TAXATION+LAW San Beda.doc

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San Beda College of Law1

MEMORYAIDIN TAXATION LAW

TAXATION 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 areprivileged to enjoy its benefits and mustbear its burdens.

Two Fold Nature of the Power of

Taxation1. It i s an inherent attribute ofsovereignty

2. It is legislative in character

Extent of Taxing PowerSubject to constitutional and

inherent restrictions, the power oftaxation is regarded as comprehensive,unlimited, plenary and supreme.

SCOPEOF LEGISLATIVE TAXING POWER1. Amount or rate of tax

2. Apportionment of the tax3. Kind of tax4. Method of collection5. Purpose/s of its levy, provided it is

for public purpose6. Subject to be taxed, provided it is

within its jurisdiction7. Situs of taxation

TAXES enforced proportionalcontributions from the persons andproperty levied by the law-making bodyof the State by virtue of its sovereignty

in support 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 collectionof certain kinds of taxes guaranteesagainst injustice to individuals,especially by way of notice andopportunity for hearing be provided

5. the tax must not impinge on theinherent 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 themotive power to activate and operate it.Hence, despite the natural reluctance tosurrender part of one's hard-earnedincome to the taxing authorities, every

person who is able to must contributehis share in the running of thegovernment. (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 for

the enjoyment of the citizenry and thosewhich 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 arepaid. (CIR v. Algue, Inc.)

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres ASST. CHAIRPERSON: Rhohail CastroEDP : Rachelle Saya SUBJECT HEADS:Jemina Sy, Casiano Ilagan, Jr., Ryan Co, Edwin Torres :MEMBERS: Marita Lourdes Azur, Edizer Enriquez, ChristianCabrera, JhundeeGuillermo


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4. Non-impairment of ContractsContractsmay not beimpaired

Contractsmay beimpaired

Contracts maybe impaired

5. Transfer of Property RightsTaxes paidbecome partof publicfunds

No transferbut onlyrestraint inits exercise

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 systemviewsindifferently thetax base andgenerally treats incommon allcategories of taxable income ofthe individual.

A system employedwhere the income taxtreatment varies andis made to depend onthe kind or categoryof taxable income ofthe taxpayer.

A system whichtaxes allcategories of

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

A system whichitemizes the differentincomes and provides

for varied percentagesof taxes, to beapplied thereto.

EXAMPLES OF TAXES LEVIED WITH AREGULATORY PURPOSE, OR COMBINEDEXERCISE OF POLICE POWER AND THE POWEROF TAXATION.

a. Motor vehicle registration feesare now considered revenue or taxmeasures.(Pal v. Edu, G.R No. L-41383,

August 15,1988)This case reversed the doctrine

previously held in Republic v. PhilippineRabbit Bus Lines, Inc., 32 SCRA 211, tothe effect that motor vehicle

registration fees are regulatoryexactions and not revenue measures.

b. The tax imposed on videogram

establishments is not only regulatory buta revenue measure because the earningsof such establishments have not beensubject to tax depriving the governmentof an additional source of income. (Tiov. Videogram Regulatory Board, 151SCRA 208)

c. The coconut levy funds wereall raised under the states taxing andpolice powers.

The states concern to make it astrong and secure source not only in the

livelihood of the significant segment ofthe population, but also of exportearnings, the sustained growth of whichis one of the imperatives of theeconomic growth. Philippine CoconutProducers Federation, Inc. Cocofed v.Presidential Commission on GoodGovernment (178 SCRA 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 simple

tenor.3. A statute will not be construed as

imposing a tax unless it does soclearly, expressly andunambiguously.

4. In case of doubt, it is construed moststrongly against the Government,and liberally in favor of thetaxpayer.

5. Provisions of a taxing act are nottobe extended by implication.

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

7. Tax laws are special laws andprevail over 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

TAXATION LAW COMMITTEECHAIRPERSON: Charmaine Torres ASST. CHAIRPERSON: Rhohail CastroEDP : Rachelle Saya SUBJECT HEADS:Jemina Sy, Casiano Ilagan, Jr., Ryan Co, Edwin Torres :MEMBERS: Marita Lourdes Azur, Edizer Enriquez, ChristianCabrera, JhundeeGuillermo


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TAXESAREPERSONALTOTHETAXPAYER1. A corporations tax delinquency

cannot be enforced against itsstockholders. (Corporate Entity

Doctrine)Exception: Stockholders may beheld liable for unpaid taxes of adissolved corporation: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 or

administrator out of the net assetsand cannot be assessed against theheirs.Exception: Ifprior to the paymentof the estate tax due, the propertiesof the deceased are distributed tothe heirs, then the latter issubsidiary liable for the payment ofsuch portion 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.Pineda G.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 exportedfrom a country.

2. As to burden:a. Direct Tax both the incidence

of 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 of

or liability for the payment of

the 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 specialpurposes

4. As to manner of computation:a. Specific Tax the computation

of 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 is

needed 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 oramount of tax increases as theamount of the income or earningto be taxed increases.

b. Regressive Tax tax rate

decreases as the amount ofincome to be taxed increases.

c. Proportionate Tax based on afixed proportion of the value ofthe property assessed.

