], id.)112 The term implies a continuity of commercial dealings and arrangements and contemplates to that

extent, the performance of acts or works or the exercise of some of the functions normally insistent to

and in the progressive prosecution of commercial gain or for the purpose and the object of the business

organization (Comm. vs. British Overseas Airways CorporationBOAC case 149 SCRA 395)

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Not engaged in trade or business within the Phils.

c. Partnerships113

Partnership is a contract whereby two or more persons bind themselves to

contribute money, property, or industry to a common fund with the intention of dividingthe profits among themselves.114

d. General Professional Partnerships

Formed by persons for the role purpose of exercising their common profession,

no part of the income of which is derived from engaging in any trade & business.115

e. Estates and Trusts

Estate Trust

The mass of property, rights and

obligations left behind by the decedent

upon his death.116

An arrangement created by will or co-

agreement under which title to property is

passed to another for conservation or

investment with the income therefrom and

ultimately the corpus117to be distributed in

accordance with the directions of the

113An ordinary business partnership is considered as a corporation and is thus subject to tax as such.Partners are considered stockholders and, therefore, profits distributed to them by the partnership are

considered as dividends.114Partnerships, no matter how created or organized, including joint ventures or consortiums, are taxable.

What are taxable unregistered partnerships?

The SC in Evangelista v. CIR 102, Phil 140, held that Sec. 24 covered unregistered partnerships and even

associations or joint accounts which have no legal personalities apart from their individual members.

Accordingly, a pool of individual real property owners dealing in real estate business was considered a

corporation for tax purposes [Afisco Insurance Corporation v. CA, 302 SCRA 1]115Sec. 22 (b)

e. g. Law firm

General professional partnerships are not taxable but partners are taxed on their share of partnership

profits actually or constructively paid during the year.116 Estates may be classified as follows:

1. Estates not under judicial settlement - are subject to income tax generally as mere co-ownership.

- The tax liability on income of the co-ownership levied directly on the co-owners. Thus, the heirs

shall include in their respective returns their distributive shares of the net income of the estate.

2. Estates under judicial settlement - are subject to income tax in the same manner as individual.

- Income received during the settlement of the estate is taxable to the fiduciary (guardian, executor,

trustee, and administrator).

- The return should be filed by executor or administrator of the trust.117principal

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creator as expressed in the governing

instrument.118

f. Co-ownerships119

It is created whenever the ownership of an undivided thing or right belongs to

different persons.

7. Income Taxation

a. Definition

A tax on all yearly profits arising from property, profession, trade or business, or

a tax on persons income, emoluments, profits and the like.120

b. Nature

It is generally regarded as an excise tax. It is not levied upon persons, property,

funds or profits but on the privilege of receiving said income or profit.

118Two (2) Kinds of Trust :

1. Irrevocable Trust - is considered as a separate taxpayer.

2. Revocable Trust - is one where at anytime the power to revest the title to any part of the corpusof

the trust is vested:

(a) in the grantor (creator of the trust) either alone or in conjunction with any person not having a

substantial adverse interest in the disposition of such part of the corpus or the income therefrom; or

(b) in any person not having a substantial adverse interest in the disposition of such part of the

corpus or the income therefrom.

The tax shall be imposed on taxable income of the grantor.119 General rule: Co-ownership is exempt from income tax because the activities of the co-owners are

usually limited to the preservation of the properties owned in common and the collection of the income

therefrom.

Exceptions: (When co-ownership is subject to tax).

(1) When the income of the co-ownership is invested by the co-owners in other income-producing

properties or income-producing activities, and

(2) When there is no attempt to divide inherited property for more than ten (10) years and the said

property was not under any administration proceedings nor held in trust, an unregistered partnership is

deemed to exist.

Tax liability of co-owners:

The co-owners in exempt co-ownership shall be liable for income tax only in their separate and

individual capacity.

Filing of return:

The owners shall report and include in their respective personal income tax returns their shares of the

net income of the co-ownership.

