02 Tax 1 Midterms

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1 TAXATION MIDTERM NOTES|404 | marukoi.mhealle

GENERAL PRINCIPLES OF TAXATION

A. Taxation

a. Definition

i. It is the power by which the sovereign raises revenue to

defray the expenses of the government. It is a way of apportioning

the cost of government among those who in some measure areprivileged to enjoy its benefits and must bear its burden.

b. Nature of the Power of Taxation

i. The power to tax is an attribute of sovereignty. It is

inherent in the State. As an incident of sovereignty, the power to tax

has been described as unlimited in its range, acknowledging in its

very nature no limits, so that security against its abuse is to be found

only in the responsibility of the legislature which imposes the tax on

the constituency who are to pay it. (MCIAA v. Marcos)

ii. Taxes are the lifeblood of the government. Withouttaxes, the government can neither exist nor endure. The exercise of

taxing power derives its source from the very existence of the State

whose social contract with its citizens obliges it to promote public

interest and the common good. (CREBA v. Romulo)

iii. The power of taxation is an essential and inherent

attribute of sovereignty, belonging as a matter of right to every

independent government, without being expressly conferred by the

people. (Pepsi Cola v. Municipality of Tanauan)

iv. It is legislative in character (Scope of Legislative Taxing

Power)

Determination of the Purpose Determination of the Subjects and Objects of

Taxation

Determination of the Amount and Rate of Tax

Determination of the Kind of Tax to be Collected

Determination of the Apportionment of Tax

Determination of the Manner and Mode of

Enforcement and Collection

Determination of the Situs of Taxation

v. It is subject to constitutional and inherent limitations

vi. It is generally not delegated to the executive or judicial

department.

EXCEPTIONS:

Local Governments

Sec. 5, Art. X, Constitution: Section 5. 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 loca

governments.

Pepsi Cola v. Municipality of Tanauan: Legislative

powers may be delegated to local governments in

respect of matters of local concern. This is sanctioned

by immemorial practice. By necessary implication, the

legislative power to create political corporations fo

purposes of local self-government carries with it the

power to confer on such local governmental agencies

the power to tax.

Quezon City v. ABS-CBN:Municipal Corporation has ageneral power to levy taxes and otherwise create

sources of revenue. They no longer have to wait fo

the statutory grant for these powers. The taxing

power of the local government is limited in the sense

that Congress can enact legislation granting

exemptions.

When allowed by the Constitution Under the

Constitution, Congress may expressly 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

the framework of the national development program

of the Government. (Sec 28[2], Art. VI, Constitution) When delegation merely relates to the administrative

implementation or implied from the policy and

purpose of the Act

c. Theory or Underlying Basis

i. Life-Blood Theory/Necessity Theory/Governmenta

Necessity

The power of taxation proceeds upon the theory that

the existence of government is a necessity; that i

cannot continue without means to pay its expensesand that for these means it has a right to compel al

its citizens and property within its limits to contribute

(71 Am. Jur. 2d 346)

ii. Benefits Received Theory/Compensation

Theory/Symbiotic Relationship Theory

According to this theory, the State demands and

receive taxes from the subjects of taxation within its

jurisdiction so that it may be enabled to carry its

mandate into effect and perform the functions of the

government, and the citizen pays from his property

the portion demanded in order that he may, by

means thereof, be secured in the enjoyment of thebenefits of organized society. (51 Am Jur. 42-43)

Taxes are what we pay for civilized society. Without

taxes, the government would be paralyzed for the

lack of the motive power to activate and operate it

Hence, despite the natural reluctance to surrender

part of their hard earned income to the government

every person who is able to must contribute his share

in the running of the government. The government

for its part, is expected to respond in the form o


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tangible and intangible benefits intended to improve

the lives of the people and enhance their moral and

material values. This symbiotic relationship is the

rationale of taxation and should dispel the erroneous

notion that it is an arbitrary method of exaction by

those in the seat of power. (CIR v. Algue)

The legislature, in adopting such measures in our tax

laws, only wanted to be assured that taxes are paid

and collected without delay. For taxes are the

lifeblood of government. Also such measures tend to

prevent collusion between the taxpayer and the taxcollector. By questioning a taxs legality without first

paying it, a taxpayer, in collusion with Bureau of

Internal Revenue officials, can unduly delay, if not

totally evade, the payment of such tax. (Phil Guaranty

Co. v. CIR)

The power to tax is the most potent instrument to

raise the needed revenues to finance and support

myriad activities of the local government units for the

delivery of basic services essential to the promotion

of the general welfare and the enhancement of

peace, progress, and prosperity of the people. (FELS

Energy, Inc. v. Province of Batangas)

d. Objectives

i. Revenue Basically, the purpose of taxation is to

provide funds or property with which the State promotes the

general welfare and protection of its citizens. (51 Am. Jur. 71-73)

The conservative and pivotal distinction between police

power and power of taxation rests in the purpose for which the

charge is made. If generation of revenue is the primary purpose and

regulation is merely incidental, the imposition is a tax; but if

regulation is the primary purpose, the fact that revenue is

incidentally raised does not make the imposition a tax. (Gerochi v.

DOE)

While it is true that the power of taxation can be used as

an implement of police power, the primary purpose of levy is

revenue generation. If the purpose is primarily revenue, or if

revenue is, at least, one of the real and substantial purposes, then

the exaction is properly called a tax. (Planters Products, Inc. v.

Fertiphil Corporation)

It is beyond serious question that a tax does not cease to

be valid merely because it regulates, discourages, or even definitely

deters the activities taxed. The tax imposed by the decree was

imposed primarily to answer the need for regulating the video

industry, particularly because of the rampant film piracy, the

flagrant violation of intellectual property rights, and the proliferationof pornographic video tapes. And while it was also an objective of

the decree to protect the movie industry, the tax remains a valid

imposition. (Tio v. Videogram)

ii. Non-Revenue

Regulation. Taxes may also be imposed for a

regulatory purpose as, for instance, in the

rehabilitation of a threatened industry which is

affected with public interest, like the oil industry

(Caltex Phils. V. COA)

Promotion of General Welfare. Taxation may be used

as an implement of the police power in order to

promote the general welfare of the people. Thus, in

the case of Lutz v. Aranea, the SC upheld the validity

of the Sugar Adjustment Act, which imposed a tax on

milled sugar since the purpose of the law was to

strengthen an industry that is so undeniably vital to

the economythe sugar industry.