IMPOSITIONS NOT STRICTLY CONSIDERED ASTAXES1. Toll amount charged for the cost

and 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 the

police power.



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6. Margin Fee exaction designed tostabilize the currency.

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

by 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, it

signifies any tax, tribute or duty. Inits 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 from

Special Assessment.

Tax License Fee

Based on the powerof taxation

Emanates frompolice power

To generaterevenue

Regulatory

Amount is unlimited Amount is limitedto the cost of (1)issuing the license,and (2) inspection

and 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 forcriminalprosecution

Non-paymentmakes the businessillegal

TEST IN DETERMINING IF THE IMPOSITION IS ATAXORALICENSEFEE

If the purpose is primarily revenueor if revenue is, at least, one of the realand substantial purposes, then theexaction is a tax. If the purpose isregulatory in nature, 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 drawinterest except incase of delinquency

Draws interest ifstipulated 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. 201987 Constitution)

Imposed only bypublic authority

Can be imposed byprivate individual



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TEST IN DETERMINING IF THE IMPOSITION IS ATAXORALICENSEFEE

If the purpose is primarily revenue orif revenue is, at least, one of the real

and substantial purposes, then theexaction is a tax. If the purpose isregulatory in nature, 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 drawinterest except incase of delinquency

Draws interest ifstipulated 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 dutyto the government

3. the government and thetaxpayer are not mutuallycreditors and debtors of eachother. (Francia v. 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 operationof law. (Domingo v. Garlitos)

DOCTRINE OF EQUITABLE RECOUPMENT NOT

FOLLOWEDINTHE PHILIPPINESA tax presently being assessed

against a taxpayer which has prescribedmay not be recouped or set-off againstan overpaid tax the refund of which isalso barred by prescription. It is againstpublic policy since both parties areguilty of negligence.

Tax Toll

Enforcedproportionalcontributions frompersons and property

A sum of money forthe use of something, aconsideration whichis paid for the use ofa property which isof a public nature;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 public

improvement used

Imposed only by theState

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

individuals orentities

Tax Penalty

Enforcedproportionalcontributions frompersons and

property

Sanction imposed asa punishment forviolation of a lawor acts deemed

injurious; violationof tax laws may giverise to imposition ofpenalty

Intended to raiserevenue

Designed to regulateconduct

May be imposedonly by thegovernment

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



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Tax Tariff

All embracing termto include variouskinds of enforcedcontributions uponpersons for theattainment ofpublic purposes

A kind of taximposed on articleswhich are tradedinternationally

TAXPAYERS SUITA case where the act complained of

directly 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 SUITa. The tax money is being

extracted and spent in violation ofspecific constitutional protectionsagainst 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 comity4. 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-DELEGABILITY OF THE TAXINGPOWER

General Rule:The power of taxation ispeculiarly and exclusively exercised by

the legislature. (See Scope ofLegislative Taxing Power, supra)- refers to tax legislationExceptions to Non-delegability:1. Flexible Tariff Clause: Authority of

the President to fix tariff rates,import and export quotas, tonnageand wharfage dues, and other dutiesor 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 administrativeagencies for implementation andcollection.

- merely refers to tax administrationor implementation

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

persons, property or businesses withinthe jurisdiction or territory of the taxingpower.

FACTORSTHAT DETERMINETHE SITUS:a. Kind or classification of the tax

being leviedb. Situs of the thing or property

taxedc. Citizenship of the taxpayerd. Residence of the taxpayere. Source of the income taxedf. Situs o f the excise, p rivilege,

business or occupation being taxed

APPLICATIONOF SITUSOF TAXATION

Kind of Tax Situs

Personal orCommunity tax

Residence ordomicile of thetaxpayer

Real property tax Location of property(Lex rei sitae)

Personal propertytax

-tangible: where itis physically locatedor permanently kept(Lex rei sitae)-intangible: subjectto Sec. 104 of theNIRC and the



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principle of mobiliasequuntur personam

Business tax Place of business

Excise or Privilegetax

Where the act isperformed or whereoccupation ispursued

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

SITUSOF TAXATIONOF INTANGIBLE PERSONALPROPERTYGeneral Rule: Domicile of the ownerpursuant to the principle of the mobilia

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

exercised in the Philippines;

(2) shares, obligations or bondsissued by any corporationorganized or constituted in thePhilippines in accordance withits laws;

(3) shares, obligations or bonds byany foreign corporation eighty-five percent (85%) of thebusiness of which is located inthe Philippines;

(4) shares, obligations or bondsissued by any foreign corporationif such shares, obligations or

bonds have acquired a businesssitus in the Philippines; and

(5) shares or rights in anypartnership, business or industry

established in the Philippines.(Sec. 104, 1997 NIRC).

(4) EXEMPTIONOFTHE GOVERNMENTAs a matter of public policy,

property of the State and of itsmunicipal subdivisions devoted togovernment uses and purposes isdeemed to be exempt from taxationalthough no express provision in the lawis made therefor.