Test to determine whether co-ownership is a taxable unregistered partnership:

Find out whether the heirs have made substantial improvements on the inherited property. If so, the

implication is that they will engage in business for profit (Evangelista Doctrine). If that happens, the co-

ownership will be taxed as an unregistered partnership.120Fisher v. Trinidad, GR L-19030, Oct. 20, 1922

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c. General principles

1. A citizen of the Philippines residing therein is taxable on all income derived

from sources within and without the Philippines.

2. A non-resident citizen is taxable only on income derived from sources within

the Philippines.

3. An individual citizen of the Philippines, who is working and deriving income

from abroad as an overseas contract worker, is taxable only on income derived from

sources within the Philippines. Provided, that a seaman who is a citizen of the

Philippines and who receives compensation for services rendered abroad as a member

of the complement of a vessel engaged exclusively in international trade shall be treated

as an overseas contract worker.

4. An alien individual, whether or not a resident of the Philippines, is taxable only

on income derived from sources within the Philippines.

5. A domestic corporation is taxable on all income derived from sources within

and without the Philippines.

6. A foreign corporation, whether engaged or not in trade or business in the

Philippines, is taxable only on income derived from sources within the Philippines.

8. Income

a. Definition

It means cash or its equivalent coming to a person within a specified period,

whether as payment for services, interest or profit from investment. It covers gain

derived from capital, from labor, or from both combined, including gain from sale or

conversion of capital assets.121

b. Nature

121 It denotes the amount of money or property received by a person or corporation within a specified

time, whether as payment for services, interests, or profits from investments ( Fisher vs. Trinidad, 43 Phil

973)

Income is not merely increase in value of property; but a gain, a profit in excess of capital as a result of

exchange transactions.

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receipt. equivalent is placed at the control of the

person who

rendered the service without restriction

by the payor.125

3) Recognition of income

a. There is income, gain or profit

b. The income, gain or profit is received or realized during the taxable year

c. The income gain or profit is not exempt from income tax

4) Methods of accounting

a) Cash method vis--vis Accrual method

Cash method Accrual method

Recognition of income and expense

dependent on inflow or outflow of cash.126

Gains and profits are included in gross

income when earned whether received or

not, and expenses are allowed as

deductions when incurred, although not

yet paid. It is the right to receive and not

the actual receipt that determines the

inclusion of the amount in gross income

b) Installment payment vis--vis Deferred

payment vis-vis Percentage

completion127

Installment payment Deferred payment Percentage completion

125Sec. 4.108-A, RR 16-2005

Examples of income constructively received:

a. Deposit in banks which are made available to the seller of services without restrictions

b. Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the

seller as payment for services rendered

c. Transfer of the amounts retained by the payor to the account of the contractor

d. Interest coupons that have matured and are payable but have not been encashed

e. Undistributed share of a partner in the profits of a general partnership126meaning, you recognize the income when you actually receive the cash payment for the sale, and you

recognize the expense when you actually pay cash for the expense127in long term contracts

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Appropriate when

collections extend over

relatively long periods of

time and there is a strong

possibility that full

collection will not be made.

Initial payments exceed

25% of the gross selling

price and such transaction

shall be treated as cash sale

which makes the entire

selling pricetaxable in the month of

sale.

Persons whose gross

income is derived from

long-term contracts shall

report such income upon

the basis of percentage of

completion.

d. Tests in determining whether income is earned for tax

purposes

1) Realization test

No taxable income until there is a separation from capital of something of

exchangeable value, thereby supplying the realization or transmutation which would

result in the receipt of income.128

2) Claim of right doctrine or Doctrine of ownership,command, or control

A taxable gain is conditioned upon the presence of a claim of right to the alleged

gain and the absence of a definite unconditional obligation to return or repay.

The power to dispose of income is the equivalent of ownership of it. The exercise

of that power to procure the payment of income to another is the enjoyment and

hence, the realization of the income by him who exercises it. The dominant purpose of

the revenue laws is the taxation of income to those who earn or otherwise create the

right to receive it and enjoy the benefit of it when paid.