Reduction of Social Inequality. This is made possiblethrought the progressive system of taxation where

the object is to prevent the undue concentration o

wealth in the hands of a few individuals. Progressivity

is keystoned on the principle that those who are able

to pay should shoulder the bigger portion of the tax

burden.

Encouragement of Economic Growth. Taxation does

not only raise public revenue, but 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. Aspects of Taxation

i. Levy Levy is the imposition of the tax which is a

legislative act. It involves the determination of the persons, property

or excises to be taxes, the sums to be raised.

ii. AssessmentThis involves the process where the tax

one is obligated to pay is being computed.

iii. Collection This consists of the manner o

enforcement of the obligation on the part of those who are taxed.

Levy is taxation, strictly speaking, while the second andthird aspects may be referred to as tax administration. These

aspects together constitute the taxation system.

B. Taxes

a. Definition

Taxes are the enforced proportional contributions from

persons and property levied by the lawmaking body of the State by

virtue of its sovereignty for the support of the State and for all public

needs.

b. Nature of Taxes

i. It is a forced charge, imposition or burden. As such

taxes operate in invitum, which means that it is in no way dependen

on the will or contractual assent, express or implied, of the person

taxed. They are not contracts but positive acts of the government.


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ii. It is based on the taxpayers ability to pay. It is assessed

in accordance with some reasonable rule of apportionment, which

means that conformably with the constitutional mandate on

progressivity of a taxing system (Sec 28[2], Art. VI, 1987

Constitution), taxes must be based on ability to pay.

iii. It is generally payable in money. Unless qualified by law

(e.g. backpay certificates under Sec. 2, RA No. 304, as amended), the

term taxes or tax is usually understood to be a pecuniary burden

an exaction to be discharged alone in the form of money which

must be in legal tender.

A taxpayer may not offset taxes due from the claims that

he may have against the government. Taxes cannot be subject of

compensation because the government and taxpayer are not

mutually creditors and debtors of each other and a claim for taxes is

not such a debt, demand, contract or judgmenst as is allowed to be

set off. (Caltex Phils. v. COA)

Taxes cannot be subject to compensation for the simple

reason that the government and the taxpayer are not creditors and

debtors of each other. There is a material distinction between a tax

and a debt. Debts are due to the Government in its corporate

capacity, while taxes are due to the Government in its sovereign

capacity. (Philex Mining Corp. v. CIR)

A person cannot refuse to pay a tax on the ground that the

government owes him an amount equal to or greater than the tax

being collected. The collection of a tax cannot await the results of a

lawsuit against the government. (Francia v. IAC)

A claim for taxes is not such a debt, demand, contract or

judgment as is allowed to be set-off under the statutes of set-off,

which are construed uniformly, in the light of public policy, to

exclude the remedy in an action of any indebtedness of the state or

municipality to one who is liable to the state or municipality for

taxes. Neither are they a proper subject of recoupment since they

do not arise out of the contract or transaction sued on. The genereal

rule base on grounds of public policy is well settled that no set-offadmissible against demands for taxes levied for general or local

governmental purposes. The reason on which the general rule is

based, is that taxes are not in the nature of contracts between the

party and party but grow out of duty to, and are the positive acts of

the government to the making and enforcing of which, the personal

consent of individual taxpayers is not required. (Republic v.

Mambulao Lumber Co.)

iv. It is imposed by the State on persons, property or

exercises within its territorial jurisdiction applying the principles of

territoriality. The object to be taxed must be subject to the

jurisdiction of the taxing state. This is necessary in order that the tax

can be enforced.

Its laws may as to some persons found within it s territory

no longer control. Nor does the matter end there. It is not precluded

from allowing another power to participate in the exercise of

jurisdictional right over certain portions of its territory. If it does so,

it by no means follows that such areas become impressed with an

alien character. They retain their status as native soil. They are still

subject to its authority. Its jurisdiction may be diminished, but it

does not disappear. So it is with the bases under lease to the

American armed forces by virtue of the military bases agreement of

1947. They are not and cannot be foreign territory. (Reagan v. CIR)

v. It is levied by the lawmaking body. The power to tax i

a legislative power which under the Constitution only Congress can

exercise through the enactment of tax statutes.

Sec. 28, Art. VI, 1987 Constitution:

Section 28. (1) The rule of taxation shall be uniform and equitable

The Congress shall evolve a progressive system of taxation.

(2) The Congress may, by law, authorize the President to fix withinspecified 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 the framework of

the national development program of the Government.

(3) Charitable institutions, churches and personages or convents

appurtenant thereto, mosques, non-profit cemeteries, and all lands

buildings, and improvements, actually, directly, and exclusively used

for religious, charitable, or educational purposes shall be exempt

from taxation.

(4) No law granting any tax exemption shall be passed without the

concurrence of a majority of all the Members of the Congress.

vi. It is levied for a public purpose. Taxation involves, and

a tax constitutes, a charge or burden imposed to provide income for

public purposesthe support of the government, the administration

of the law, or the payment of public expenses. For this reason,

revenues derived from taxes cannot be used for purely private

purposes or for the exclusive benefit of private persons.

The term public purpose is not defined. Xxx Jurisprudence

states that public purpose should be given a broad interpretation. It

does not only pertain to those purposes which are traditionally

viewed as essentially government functions, such as building roads

and delivery of basic services, but also includes those purposes

designed to promote social justice. Thus, public money may now beused for the relocation of illegal settlers, low-cost housing and urban

or agrarian reform.

While the categories of what may constitute a public

purpose are continually expanding in light of the expansion o

government functions, the inherent requirement that taxes can only

be exacted for public purpose still stands. Public purpose is the hear

of a tax law. When a tax law is only a mask to exact funds from the

public when its true intent is to give undue benefit and advantage to

a private enterprise, that law will not satisfy the requirement o

public purpose. (Planters Products v. Fertiphil Corporation)

The concept of public use is no longer confined to the

traditional notion of use by the public, but held synonymous with

public interest, public benefit, public welfare and public

convenience. The discount privilege to which our senior citizens are

entitled is actually a benefit enjoyed by the general public to which

these citizens belong. The discounts given would have entered the

coffers and formed part of the gross sales of the private

establishments concerned, were it not for RA 7432. The permanen

reduction in their total revenues is a forced subsidy corresponding

to the taking of private property for public use or benefit. (CIR v

Central Luzon Drug Corp.)