General Rule: The Government is tax

exempt.- 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. GOCCs

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

3. Government Educational Institutionsa. Property or real estate tax

property actually, directly andexclusively used for educationalpurposes exempt but incomeof whatever kind and characterfrom any of their properties,real or personal, regardless ofthe disposition, is taxable. (Sec.30, last par., NIRC)

b. Income received by them assuch are 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 any

essential governmental function



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

A license tax or fee constitutes a

curtailment of religious freedom ifimposed as a condition for itsexercise. (American Bible Societyvs. City of Manila, GR No. L-9637,

April 30, 1957)

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

No law impairing the obligationof contract shall be passed. (Sec.10, Art. III, 1987 Constitution)

The rule, however, does notapply to public utility franchises or

right since they are subject toamendment, alteration or repeal bythe Congress when the publicinterest so requires. (CagayanElectric & Light Co., Inc. v.Commissioner, GR No. 60216,September 25, 1985)

RULES:a. When the exemption is bilaterally

agreed upon between thegovernment and the taxpayer itcannot be withdrawn without

violating the non-impairmentclause.

b. When it is unilaterally granted bylaw, 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 andforfeitures after conviction (ART.VII, SEC. 19, 1987 CONSTITUTION)Due

ProcessEqual

ProtectionUniformity

Taxpayermay notbedeprivedof life,liberty orpropertywithout

due

Taxpayersshall betreated alikeunder likecircumstancesand conditionsboth in theprivileges

conferred and

Taxablearticles, orkinds of property ofthe sameclass, shallbe taxed atthe same

rate. There

process oflaw.Noticemust,therefore

, be givenin case offailure topay taxes

liabilitiesimposed.

shouldtherefore,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 classare taxed 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, areregressive. The Constitutional provisionmeans simply that indirect taxes shall beminimized. The mandate to Congress isnot to prescribe, but to evolve, a

progressive tax system. (EVAT En BancResolution, Tolentino, et al vs Secretaryof 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 Exclusively

Used For Religious, Charitable And



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Educational Purposes. (Art. VI,Sec. 28(3) 7, 1987 Constitution)

The constitutional provision(above cited) which grants tax

exemption applies only to propertyor realty taxes assessed on suchproperties used actually, directlyexclusively for religious, charitableand educational purposes. (Lladocvs. Commissioner, GR No. L-19201,

June 16, 1965)The present Constitution

required that for the exemption oflands, buildings andimprovements, they should not onlybe exclusively but also actuallyand directly used for religious and

charitable purposes. (Province ofAbra vs. Hernando, GR No. 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,

June 15, 1988)

EXCLUSIVE BUT NOT ABSOLUTE USEThe term exclusively used does

not necessarily mean total or absolute

use 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 Connection

With The Legislative Grant Of Tax

Exemption (Art. VI, Sec. 28(4),1987 Constitution)

7. Non-Impairment Of TheJurisdiction Of The Supreme Court

In Tax Cases (Art. VIII, Sec. 2 And5(2)(B), 1987 Constitution)

8. Exemption From Taxes Of TheRevenues And Assets Of Educational Institutions, IncludingGrants, Endowments, DonationsAnd Contributions. (Art. XIV, Sec.4(3) And (4), 1987 Constitution)

OTHER SPECIFIC TAX PROVISIONS INTHE 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 moneyor property for the use, benefit, orsupport of any sect, church, orsystem 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 sameproperty twice when it should be taxedbut once.

IS DOUBLE TAXATION PROHIBITED IN THEPHILIPPINES?

No. There is no constitutionalprohibition 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.



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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 purpose

c. imposed by the same taxingauthority

d. within the same jurisdictione. during the same taxing periodf. covering the same kind or

character 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 same

subject 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 beenpaid in the Phil. (Sec.28 B 5b) (CIRvs Procter & 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

inputs or items that go into themanufacture of finished products(which are eventually sold) may becredited against or deducted from

the output tax or tax on the finishedproduct.

Foreign income taxes may be

credited against the Phil. Income

tax, subject to certain limitations,by citizens, including members ofgeneral professional partnerships orbeneficiaries of estates or trusts(pro rata), as well as domesticcorporations.

A tax credit is granted for estate

taxes paid to a foreign country onthe estate of citizens and residentaliens subject to certain limitations.

The donors tax imposed upon a

citizen or a resident shall be

credited with the amount of anydonors tax imposed by the authorityof a foreign country, subject to

certain limitations.4. Tax Exemptions5. Principle of Reciprocity6. Treaties with other states

METHODS RESORTED TO BY A TAX TREATY INORDERTO ELIMINATE DOUBLE TAXATION

FIRST METHOD: The tax treaty sets outthe respective rights to tax by the state

of 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 incumbent

upon the state of residence to allowrelief in order to avoid double taxation.