3) Economic benefit test, Doctrine of proprietary

interest

128There must be separation from capital of something of exchangeable value (e.g., sale of asset)

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Income realized is taxable only to the extent that the taxpayer is economically

benefited.

Any economic benefit to the employee that increases his net worth is taxable.

4) Severance test

There is no taxable income until there is a separation from capital of something

which is of exchangeable value129 thereby supplying the realization or transmutation

which would result in the receipt of income. Thus, income is not taxable unless

separated or severed from the capital or labor that bore it.

5) All events test

Requires that the right to income or liability be fixed, and the amount of such

income or liability be determined with reasonable accuracy. However, the test does not

demand that the amount of income or liability be known absolutely, only that a

taxpayer has at his disposal the information necessary to compute the amount with

reasonable accuracy. The all-events test is satisfied where computation remains

uncertain, if its basis is unchangeable; the test is satisfied where a computation may be

unknown, but is not as much as unknowable, within the taxable year.130

9. Gross Income

a. Definition

All income derived during a taxable year by a taxpayer from whatever source,whether legal or illegal,131including the following items:

1. Gross income derived from the conduct of trade or business or the exercise of

a profession.

2. Rents

129Eisner vs. Macomer, 252 US 189130CIR vs. Isabela Cultural Corp., G.R. No. 172231, February 12, 2007131As such, income includes the following, among others:

1. Treasure found;

2. Punitive damages representing profit lost;

3. Amount received by mistake;

4. Cancellation of the taxpayer indebtedness;

5. Receipt of usurious interest;

6. Illegal gains;

7. Taxes paid and claimed as deduction subsequently refunded;

8. Bad debt recovery.

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3. Interests

4. Prizes and winnings

5. Compensation for services in whatever form paid, including, but not

limited to fees, salaries, wages, commissions, and similar items

6. Annuities

7. Royalties

8. Dividends

9. Gains derived from dealings in property

10. Pensions

11. Partner's distributive share from the net income of the general professional

partnership.132

b. Concept of income from whatever source derived

Implies the inclusion of all income under the law, irrespective of the voluntary or

involuntary action of the taxpayer in producing the gains.133

All income not expressly excluded or exempted from the class of taxable income,

irrespective of the voluntary or involuntary action of the taxpayer in producing the

income.134

c. Gross Income vis--vis Net Income vis--vis TaxableIncome

Gross Income Net Income or Taxable Income

132The above enumeration can be simplified into five (5) categories:

1. Compensation Income - income derived from rendering of services under an employer-employee

relationship.

2. Professional Income - fees derived from engaging in an endeavor requiring special training as

professional as a means of livelihood, which includes, but not limited to, the fees of CPAs, lawyers,

engineers and the like.

3. Business Income - gains or profits derived from rendering services, selling merchandise,

manufacturing products, farming and long-term contracts.

4. Passive Income - income in which the taxpayer merely waits for the amount to come in, which

includes, but not limited to interest income, royalty income, dividend income, prizes and

winnings.

5. Gains from Dealings in Property It includes all income derived from the disposition of property

whether real, personal or mixed.133It includes illegal gains arising from gambling, betting, lotteries, extortion and fraud.134Gutierrez v. CIR, CTA case

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As to deductions

Allows no deductions Allows deductions

As to exemptions

Grants no exemptions Grants exemptions

As to tax base

Gross Income Net Income

Advantages/Disadvantages

Simplifies the income tax

system

Confusing and complex

process of filing income

tax return

Substantial reduction in corruption and tax

evasion as the exercise of discretion, to

allow or disallow deductions, is dispensed

with.