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Once it is conceded, as it must, that the protection and promotion of

the sugar industry is a matter of public concern, it follows that the

legislature may determine within reasonable bounds what is

necessary for its protection and expedient for its promotion. (Lutz v.

Araneta)

vii. It is personal to the taxpayer.

c. Tax distinguished from other fees/charges

i. Tax v. Debt

A debt is generally based on contract, express or implied,

while a tax is based on law;

A debt is assignable, while a tax cannot generally be

assigned;

A debt may be paid in kind, while a tax is generally payable

in money;

A debt may be the subject of set-off or compensation,

while a tax is generally not;

A person cannot be imprisoned for non-payment of debt

(except when it arises from a crime), while imprisonment

is a sanction for non-payment of tax (except poll tax); A debt is governed by the ordinary periods of prescription,

while a tax is governed by the special prescriptive periods

provided for in the Tax Code; and

A debt draws interest when it is so stipulated or when

there is default, while a tax does not draw interest except

only when delinquent.

A tax, however, like a debt, is a liability or obligation.

ii. Tax v. Toll

A toll is a demand of proprietorship, while a tax is a

demand of sovereignty;

A toll is paid for the use of anothers property, while a tax

is paid for the support of the government; The amount of toll depends upon the cost of construction

or maintenance of the public improvement used, while

there is generally no limit on the amount of tax that may

be imposed; and

A toll may be imposed by the government or private

individuals or entities, while a tax may be imposed only by

the government.

iii. Tax v. License Fee

License or permit fee is a charge imposed under the police

power for purposes of regulation.

License fee is the legal compensation or reward of an

officer for specified services, while tax is an enforcedcontribution assessed by sovereign authority to defray

public expenses.

It is imposed for regulation, while a tax is levied for

revenue;

Its amount should be limited to the necessary expenses of

inspection and regulation, while there is generally no limit

on the amount of tax that may be imposed;

It is imposed on the right to exercise a privilege, while a

tax is imposed also on persons and property; and

Failure to pay a license fee makes the act or business

illegal while failure to pay a tax does not necessarily make

the act or business illegal but may be a ground fo

prosecution.

iv. Tax v. Special Assessment

Special assessment is an enforced proportiona

contribution from owners of lands especially or peculiarly

benefited by public improvements.

A special assessment is levied only on land; It is not a personal liability of the person assessed, i.e., his

liability is limited only to the land involved;

It is based wholly on benefits (not necessity); and

It is exceptional both as to the time and place. A tax, on

the other hand, has general application.

v. Tax v. Penalty

Penalty is any sanction imposed as a punishment fo

violation of law or acts deemed injurious. Thus, the

violation of tax laws may give rise to imposition of penalty

A penalty is designed to regulate conduct, while a tax is

generally intended to raise revenue; and A penalty may be imposed by the government or private

individuals or entities, while a tax may be imposed only by

government.

C. INHERENT POWERS OF THE STATE, distinctions

i. Taxation v. Police Power

As to Purpose. Taxation is levied for the purpose of raising

revenue; police power is exercised to promote public welfare

through regulations.

As to Amount of Exaction. In taxation there is no limit; in

police power, the exaction should only be such as to cover the cost

of regulation, issuance of the license or surveillance.

As to Benefits Received. In taxation, no special or direct

benefit is received by the taxpayer other than the fact that the

Government only secures to the citizen that general benefi

resulting from the protection of his person and property and welfare

of all. As to police power, however, while no direct benefits are

received, a healthy economic standard of society known as

damnum absque injuria is attained.

As to Non-Impairment of Contracts. In taxation, the non

impairment of contracts rule subsist. In the exercise of police powerhowever, this limitation does not apply.

As to Transfer of Property Rights. In taxation, taxes paid

become part of the public funds; in police power, no transfer, bu

only restraint on the exercise, of property rights exists.


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ii. Taxation v. Eminent Domain

As to Nature of the Power Exercised. Taxation is exercised

in order to raise public revenue; eminent domain or expropriation is

the taking of private property for public use.

As to Compensation Received. In taxation, payment of

taxes results in the general benefit of all citizens and inhabitants of a

State; in eminent domain, a direct benefit results in the form of just

compensation to the property owner.

As to Non-Impairment of Contracts. In taxation, a contract

may not be impaired; this is not so in eminent domain.

As to Persons Affected. Taxation applies to all persons,

property and excises that may be subject thereto; in eminent

domain, only a particular property is comprehended.

D. BASIC PRINCIPLES OF A SOUND TAX SYSTEM

a. Fiscal Adequacy

The sources of government revenue must be sufficient to

meet government expenditures and other public needs. This is

essential in order to avoid budgetary defisits and to minimize foreign

and local borrowings.

Fiscal adequacy, which is one of the characteristics of a

sound tax system, requires that sources of revenue must be

adequate to meet government expenditures and their variations.

(Chavez v. Ongpin)

b. Theoretical Justice or Equality

A good tax system must be based on the taxpayers ability

to pay. This suggests that taxation must be progressive conformablywith the constitutional mandate that Congress shall evolve a

progressive system of taxation. (Sec. 28[1], Art. VI, 1987

Constitution) It holds that similarly situated taxpayers should pay

equal taxes, while those who have more should pay more.

c. Administrative Feasibility

It means that tax laws should be capable of convenient,

just and effective administration or enforcement at a reasonable

cost.

d. Economic Efficiency

The system or power of collecting taxes should not exceed

the amount of tax collected.

E. INHERENT AND CONSTITUTIONAL LIMITATIONS

a. Inherent Limitations So called because they proceed from

the very nature of the taxing power itself.

i. Public Purpose

One test of determining the public purpose in a tax is

whether the thing to be furthered by the appropriation of public

revenue is something which is the duty of the State, as a

government, to provide. Another test is whether the proceeds of thetax will directly promote the welfare of the community in equa

measure.

There is no power to tax an object which is not within the

purposes for which governments are established. Such purpose also

includes the promotion of social justice because it is the duty of the

State to protect those less in life; thus fulfilling the public purpose

requirement.

The term public purpose is not defined. Xxx It does not

only pertain to those purposes which are traditionally viewed as

essentially governmental functions, such as building roads and

delivery of basic services, but also includes those purposes designed

to promote social justice. Thus, public money may now be used forthe relocation of illegal settlers, low-cost housing and urban or

agrarian reform. (Planters Products v. Fertiphil Corp.)