TWOMETHODSOFRELIEFAREUSEDUNDERTHESECONDMETHOD:

1. The exemption method- the incomeor capital which is taxable in the stateof source or situs is exempted in thestate of residence, although in someinstances it may be taken into accountin determining the rate of tax applicableto the tax payers remaining income or



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capital.(This may be done using the taxdeduction method which allows foreignincome taxes to be deducted from grossincome, in effect exempting the

payment from being further taxed.)2. The credit method- although theincome or capital which is taxed in thestate of source is still taxable in thestate of residence. The tax paid in theformer is credited against the tax, leviedin the latter.(Commissioner of InternalRevenue v. S.C Johnson and Son, Inc. etal., G.R No. 127105, June 25, 1999)

ExemptionMethod

Credit Method

Focus is on the

income or capitalitself

Focus is on the tax

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

Gross incomeLess: allowable deductionsincludingforeign taxes paidIncome subject to tax

Multiplied by rateIncome tax due

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

FORMS OF ESCAPEFROM TAXATION

(1) SHIFTING the process by which thetax burden is transferred from thestatutory taxpayer (impact of taxation)to another (incident of taxation) withoutviolating the law.

IMPACTOF TAXATION point on which tax

is originally imposed.

INCIDENCE OF TAXATION point on whichthe tax burden finally rests or settlesdown.

Illustration: Value added tax. Theseller is required by law to pay tax, butthe burden is actually shifted or passedon to the buyer.

KINDS OF SHIFTING

a. Forward shifting- when burden oftax is transferred from a factor ofproduction through the factors ofdistribution until it finally settles onthe ultimate purchaser or consumer

b. Backward shifting- when burden istransferred from consumer through

factors 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 inthe value of the property is not incomebut merely an unrealized increase incapital. No income until after theactual sale or other disposition of theproperty in excess of its original cost.EXCEPT: if by reason of appraisal, the

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

(3) TRANSFORMATION the manufactureror producer upon whom the tax has beenimposed, fearing the loss of his market ifhe should add the tax to the price, pays

the tax and endeavors to recoup himselfby improving his process of production,thereby turning out his units at a lowercost.

(4) TAX AVOIDANCE the exploitation bythe taxpayer of legally permissiblealternative tax rates or methods ofassessing taxable property or income, inorder to avoid or reduce tax liability.Example: estate planning(conveyance of property to a family



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corporation for shares) (Delpher TradesCorp. vs. IAC, 157 SCRA 349)(5) TAX EVASION use by the taxpayer ofillegal or fraudulent means to defeat or

lessen the payment of the tax.

FACTORSINTAX EVASION1. the end to be achieved, i.e. paymentof less than that known by the taxpayerto be legally due, or paying no tax whenit is shown that the tax is due;2. an accompanying state of mindwhich is described as being evil, in badfaith, willful, or deliberate and notcoincidental; and3. a course of action which is unlawful.

INDICIA OF FRAUD IN TAX EVASION1. Failure to declare for taxationpurposes true and actual income derivedfrom business for 2 consecutive years(Republic vs Gonzales, L-17962)2. Substantial under-declaration ofincome tax returns of the taxpayer for 4consecutive years coupled withintentional overstatement of deductions(CIR vs Reyes, 104 PHIL 1061)

TAXAVOIDANCE

TAXEVASION

Validity Legal and notsubject tocriminal penalty

Illegal andsubject tocriminalpenalty

Effect Minimization of taxes

Almostalwaysresults inabsence oftax payments

(6) TAX EXEMPTION a grant ofimmunity to particular persons orcorporations from the obligation to paytaxes.

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 emanate

from legislationExamples of Statutory Exemptions

Sec. 27, NIRCSec. 105 Tariff and Customs

CodeSec. 234 Local Government CodeSpecial Laws, such as the

Omnibus 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 463

as 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. Treatye. Licensing Ordinance

2. As to form(1) Express expressly granted by

organic or statute law(2) Implied when particular

persons, 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 dispensedwith

4. As to object(1) Personal granted directly in

favor of certain persons(2) Impersonal granted directly in

favor of a certain class ofproperty

PRINCIPLES GOVERNING TAX EXEMPTIONa. Exemptions from taxation are

highly disfavored in law and arenot presumed.

b. He who claims as exemption mustbe able to justify his claim by theclearest grant of organic or statute

law by words too plain to be



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mistaken. If ambiguous, there is noexemption.

c. He who claims exemption shouldprove by convincing proof that he

is exempted.d. Taxation is the rule; tax exemption

is the exception.e. Tax exemption must be strictly

construed against the taxpayer andliberally 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

TAX EXEMPTION1. Deductions for income tax purposes2. Claims for refund3. Tax amnesty4. Condonation of unpaid tax liabilitiesNOTE: must be strictly construedagainst the taxpayer

WHEN EXEMPTIONS ARE CONSTRUEDLIBERALLYINFAVOROF 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 traditionalexemptees, such as those in favor ofreligious and charitable institutions.

5. If exemptions refer to the publicproperty

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 TAXEXEMPTIONSa. Non impairment clause. Where the

exemption was granted to private

parties based on materialconsideration of a mutual nature,which then becomes contractual andis covered by the non-impairment

clause of the Constitution.b. Adherence to form- if the tax

exemption is granted by theConstitution, its revocation may beeffected through Constitutionalamendment only

c. Where the tax exemption grant is inthe form of a special law and not bya general law even if the terms ofthe general act are broad enough toinclude the codes in the general lawunless there is manifest intent torepeal or alter the special law

(Province of Misamis Oriental vsCagayan Electric Power and LightCo. 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 revenueor tax 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 completecompliance with the law)

2.Government not estopped from

questioning 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,is a personal defense.