Vulnerable to corruption on account of

margin of discretion in the grant of

deductions

More administratively feasible Provides equitable releifs in the form of

deductions, exemptions and tax credit

Does away with wastage of manpower and

supplies

Tax audit minimizes fraud

d. Classification of Income as to Source

1) Gross income and taxable income from sources

within the Philippines

1)

Interests:

a) Interests derived from sources withinthe Phils.

b) Interests on bonds, notes or other interest-bearing obligations of

residents, corporate or otherwise.135

2)

Dividends:

135Sec. 42, (A)( 1)

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a) From a domestic corporation, and

b) From a foreign corporation 50% or more of the gross income of which

for the 3-year period ending with the close of the taxable year preceding the

declaration of such dividends, or for such part of such period as thecorporation within the Phils.136 has been in existence, was derived from

sources. It must be only in an amount which bears the same ratio to such

dividends as the gross income of the corporation for such period derived

from sources within the Philippines bears to its gross income from all

sources.

3) Compensation for labor or personal services performed in the Phils.137

4) Rentals and Royalties from property located in the Phils.or from any interest

in such property, including rentals or royalties for

a) The use of, or the right or privilege to use in the Phils. any copyright,

patent, design or model, plan, secret formula or process, goodwill, trademark,

trade brand or other like property or night;

b) The use of, or the right to use in the Phils.any industrial, commercial

or scientific equipment;

c) The supply of scientific, technical, industrial or commercial knowledge

or information;

d) The supply of any assistance that is ancillary and subsidiary to, and is

furnished as a means of enabling the application or enjoyment of, any such

property or right as is mentioned in paragraph (a), any such equipment as is

mentioned in paragraph (b) or any such knowledge or information as is

mentioned in paragraph (c);

e) The supply of services by a nonresident person or his employee in

connection with the use of property or rights belonging to, or the installation or

operation of any brand, machinery or other apparatus purchased from such

nonresident person;

f) Technical advice, assistance or services rendered in connection with

technical management or administration of any scientific, industrial or

commercial undertaking, venture, project or scheme; and

g) The use of, or the right to use:

136 Id. (A)(2)137 Id. (A)(3)

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1. motion picture films;

2. films or video tapes for use in connection with television; and

3. tapes for use in connection with radio broadcasting

5) Gains, profits, and income from the sale of real property located in the Phils.

and

6) Gains, profits, and income from sale of personal property, treated as derived

entirely from the country where it is sold.138

2) Gross income and taxable income from sources

without the Philippines

1) Interest other than those derived from sources within the Phils.

2) Dividends other than those derived from sources within the Phils.

a.

Dividends from foreign corporations in general; and

b. Dividends derived from foreign corporations, 50% or more of the gross

income of which for the 3-year period preceding the declaration of

dividends.

3) Compensation for labor or personal services performed outside the Phils.

138Exception to the rule: gain from the sale of shares of stock in a domestic corporation which is treated

as derived entirely from sources within the Phils. regardless of where the shares are sold.

Passage of title test: it is the prevailing view that in ascertaining the place of sale, the determination of

where and when the title to the goods passes from the seller to the buyer is decisive.

Enumeration in Section 42 not all-inclusive.

In the case of Commissioner vs. British Overseas Airways Corporation (BOAC) [149 SCRA 395], the

Supreme Court held:

xxx Section 37 (now Section 42) by its language, does not intend the enumeration to be exclusive. It

merely directs that the types of income listed therein be treated as income from sources within the Phils.

a cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, and

that no other kind of income may be so considered xxx

The Supreme Court further held:

xxx The absence of flight operations to and from the Phils. is not determination of the source of

income on the situs of income taxation. Admittedly, BOAC was an off-line international airline at the time

pertinent to this case. The test of taxability is the source, and the source of an income is that activity xxx

which produced the income. Unquestionably the passage documentations in these cases were sold in the

Phils. and the revenue therefrom was derived from a business activity regularly pursued within the Phils.

xxx

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1)

Compensation Income142

All remuneration for services performed by an employee for his employer,

including the cash value of all remuneration paid in any medium other than cash.143

It includes all remuneration for services rendered by an employee for hisemployer unless specifically excluded under the NIRC.144

2) Fringe Benefits145

a) Special treatment of fringe benefits

Applied to fringe benefits given or furnished to managerial or supervising

employees and not to the rank and file.146

b) Definition

Any good, service or other benefit furnished or granted in cash or in kind by an