The test of the constitutionality of a statute requiring the

use of public funds is whether the statute is designed to promote

public interest, as opposed to the furtherance of the advantage of

individuals, although each advantage to individuals might

incidentally serve the public. (Pasucal v. Sec. of Public Works)

ii. Non Delegation of the Legislative Power to Tax

The power of taxation is exclusively legislative

Consequently, the taxing power as a general rule may not be

delegated.

Exceptions:

1. Delegation to the President. Under the Constitution

Congress may expressly 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 the framework of the nationa

development program of the Government. (Sec. 28[2], Art

VI, 1987 Constitution)

2. Delegation to Local Governments. Each local governmen

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 loca

autonomy. Such taxes, fees, and charges shall accrue

exclusively to the local governments. (Sec. 5, Art. X, 1987

Constitution)

3. Delegation to Administrative Agencies. Administrative

agencies like the BIR and Bureau of Customs may be

delegated with respect to administrative purposes tha

is, only for tax collection.


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Iii. Exemption of Government Entities

As a matter of public policy, property of the State and of

its municipal subdivisions devoted to government uses and purposes

is generally deemed to be exempt from taxation although no

express provision in the law is made therefor. Such exemption is

upheld as long as the said property is devoted to government uses

and purposes. Further, it may be said that it is absurd to tax entities

which is actually funded by the revenues raised through taxation.

GOCCs are exempted unless they are performingproprietary functions in which case such income derived therefrom

should be properly subjected to tax.

Exempt Entities: PHIC, SSS, GSIS, PNR

iv. International Comity

The property of a foreign state or government may not be

taxed by another under the principle of sovereign equality among

states by virtue of which one state cannot exercise its sovereign

powers over another.

v. Territorial Jurisdiction

However broad the power of taxation may be as to its

character and no matter how searching it is in its extent, such power

is necessarily limited only to persons, property or businesses within

its jurisdiction.

b. Constitutional Limitations

i. Due Process of Law

Sec. 1, Art. III of the Constitution provides in part that

(n)o person shall be deprived of life, liberty or property without due

process of law.

Substantive Requirement. The tax law should be valid;

should not be harsh, oppressive or confiscatory; must be for a public

purpose and imposed within territorial jurisdiction.

Procedural Requirement. This involves the compliance

with the fair and reasonable methods of procedure prescribed by

law. There must be no arbitrariness in assessment and collection

and that the taxpayer is entitled to right to notice and hearing.

ii. Equal Protection of Laws

All persons subject to legislation shall be treated alike

under like circumstances and conditions both in the privileges

conferred and obligations imposed.

The Constitution prohibits class legislation which

discriminates against some and favors others. As long as there are

rational or reasonable grounds for so doing, Congress may,

therefore, group the persons or properties to be taxed and it is

sufficient ifall of the same class are subject to the same rate and

the tax is administered impartially upon them.

Classification to be valid must:

- Rest on substantial distinctions

-

Germane to the purposes of the law

- Not be limited to existing conditions only

- Equally apply to all members of the same class

The State has the inherent power to select the subject of

taxation ad inequalities which result from the singling out of one

particular class for taxation or tax exemption infringe no

constitutional limitation. (Sison v. Ancheta)

iii. Rule of Uniformity and Equity in Taxation

Uniformity in taxation means that all taxable articles o

properties of the same class shall be taxed at the same rate. This

means that there must be equality in burden and not necessarily

equality in amount. It does not signify an intrinsic, but simply a

geographic, uniformity.

A tax is uniform when it operates with the same force and

effect in every place where the subject of it is found. It does not

signify an intrinsic but simply geographic uniformity. A levy of tax is

not unconstitutional because it is not intrinsically equal and uniform

in its operation. The uniformity rule does not prohibit classification

for purposes of taxation. (British American Tobacco v. Camacho)

Equity in taxation involves the application of the ability to

pay principle. The concept of equity in taxation requires that such

apportionment be more or less just in the light of the taxpayers

ability to shoulder the tax burden (usually measured in terms of the

size of wealth or property and income, gross or net) and, i

warranted, on the basis of the benefits he receives from the

government.

Taxation may be uniform but inequitable when the

amount of tax imposed is excessive or unreasonable.

To insure and enhance the equity objective, the

Constitution enjoins Congress to evolve a progressive system of

taxation. This means that tax laws shall place emphasis on direct

rather than indirect taxation, with ability to pay as the principa

criterion.

On the basis of the foregoing discussions, it can safely be

said that while equal protection refers more to like treatment of

persons in like circumstances, uniformity and equity refers to the

proper relative treatment for tax purposes of persons in unlike

circumstances.

Absolute or perfect equality or uniformity and equity is, o

course, hardly attainable, if not impossible. No system has ever been

devised which has produced perfect equality and uniformity of

taxation as between persons or corporations or different classes of

property and such a result cannot reasonably be expected. (First

Nat. Bank v. Holmes, 92 N.E. 893.) Approximation to it is all that can

be had.

iv. Prohibition against impairment of obligation o

contracts

The above proceeds from the constitutional provision that

No law impairing the obligation of contracts shall be passed. (Sec

10, Art. III)


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The obligation of a contract is impaired when its terms or

conditions are changed by law or by a party without the consent of

the other, thereby weakening the position or rights of the latter.

An exemption of impairment by law is when a tax

exemption based on a contract is revoked by a later taxing statute.

Note that when the government is a party to the contract granting

exemption, it cannot be withdrawn without violating the non-

impairment clause.

However, non-impairment may not be invoked in the caseof a public utility franchise grantee; the legislature can impair a

grantees franchise since a franchise is granted under the

Constitutional condition that it shall be subject to amendment,

alteration or repeal by Congress when the public interest so

requires. (See Sec. 11, Art. XII)

Thus in the case of PPI v. Chato, the SC said that since the

law granted the press a privilege, the law could take back the

privilege anytime without offense to the Constitution. The reason is

simple: by granting exemptions, the State does not forever waive

the exercise of its sovereign prerogative. Indeed, in withdrawing the

exemption, the law merely subjects the press to the same tax

burden to which other businesses have long ago been subject.