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Reason: Relates to the circumstancesof a particular accused and not thecharacter of the acts charged in theinformation.

Tax amnesty Tax exemption

Immunity from allcriminal, civil andadministrativeliabilities arisingfrom non paymentof taxes

Immunity from civilliability only

Applies only to pasttax periods, henceretroactiveapplication

Prospectiveapplication

DOCTRINE OF IMPRESCRIPTIBILTYAs a rule, taxes are imprescriptible

as they are the lifeblood of thegovernment. However, tax statutes mayprovide for statute of limitations.

The rules that have been adoptedare as 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 day

prescribed 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 orif the return filed is false or fraudulent,the period to collect is within ten yearsfrom discovery without need of an

assessment.

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 ofone(1) year, from the date of the final

payment of duties, in the absence of

fraud 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) years fromthe date they became due. In case of

fraud or intent to evade the payment oftaxes, fees or charges the same may beassessed within ten (10) years fromdiscovery of the fraud or intent toevade payment. They shall also becollected either by administrative or

judicial action within five (5) yearsfrom date of assessment (Sec. 194. LGC)

TAX ENFORCEMENT ANDADMINISTRATION

SOURCES OF TAX LAWS (Key: SPEC2TRABLT)1. Statutes2. Presidential Decrees3. Executive Orders4. Constitution5. 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 harmony with theprovisions of the law. In case ofdiscrepancy between the basic law andthe implementing rule or regulation, theformer prevails.

NON-RETROACTIVITYOF BIR RULINGSGeneral Rule: Rulings are notretroactive if they are prejudicial to thetaxpayer. (Sec. 246, NIRC)Exceptions:1. Where the taxpayer deliberately

misstates or omits material facts



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from his return or any documentrequired of him by the BIR.

2. Where the facts subsequentlygathered by the BIR is materially

different from the facts on whichthe ruling is based.

3. Where the taxpayer acted in badfaith.

PRINCIPLE OF LEGISLATIVE APPROVAL OF ANADMINISTRATIVE INTERPRETATION THROUGHREENACTMENT

Where a statute is susceptible of themeaning placed upon it by a ruling ofthe government agency charged with itsenforcement and the legislaturethereafter reenacts the provision

without substantial change, such actionis to some extent confirmatory that theruling carries out the legislativepurpose.

RULE OF NO ESTOPPEL AGAINST THEGOVERNMENTGeneral Rule: The Government is notestopped by the mistakes or errors of itsagents; erroneous application andenforcement of law by public officers donot 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 resultto the 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 taxesAgents 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 THE

BUREAU OF INTERNAL REVENUE (BIR)BIR shall be under the supervision

and control of the Dept. of Finance (Sec.2, NIRC)

POWERSAND DUTIESOFTHE BIRAssessment and collection of all

national internal revenue taxes, fees,and charges1. Enforcement of all forfeitures,

penalties, and fines connectedtherewith

2. Execution of judgments in all casesdecided in its favor by the Court ofTax Appeals (CTA) and the ordinarycourts

3. Give effect to and administer the

supervisory 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 atax and containing a demand for thepayment thereof.General rule: Taxes are self-assessingand thus, do not require the issuance of

an assessment notice in order toestablish the 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 oflimitations,

c. In the establishment of tax liens,and

d. In estimating the revenues that may

be collected by government in the



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coming year. (Mamalateo,Victorino. Reviewer on Taxation,2004)

KINDS1. SELF- ASSESSMENT- one in which the

tax is assessed by the taxpayerhimself

2. DEFICIENCY ASSESSMENT- made by thetax assessor himself whereby thecorrect amount of the tax isdetermined after an examination orinvestigation is conducted. Theliability is determined and assessedfor 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

BURDEN OF PROOF IN PRE-ASSESSMENTPROCEEDINGS

There is a presumption ofcorrectness and good faith on the part ofthe CIR; thus, the burden lies on thetaxpayer. Otherwise, the finding of theCIR will be conclusive and he will assessthe taxpayer. The same is true even ifthe CIR is wrong, if the taxpayer doesnot controvert. (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 facie

presumed correct and made in goodfaith.

2. It should be based on actual facts.

3. It is discretionary on the part of theCommissioner.

4. The authority of the Commissionerto assess taxes may be delegated,except the power to make finalassessments.

5. It must be directed to the rightparty.

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

a. To examine taxpayers within

the jurisdiction of the district inorder to collect the correctamount of tax;

b. To recommend the assessment ofany deficiency tax due in thesame manner that the said actscould have been performed by theRevenue Regional Director.

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

1. inspection is authorized uponwritten order 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 isinterested in 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 = networthCondition 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 for

increases in networth;



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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)

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 theretod) other matters arising

from this Code or other laws orportions thereof administered bythe BIR 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 to ascertain:(a) correctness of any return or in

making a return where none hasbeen made

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

(c) tax complianceThe Commissioner is authorized:1. to Examine any relevant Book, paper,

record or other data

2. 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 Summon

i. the person liable for tax orrequired to file a return or

ii. any officer or employee of suchperson or

iii. any person having in hispossession/custody/care-- the books of accounts,-- accounting records of entriesrelating to the business of theperson liable for tax or any otherperson-- to produce such books,papers, records, and other dataand to give testimony

4. to take the Testimony of the personconcerned, 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 forunder sec. 6 (F) of the Code.

III. SECTION 6 (power to makeassessments, prescribe additionalrequirements for tax administration

and 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. Failure 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 hisrepresentative

* Any return, statement ordeclaration filed in anyauthorized office shall not be



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withdrawn; but within threeyears from date of filing, thesame may be modified,changed or amended;

provided that no notice foraudit or investigation of suchreturn, has in the meantime,been actually served upon thetaxpayer.

5.Failure to submit required returns andother documentsIf a person

i. fails to file a required return orreport at the time prescribed or

ii. willfully or otherwise files afalse 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 Sales

A. Commissioner may, at any time

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

goods of any taxpayer or(b) may place the business

operations of any person(natural/juridical) underobservation or Surveillance,

if there is reason tobelieve that such is notdeclaring his correct income,sales or receipts for taxpurposes.

The findings may be used

as basis for assessing thetaxes and shall be deemedprima facie 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 to

issue receipts as required bysec.113 (Invoice requirements

for VAT-registered persons)and Sec. 237 (Issuance ofReceipts or CommercialInvoices) or

ii. When the books of accountsor records do not correctlyreflect the declarations madeor required to be made in areturn,Such minimum amount shallbe considered correct.

7. Terminate taxable period

Commissioner shall declare the taxperiod of a taxpayer Terminated andsend notice to the taxpayer of suchdecision with a request for immediatepayment of the tax when it has come to

the knowledge of the Commissioner:a) that a taxpayer is retiring from

business subject to tax orb) 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 forthe collection 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 ishigher of:a) Fair market value as

determined by the

Commissioner; orb) Fair market value as shown in

the schedule of values of theprovincial and city assessors.

9. Authority to Inquire into BankDeposit

Notwithstanding R.A. 1405 (BankSecrecy Law) the Commissioner isauthorized to inquire into the Bankdeposits of:(a) a decedent to determine his gross

estate



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(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 waivershall authorize the Commissioner toinquire into his bank deposits.

10. Authority to Register tax agents

(a)The Commissioner shall accreditand Register, individuals andgeneral professional partnershipsand their rep. who prepare and

file 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 shallrule on the appeal within 60 days

from receipt of such appeal. Failureto do so within the prescribed

period shall be deemed as approval

for accreditation.

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. SECTION 7 (Authority to DelegatePower )

12. The Commissioner may delegate thepowers vested in him to

- subordinate officials with rankequivalent to Division Chief orhigher, subject tolimitations/restrictions imposedunder the rules and regulations

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 maycompromise:1. assessments issued by

regional offices involving

deficiency 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 and

distribution of forms, receipts,certificates, and appliances, andthe acknowledgment of payment oftaxes (Sec. 8)

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

15. Authority to make arrests andseizures(Sec. 15)

16. Authority to employ, assign or

reassign internal revenue officers



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involved in excise tax functions toestablishments where articlessubject to excise tax are producedor kept (Sec. 16)

17. Authority to assign or reassigninternal revenue officers andemployees of the BIR to other orspecial duties connected with theenforcement or administration ofthe revenue laws (Sec. 17)

ARE LEGAL OFFICERSOFTHE BIRAUTHORIZEDTO INSTITUTE APPEAL PROCEEDINGS WITHOUTTHE PARTICIPATION OF THE SOLICITORGENERAL?

NO. The institution or

commencement before a proper court ofcivil and criminal actions andproceedings arising under the TaxReform Act which shall be conducted bylegal officers of the BIR is not in dispute.An appeal from such court, however, isnot a matter of right. It is still theSolicitor General who has the primaryresponsibility to appear for thegovernment in appellate proceedings.(Commissioner vs. La Suerte Cigar andCigarette Factory, GR No. 144942, July4, 2002)

SOURCES OF REVENUEThe following taxes, fees and

charges are deemed to be nationalinternal revenue taxes. (Sec. 21, NIRC)1. Income tax2. Estate and donor's taxes3. Value-added tax4. Other percentage taxes5. Excise taxes6. Documentary stamp taxes7. Such other taxes as are or hereafter

may be imposed and collected bythe Bureau 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 a

persons income, emoluments,profits and the like (61 CJS 1559)

tax on income,whether gross 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 canbe used 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 FORINCOME 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 INCOME1. Flow of Wealth Test The

determining 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 istaxable only to the extent thatthe taxpayer is economicallybenefited.

CRITERIAIN IMPOSING INCOME TAX1. Citizenship Principle A citizen ofthe Philippines is subject to Philippineincome tax (a.) on his worldwideincome, if he resides in the Philippines,or (b.) only on his income from sourceswithin the Philippines, if he qualifies asnonresident citizen.



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2. Residence Principle resident alienis liable to pay income tax on his incomefrom sources within the Philippines butexempt from tax on his income from

sources 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 onhis income from sources within thePhilippines such as dividend, interest,rent, or royalty, despite the fact that hehas not set foot in the Philippines.