In Tolentino v. Sec. of Finance, CREBA, one of the

petitioners, alleged that the imposition of the VAT on sales and

leases of real estate by virtue of contracts entered into prior to the

effectivity of the law would violate the non-impairment of contracts

rule. The Court ruled that it is not enough to say that the parties to a

contract cannot, through the exercise of prophetic discernment,

fetter the exercise of the taxing power of the State. For not only are

existing laws read into contracts in order to fix obligations as

between parties, but the reservation of essential attributes of

sovereign power is also read into contracts as a basic postulate of

the legal order. The policy of protecting contracts against

impairment presupposes the maintenance of a government which

retains adequate authority to secure the peace and good order of

society.

v. Prohibition against imprisonment for non-payment of

poll tax

This principle is based on the provision of the Constitution

that No person shall be imprisoned for debt or non -payment of a

poll tax. (Sec. 20, Art. III)

A poll tax refers to a personal or capitation tax; it is a tax of

a fixed amount on individuals residing within a specified territory,

whether citizen or not, without regard to their property or

occupation. Applying the said provision, no one may be sent to

prison for failure to pay the community tax. One should not be

punished on account of his poverty.

Under the LGC, the only penalty for delinquency is the

payment of a surcharge in the form of interest at the rate of 24% per

annum which shall be added to the unpaid amount, from the due

date until it is paid.

vi. Non-infringement of Religious Freedom

Sec. 5, Art. III of the Constitution provides that (n)o 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 forever be allowed. No religious test shall be

required for the exercise of civil or political rights.

The general rule is that activities simply, purely and for

propagation of faith are exempt, as well as sales of bibles and

religious articles not for purposes of profit by a non-stock, non-profit

organization. However, as an exception, the Constitution does not

prohibit the imposition of a generally applicable tax on the sale of

religious materials when done by proprietary institution.

A municipal license tax on the sale of bibles and religious

articles by a non-stock, non-profit missionary organization at a little

profit constitutes curtailment of religious freedom and worship

which is guaranteed by the Constitution. The license tax is actually in

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

(American Bible Society v. City of Manila)

vii. Prohibition against appropriation for religious

purposes

Sec. 29(2) of Art. VI of the Constitution provides that (n)o

public money or property shall be appropriated, applied, paid, or

employed, directly or indirectly, for the use, benefit, or support ofany 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 pena

institution, or government orphanage or leprosarium.

The above limitation is based on the requirement that

taxes can only be levied for a public purpose. Note that what the

Constitution prohibits is the use of public money or property for the

benefit of any priest, etc. as such. When so employed in the armed

forces, any penal institution, or government orphanage o

leprosarium, they may receive their corresponding compensations

for services rendered in their non-religious capacity without

violating the constitutional prohibition.

viii. Exemption of religious, charitable and educationa

entities, non-profit cemeteries, and churches from property

taxation

Sec. 28(3), Art. VI of the Constitution provides: Charitable

institutions, churches and parsonages or convents appurtenan

thereto, mosques, non-profit cemeteries and all lands, buildings and

improvements actually, directly, and exclusively used for religious

charitable, or educational purposes shall be exempt from taxation.

Note that the exemption covers only property taxes and

not other taxes. (LLadoc v. CIR) The test of exemption is the use of

the property and not ownership. Thus, a property leased by the

owner to another who uses it exclusively for religious purposes is

exempt from property tax but the owner is subject to income tax on

rents received. Likewise, that if a property, although actually owned

by a religious, charitable or educational institution, is actually used

for a non-exempt purpose, the exemption from tax vanishes.

The use of the word exclusively means primary rather than

solely. Such that the exemption is not wholly or partly lost because

on certain occasions the property exempted or part of it is used fo

social purposes or let out to others for entertainment.


8/31


What is exempted is not the institution itself, those

exempted from real estate taxes are lands, buildings and

improvements actually, directly and exclusively used for religious,

charitable and educational purposes. Portions of the land leased to

private entities as well as those parts of the hospital leased to

private individuals are not exempt from such taxes. On the other

hand, the portions of the land occupied by the hospital and portions

of the hospital used for its patients, whether paying or non-paying,

are exempt from real property taxes. (Lung Center of the Phils. v.

Quezon City)

ix. Origin of Appropriation, Revenue and Tariff Bills

Sec. 24, Art. VI of the Constitution provides that (a)ll

appropriation, revenue or tariff bills, bills authorizing the increase of

the public debt, bills of local application and private bills shall

originate exclusively in the House of Representatives but the Senate

may propose or concur with amendments.

In the Tolentino E-VAT case, the SC said that (A) bill

originating in the House may undergo such extensive changes in the

Senate that the result may be a rewriting of the whole. At this point,

what is important to note is that, as a result of the Senate action, a

distinct bill may be produced. To insist that a revenue statute and

not only the bill which initiated the legislative process culminating inthe enactment of the lawmust be substantially be the same as the

House bill would be to deny the Senates power not only to only

concur with amendments but also to propose amendments. It

would be to violate the co-equality of legislative power of the two

houses of Congress and in fact make the House superior to the

Senate.

x. Exemption of Non-stock, non-profit educational

institutions from taxation

The exemption covers (1) income tax, (2) property tax, (3)

donors taxes, and (4) custom duties.

To be exempt from tax or duty, the revenue, assets,

property or donations must be used actually, directly and exclusively

for educational purposes. In the case of religious and charitable

entities and non-profit cemeteries, the exemption is limited to

property tax.

Congress is authorized to grant similar exemption to

proprietary (for profit) educational institutions subject to limitations

provided by law including restrictions on dividends and provisions

for reinvestment. The restrictions are designed to insure that the tax

exemption benefits are used for educational purposes.

Lands, buildings, and improvements actually, directly, and

exclusively used for educational purposes are exempt from property

tax whether the educational institution is proprietary or non-profit.

Canteens and bookstores inside schools are exempt from

income tax as long as it operates within the school and is primarily

used by the school even if it caters to outsiders.

xi. Concurrence by a majority of all the members of

Congress for the passage of a law granting tax exemption

The requirement is obviously intended to prevent

indiscriminate grant of tax exemptions. The phrase a majority of all

the members of the Congress means at least one-half plus one o

all the members thereof voting separately. Such rule also applies to

a law authorizing refund of a tax already collected.

xii. Power of the President to veto any particular item o

items in a revenue or tariff bill

As a general rule, under the Constitution, the President

may not veto a bill in part and approve it in part. The exception lies

in the case of revenue or tariff bills whereby the vetoed items shal

simply be not given effect.

xiii. Non-impairment of the jurisdiction of the Supreme

Court in tax cases

The Constitution prohibits Congress from taking away the

jurisdiction of the SC as the final arbiter of tax cases.

F. DOUBLE TAXATION

a. Prohibited sense v. Broad sense

(1)

In its strict sense (referred to as direct duplicate taxation

or direct double taxation), double taxation means

taxing twice,

by the same taxing authority,

within the same jurisdiction or taxing district,

for the same purpose

in the same year (or taxing period),

for some of the property in the territory.

Both taxes must be imposed on the same property or

subject matter.

(2) In its broad sense (referred to as indirect duplicate

taxation or indirect double taxation), double taxation is

taxation other than duplicate. It extends to all cases in

which there is a burden of two or more pecuniary

impositions. In other words, any of the elements in theprohibited sense of double taxation is missing.

b. Concept applicable in this jurisdiction

There is no constitutional prohibition against double

taxation in the Philippines. It is something not favored but

nevertheless permissible. Such taxation should, whenever possible

be avoided and prevented.

-

Doubts as to whether double taxation has been

imposed should be resolved in favor of the taxpayer

The reason obviously is to avoid injustice o

unfairness.

- When double taxation (in its narrow sense) occurs

the taxpayer may seek relief under the uniformity

rule or the equal protection guarantee.


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G. EXEMPTION FROM TAXATION

a. Definition

Exemption from taxation is the grant of immunity to

particular persons or corporations or to persons or corporations of a

particular class from a tax which persons and corporations generally

within the same state or taxing district are obliged to pay.

It is an immunity or privilege; it is freedom from a financial

charge or burden to which others are subjected.

b. Nature of Exemption

(1) An exemption from taxation is a mere personal privilege of

the grantee. Thus, an exemption granted to a corporation

does not apply to its stockholders, the former being

considered as a legal entity with a personality separate and

distinct from the latter. Being personal in nature, a tax

exemption cannot be assigned or transferred by the person

to whom it is granted without the consent of the legislature.

(2) It is generally revocable by the government unless the

exemption is founded on a contract which is protected fromimpairment. An exemption provided for in a franchise,

however, may be repealed or amended pursuant to the

Constitution.

(3) It implies a waiver on the part of the government of its right

to collect what otherwise would be due to it, and, in this

sense, is prejudicial thereto. Hence, it exists only by virtue of

an express grant and must be strictly construed.

(4) It is not necessarily discriminatory so long as the exemption

has a reasonable foundation or rational basis. Where,

however, no valid distinction exists, the exemption may be

challenged as violative of the equal protection guarantee or

the uniformity rule.

c. Nature of power to grant exemption

(1) National Government. Like the inherent power to tax, the

power to exempt from taxation is an attribute of sovereignty for the

power to prescribe who or what property shall be taxed implies the

power to prescribe who or what property shall not be taxed. Unless

restricted by the Constitution, the legislative power to exempt is as

broad as its power to tax.

(2) Local Governments.Municipal corporations, however, unlike

a sovereign state, are clothed with no inherent power to tax. Hence,

they have also no inherent power to exempt from taxation. But the

moment the power to impose particular tax is granted, they have

also the power to grant exemption therefrom unless forbidden by

some provision of the Constitution or law.

d. Grounds

(1) Contract. Tax exemption may be based on contract in

which case the public represented by the government is

supposed to receive a full equivalent therefor. Ordinarily, the

provisions of a contract of exemption from taxation are

contained in the charter of the corporation (law under which

is organized) to which the exemption is granted.

(2) Public Policy. It may be based on some ground of public

policy, such as, for example to encourage new and necessary

industries or to foster charitable and other benevolent

institutions. In this case, the government need not receive

any consideration in return for the tax exemption.

(3)

Reciprocity. It may be created in a treaty on grounds o

reciprocity, or to lessen the rigors of international double or

multiple taxation which occurs where there are many taxingjurisdictions.

e. Construction and Interpretation

i. General Rule

In the construction of tax statutes, exemptions are no

favored and are construed strictissimi jurisagainst the taxpayer. An

exemption from the common burden cannot be permitted to exist

upon vague implication or inference.

Taxation is the rule and exemption is the exception

Therefore, he who claims must be able to justify his claim or right

thereto, by a grant expressed in terms too plain to be mistaken and

too categorical to be misinterpreted.

ii. Exceptions

In the following cases, however, the exemption statutes

are liberally construed:

(1) When the law itself expressly provides for a libera

construction;

(2) When the exemption is in favor of the government itself o

its agencies;

(3) When the exemption is in favor of religious, charitable and

educational institutions because the general rule is that

they are exempt from tax.

H. CONSTRUCTION OF TAX LAWS

a. Nature of Tax Laws

Tax laws are civil in nature. Not political. Hence, even

during the period of enemy occupation (such as, for instance, during

the Japanese occupation of the Philippines in World War II), tax laws

are continually enforced as they are deemed to be the laws of the

occupied territory and not of the occupying power.

Neither are tax laws penal in nature. Not being penal in

character, the rule in the Constitution against the passage of ex pos

factolaws cannot be invoked. The constitutional prohibition applies

only to criminal or penal matters, and not to laws which concern civi

matters or proceedings generally, or which affect or regulate civil or

private rights.


10/31


b. Statutes imposing taxes are construed against the govt

No person or property is subject to taxation unless within

the terms or plain import of a taxing statute. In every case of doubt,

tax statutes are construed strictly against the government and

liberally in favor of the taxpayer.

The rule of strict construction as against the government is

not applicable where the language of the statute is plain and there is

no doubt as to the legislative intent. In such case, the words

employed are to be given their ordinary meaning.

c. Construction of Statute by Predecessors is not binding on the

Successors

The Secretary of Finance has the power to revoke, repeal

or abrogate the acts or previous rulings of his predecessors in office.