CLASSIFICATION OF TAXPAYERS

Individuals

a. 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 thePhils. (NRAETB)

(b) not engaged in trade orbusiness within thePhilippines (NRANETB)

Corporationsa. Domestic (DC)b. Foreign

(1) resident foreign corporation(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 Philippinesduring the taxable year to reside

abroad, either as an immigrant

or for employment on apermanent basis;

c. who works and derives incomefrom abroad and whose

employment thereat requireshim to be physically presentabroad most of the time duringthe taxable year;

d. who is previously considered as anon-resident and who arrives inthe Philippines at anytime duringthe taxable year to residethereat permanently shall beconsidered non-resident for thetaxable year in which he arrivesin the Philippines with respect tohis income derived from sources

abroad 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 nonresident citizens, namely: (1)immigrants; (2) employees of a foreignentity on a permanent basis; and(3) overseas contract workers.Immigrants and employees of a foreignentity on a permanent basis aretreated as nonresident citizens fromthe time they depart from thePhilippines. However, overseascontract workers must be physicallypresent abroad most of the timeduring the calendar year to qualify asnonresident 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 intrade or business within thePhilippines. (NRAETB)



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

A non-resident alien individualwho shall come to the Philippinesand stay therein for an aggregateperiod of more than 180 days during

any calendar year shall be deemed anon-resident alien doing business inthe Philippines Section 22(G)notwithstanding [Sec. 25(A)(1)]

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

ONLY RESIDENT CITIZENS are taxablefor income derived from sources withinand without the Philippines. All otherindividual income taxpayers are taxableonly for income derived from sources

within 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 within

the 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 consortiumformed for the purpose of undertaking construction projects orengaging in petroleum, coal,geothermal and other energyoperations pursuant to an operatingor consortium agreement under aservice contract with theGovernment.

CORPORATIONS EXEMPT FROM INCOMETAXATION (FOR INCOME REALIZED AS SUCH)UNDERNIRC

1. Those enumerated under Sec. 30.Exempt corporations are subject

to 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. GSISb. SSS

c. 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 aretaxable 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 ESTATE



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When a person who owns propertydies, the following taxes are payableunder the provisions of the income taxlaw:

1. Income tax for individual under Sec.24 and 25 (to cover the periodbeginning January to the time ofdeath);

2. Estate income tax under Sec. 60 ifthe estate is under administration orjudicial settlement.

ESTATES UNDERJUDICIAL SETTLEMENTA. During the Pendency of the

Settlement

General 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 heirs

during the taxable year of estateincome is deductible from thetaxable income of the estate.Such distributed income shallform part of the respectiveheirs taxable 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, thesubsequent distribution thereofis no longer taxable on the partof the recipient.

B. TERMINATION OF THE JUDICIALSETTLEMENT (WHERE THE HEIRS STILLDO NOT DIVIDE THE PROPERTY)1. If the heirs contribute to the

estate money, property, orindustry with intention to dividethe profits between/amongthemselves, an unregisteredpartnership is created and the

estate becomes liable for the

payment of corporate incometax. (Evangelista vs. Collector,GR No. L-9996, October 15,1957; Oa vs. Commissioner, GR

No. L-19342, May 25, 1972)2. If the heirs, without contributing

money, property or industry toimprove the estate, simplydivide the fruits thereofbetween/among themselves, aco-ownership is created, andindividual income tax is imposedon the income received by eachof the heirs, payable in theirseparate and individualcapacity. (Pascual vs.Commissioner, GR No. L-78133,

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

ESTATESNOTUNDERJUDICIAL 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 andincome tax 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 thefiduciary may, at

his discretion, either distribute oraccumulate the income.

RULES ON TAXABILITY OF THE INCOME OF A

TRUST



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

filing and payment of tax lie on the

beneficiaries.2. The income of the trust which is to

be accumulated or held for futuredistribution whether consisting ofordinary income or gain from thesale of assets included in the"corpus" of the estate filing ofreturn and payment of tax becomethe burden of the trustee or

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

the income of the trust will be

returned by the grantor.b. In a trust where the income is

held 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

to corpus 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 theminimum personal exemption (P20,000)and distribution of trust income duringthe taxable 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 trustby 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 pension

trust; otherwise, taxation of thoseearnings would result in a diminution ofaccumulated 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 PARTNERSHIP FOR TAX PURPOSESUNDERTHE NIRC

1. General Professional Partnerships(GPP)- formed by persons for:a. the sole purpose of exercising a

common profession andb. no part of the income of which is

derived from engaging in anytrade or business. [Sec. 22(B),NIRC].

2. Taxable or Business Partnership All other partnerships except

general professional partnerships no

matter, how created or organized.It includes unregistered jointventures and business partnerships.

However, joint ventures are nottaxables as corporations when it is;(a) undertaking construction projects(b) engaged in petroleum, coal andother energy operation under aservice contract with thegovernment

General co-partnerships (GCP)are partnerships, which are by lawassimilated to be within the context

of, and so legally contemplated as,



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corporations. The partnership itselfis subject to corporate taxation. Theindividual partners are consideredstockholders and, therefore, profits

distributed to them by thepartnership are taxable as dividends.