The reason for this is that the construction of the statute by those

administering it is not binding on their successors if thereafter the

latter becomes satisfied that a different construction should be

given. (Hilado v. Collector)

d. Tax statutes must be applied prospectively

i. General Rule

The general rule is that tax laws or amendments thereof

are prospective in operation. The reason is that the nature and

amount of the tax could not be foreseen and understood by the

taxpayer at the time of the transaction which the law seeks to tax

was completed.

ii. Exception

A statute may nevertheless operate retroactively provided

it is expressly declared or is clearly the legislative intent. As such,increasing taxes on income already earned is not invalid.

iii. Exception to the Exception

A tax law should be given retroactive application when it

would be harsh and oppressive, for in such case, the constitutional

limitation on due process would be violated. Where the increase is

made to apply to income earned long before the enactment of the

law, the proper tax of which has already been paid, such increase is

a violation of due process.

e. Publication

Not all sources of tax laws require publication as required

in Art. 2 of the Civil Code.

Interpretative regulations and those which are merely

internal in nature, i.e., those which regulate only the personnel of

the administrative agency and not the public, need not be published.

When an administrative agency renders an opinion by

means of a circular or memorandum it merely interprets a pre-

existing law and no publication is required for its validity. In one

case, a BIR Memorandum Circular was ruled as one which is only for

the internal administration of the BIR and not a regulation within the

contemplation of Sec. 245 of the Tax Code, and therefore, needs no

publication in the Official Gazette. (La Suerte Cigar v. CTA)

f. Special laws prevail over general laws

Tax laws are special laws. The tax code, as a special lawprevails over a general law such as the Civil Code. But in case the

provisions of a special law are found to be deficient in a particular

situation, the Civil code shall apply. (See Art. 18, NCC)

I. TAX EVASION v. TAX AVOIDANCE

a. Tax Evasion

Tax evasion is a term that connotes fraud thru the use of

pretenses and forbidden devices to lessen or defeat taxes. (Yutivo

Sons Hardware v. CTA)

It is the use by the taxpayer of illegal or fraudulent means

to defeat or lessen the payment of a tax. It is also known as tax

dodging. It is punishable by a law, subjecting the taxpayer to civi

and criminal liabilities.

Some tax evasion devices include the deliberate failure to

report taxable income or property and the deliberate reduction o

income that has been received.

Tax evasion connotes the integration of 3 factors:

- The end to be achieved, i.e., payment of less than

that known by the taxpayer to be legally due, or in

paying no tax when it is shown that a tax is due;

-

An accompanying state of mind which is described as

being evil, in bad faith, willful or deliberate and not

accidental;

-

A course of action (or failure of action) which is

unlawful.

b. Tax Avoidance

Tax avoidance is the tax saving device within the means

sanctioned by law. This method should be used by the taxpayer in

good faith and at arms length. (CIR v. The Estate of Toda)

Tax avoidance, often called tax planning or tax

minimization, is the use by the taxpayer of legally permissible

alternative tax rates or methods of assessing taxable property o

income, in order to avoid or reduce tax liability.

The term may be extended to include situations where a

person refrains from engaging in some activity or enjoying some

privilege in order to avoid the incidental taxation or to lower his tax

bracket for a taxable year. Thus, a man may change his residence to


11/31


avoid taxation or change the form of his property by putting his

money into non-taxable securities.

Where the tax evader breaks the law, the tax avoider

sidesteps it.

References:

Law of Basic Taxation by Aban

The Fundamentals of Taxation by De Leon

Atty. Bathans Taxation Reviewer on General Principles of Taxation

Notes from Previous Batches based on Atty. Tius Syllabus


12/31


INTRODUCTION TO INCOME TAXATION

I. Income Tax

Income taxis defined as a tax on all yearly profits arising

from property, professions, trades or offices, or as a tax on a

persons income, emoluments, profits and the like. Income tax is a

direct tax on actual or presumed income (gross or net) of a taxpayer

received, accrued, or realized during the taxable year.

II. Income Tax Systems

1.

GLOBAL TAX SYSTEM

In a global tax system, all items of gross income,

deductions and personal and additional exemptions, if

any, are reported in one income tax return, and the

applicable tax rate is applied on the tax base.

This system treats indifferently the tax base and

generally treats in common all categories of taxableincome of the taxpayer without any distinction as to their

type or nature, and subjects them to a single set of

graduated or fixed tax rates.

All income from whatever source is recorded in

one return and only one rate is applied to the taxable

income.

Ex.:

Business Income xx

Passive Income xx

Compensation Income xx

Total Income xxLess: Deductions (xx)

Taxable Income xx

Tax Rate %

Tax xx

2.

SCHEDULAR TAX SYSTEM

Under the schedular tax system, different types

of incomes are subject to different sets of graduated or

flat income tax rates. The applicable tax rate(s) will depend

on the classification of the taxable income. A separate tax

return or computation is required for each type of income.

Each type of income is subjected to a different

rate and the taxpayer files different income tax returns.

Ex.:

Passive Income xx

Tax Rate %

Tax xx

Business Income xx

Tax Rate %

Tax xx


Tax Rate %

Tax xx

3.

SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM

Under this system, the compensation incomebusiness or professional income, capital gain and passive

income not subject to final withholding income 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, capita

gain, passive income and other income not subject to fina

tax, in the case of corporations, as well as personal and

additional exemptions, in the case of individual taxpayers

the taxable income (i.e., gross income less allowable

deductions and exemptions) is subjected to one set of

graduated tax rates (if an individual) or normal corporate

income tax rate (if a corporation). With respect to the

above incomes not subject to final withholding tax, the

computation of income tax is global.

However, passive investment income subject to

final tax and capital gains from the sale or transfer of

shares of stocks of a domestic corporation and rea

properties remain subject to different sets of tax rates and

covered by different tax returns. The schedular tax system

thus applies to the capital gains and passive income

subject to final tax at preferential tax rates.

This system is applicable in PHILIPPINE

JURISDICTION.

Ex.:

Passive Income xxTax Rate %

Tax xx

Business Income xx


Total Income xx

Less: Deductions (xx)

Taxable Income xx

Tax Rate %

Tax xx

*Some income are subject to globa

tax system while some are schedula

tax system. (In short: mixed)

III. Features of Income Tax

1.

Direct Tax

The tax burden is borne by the income recipient

upon whom the tax is imposed. It is a tax demanded from


13/31


the very person who, it is intended or desired, should pay

it.