The taxable income for a taxableyear, after deducting the corporateincome tax imposed therein, shall bedeemed to have been actually orconstructively received by thepartners in the same taxable yearand shall be taxed to them in theirindividual capacity whether actuallydistributed or not. [Sec. 73(D),NIRC]

LIABILITY OF A PARTNERSHIP1. General Professional Partnership .-

They are not subject to income tax,but are required to file returns oftheir income for the purpose offurnishing information as to theshare of each partner in the net gainor profit, which each partner shallinclude in his individual return. Thepartnership shall act as thewithholding agent.

The net income (income fordistribution) shall be computed in

the same manner as a corporation.Date of filing of the return is April15 of each year.

2. Taxable or Business Partnership -The income tax of this type ofPartnership is computed and taxedlike that of a corporation. This kindof partnership, like a regularcorporation, is also required to file aquarterly corporate income taxreturn. Filing and payment ofquarterly return is within 60 daysafter the end of each quarterwhilethe annual return is on or beforeApril 15 of the following year.

LIABILITY OF A PARTNERRules:1. Share of a partner in general

professional Partnershipa. Each partner shall report as

gross income (business income)his distributed share actually orconstructively received in thenet income of the partnership.

(Sec. 26, NIRC) [The same share

shall be subject to creditablewithholding tax of 10%.] Theyare liable in their separate andindividual capacity.

b. Share of a partner in the lossof a general professionalpartnership may be taken by theindividual partner in his returnof income.

c. Each partner in a generalprofessional partnership shall,report as gross income hisdistributed share in the netincome of the GPP, based on his

agreed ratio, whether he, availsof itemized or optional standarddeduction.

d. Payments made to a partner ofa GPP for services rendered shallbe considered as ordinarybusiness income subject to Sec.24A (Effective January 1, 1982)

2. Share of a partner in Taxable orBusiness partnershipa. Share of a partner in the net

income of a taxable or businesspartnership (dividend) shall besubject to a final tax as follows.

Resident Citizen, Non-

resident Citizen andResident Alien (2000 andonward) 10% (Sec. 24B2)

Non-resident Alien engaged

in trade or business 20%(Sec. 25 A2)

Non-resident alien not

engaged in trade or business

25% (Sec. 25B)b. Share of a partner in the lossof a taxable or businesspartnership maybe taken by theindividual partner in his returnof income.

c. Payments made to a partner ofa business or taxable partnershipfor services rendered shall beconsidered as compensationincome subject to sec. 24A.

KINDS OF INCOME TAXES



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UNDER THE NIRC

1. Net Income Tax2. Optional Corporate Income tax

3. Minimum Corporate Income Tax4. Improperly Accumulated Earnings

Tax5. Preferential Rates or Special Rates

of Income Tax6. Gross Income Tax7. Final Income Tax8. Fringe Benefits Tax9. Capital Gains Tax

(1) NET INCOME TAX

DEFINITION: Means gross income lessdeductions and/or personal andadditional exemptions (Sec. 31, NIRC)

NET INCOME TAX FORMULAEntire IncomeLess: Exclusions and Income subject

to Final Tax (e.g. PassiveIncome)

Gross IncomeLess: Deductions (and/or additional

exemptions, if applicable)Net Taxable Income

Multiply by:Tax Rate (%)

Net Income Tax DueLess: Tax Credit, if any

Tax Still due, if any

GROSS INCOME

DEFINITION: Means all income derivedfrom whatever source, including but notlimited to the following(Sec. 32)a. Compensation;b. Gross income from profession, trade

or business;

c. Gains form dealings in property;d. Interests;e. Rents;f. Royalties;g. Dividends;h. Annuities;i. Prizes and winnings;j. Pensions;k. Partners share in the net income of

the general professional partnership

See Annex D for detailed discussionof items.

KINDS OF DIVIDENDS1. Cash and Property Dividends

Individual Taxpayera. From Domestic Corporations

RC, NRC, RA 10% (Sec.24A)

NRAETB 20%(Sec. 25A2)

NRANETB 25% on gross

income (Sec. 25B)b. From Foreign Corporations

RC, NRC, RA, NRAETB 5-

32%(Sec. 24, 25A1)

NRANETB 25% on gross

income (Sec. 25B)

Corporate Taxpayer

a. Foreign to Domestic Corp. 32%(Sec. 32A)b. Domestic to Domestic Corp.

Exempt; intercorporatedividends (Sec. 27D)

c. Domestic to Foreign Corp. -

Resident Foreign Corp.

Exempt(Sec. 28 [A] 7d)

Nonresident Foreign Corp.

15% subject to the conditionstated in Sec. 28 [B] 5.Otherwise, it shall be taxedat 32%. (See Commissioner

vs. Procter and Gamble, GRNo. 66838, December 2,1991)

2. Stock DividendsGeneral rule: Not subject to taxbecause it does not constituteincome; it represents transfer ofsurplus to capital account. (Sec.73B, 1997 NIRC)Exceptions:a. Sec. 73B, 1997 NIRC

(1) there is

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