In context, direct taxes are those that are

exacted from the very person who, it is intended or

desired, should pay them, they are impositions for which a

taxpayer is directly liable on the transaction or business he

is engaged in. (Silkair v. CIR)

On the other hand, indirect taxesare those that

are demanded, in the first instance, from, or are paid by,one person in the expectation and intention that he can

shift the burden to someone else. Stated elsewise,

indirect taxes are taxes wherein the liability for the

payment of the tax falls on one person but the burden

thereof can be shifted or passed on to another person,

such as when the tax is imposed upon goods before

reaching the consumer who ultimately pays for it. When

the seller passes on the tax to his buyer, he, in effect,

shifts the tax burden, not the liability to pay it, to the

purchaser as part of the purchase price of goods sold or

services rendered. (Silkair v. CIR)

Direct tax vis-a-vis indirect tax, the difference lies

in the liability to pay the tax and the burden to pay the tax.

Income tax is a progressive tax, since the tax

base increases as the tax rate increases (i.e. graduated

income tax rates 5-32%). It is founded on the ability to pay

principle and is consistent with the Constitutional

provision that Congress shall evolve a progressive system

of taxation. (See Sec 28[1], Art. III, 1987 Constitution)

On the other hand, in a regressive tax, fixed flat

rates are applied regardless of the ability to pay of

taxpayer or the lesser you earn the more your taxes. I.e.

Value Added Tax (VAT)].

In the case of Tolentino vs. SOF, the SC said that

direct taxes are to be preferred and as much as possible,

indirect taxes should be minimized. Resort to indirect

taxes should be minimized but not avoided entirely

because it is difficult, if not impossible, to avoid them by

imposing such taxes according to the taxpayers ability to

pay.

2.

Basis of Income Tax Imposition

Citizenship Principle

A citizen of the Philippines is subject to

Philippine income tax (a) on his worldwide income

from within and without the Philippines, if he resides

in the Philippines, or (b) only on his income from

sources within the Philippines, if he qualifies as a

nonresident citizen; hence, the income of a

nonresident citizen from sources outside the

Philippines shall be exempt from Philippine income

tax.

Residence Principle

An alien was subject to Philippine income tax on

his worldwide income because of his residence in the

Philippines. Thus, a resident alien is now liable to pay

Philippine income tax only on his income from

sources within the Philippines and is exempt from tax

on his income from sources outside the Philippines.

Source Principle

An alien is subject to Philippine income tax

because he derives income from sources within thePhilippines. Thus, a non-resident alien is liable to pay

Philippine income tax on his income from sources

within the Philippines, such as dividend, interest

rent, or royalty, despite the fact that he has not set

foot in the Philippines.

3.

System of income taxation in the Philippines

The Philippines follows the semi-schedular o

semi-global system of income taxation, although certain

passive investment incomes and capital gains from sale o

capital assets, namely: (a) shares of stock of domestic

corporations; and (b) real property are subject to fina

taxes at preferential tax rates.

4.

Origin of income taxation in the Philippines

The Philippine income tax law is a law of

American origin. Thus, the authoritative decision of the

American official charged with enforcing the U.S. Interna

Revenue Code has peculiar force and persuasive effect fo

the Philippines. Great weight should be given to the

construction placed upon a revenue law, whose meaning

is doubtful, by the department charged with its execution.

5.

When is income taxable? (personal note ^^, )

Income, gain or profit is subject to income tax

when the following requisites are present:

a.

There is income gain or profit;

b. The income, gain or profit is received, accrued, o

realized during the taxable year; and

c.

The income, gain or profit is not exempt from income

tax.

Return of capital is not subject to income tax

Thus, payment of loan principal is exempt from income

tax. Cost of sales of manufacturers and dealers of goods

which represents return of capital, is not subject to income

tax.

Self-assessment tax system is followed in the

Philippines. You have to file your tax return without need

of assessment from administrative agencies (i.e. BIR). You

are only assessed usually when there is suspicion that you

are understating your revenues or overstating you

deductions (consequently under-declaring your tax

liability)


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IV. Kinds of Individual Taxpayers

a.

CITIZENS

Resident Citizen (RC)

RC is a citizen of the Philippines residing therein

Non-Resident Citizen (NRC)

NRC is a citizen of the Philippines whoestablished to the satisfaction of the CIR the fact of

his physical presence abroad with a definite intention

to reside therein.

NRC is a citizen of the Philippines who leaves

the Philippines during the taxable year to reside

abroad, either as an immigrant or for employment on

a permanent basis.

NRC is a citizen of the Philippines who works

and derives income abroad and whose employment

thereat requires him to be physically present abroad

most of the time during the taxable year (not less

than 183 days during the taxable year).

NRC is a citizen of the Philippines who has been

previously considered as non-resident citizen and

who arrives in the Philippines at any time during the

taxable year to reside permanently in the Philippines

shall likewise be treated as a non-resident citizen for

the taxable year in which he arrives in the Philippines

with respect to his income derived from sources

abroad until the date of his arrival in the Philippines.

Overseas Contract Worker (OCW)

A citizen of the Philippines who is working and

deriving income from abroad by virtue of an

employment contract with an employer without the

Philippines (including a seaman who is a citizen of the

Philippines and who receives compensation as a

member of the compliment of a vessel engaged

exclusively in international trade).

b.

ALIENS

Resident Alien (RA) An alien who resides in the

Philippines on a more or less permanent basis (must

be actually present in the Philippines for more than

12 months from his arrival to the country).

Non-Resident Alien Engaged in Trade or Business in

the Philippines (NRA-ETB) An alien deriving income

in the Philippines and who stays therein for an

aggregate period of more than 180 days during any

calendar year.

Non-Resident Alien Not Engaged in Trade or Business

in the Philippines (NRA-NETB) An alien deriving

income in the Philippines and who stays therein for

an aggregate period of 180 days or less during any

calendar year.

[Section 25(A)(1), NIRC]

V. Taxablity

a. Kind of Taxpayer, Sources of Taxable Income, Tax Base,

Tax Rate

*Special Treatment:

- Resident citizens are the only taxpayers taxed for income

from sources within and without

- NRA-NETB are the only taxpayers subjected to a flat rate o

25% and tax base is gross income. The difference between ne

income and gross income is that in gross income, deduction

and personal exemption are not yet availed of.

b.

Relevant NIRC provisions:

SEC. 24.Income Tax Rates.-

(A) Rates of Income Tax on Individual Citizen and Individual Resident

Alien of the Philippines.

(1) An income tax is hereby imposed:

(a) On the taxable income defined in Section 31

of this Code, other than income subject to tax

under Subsections (B), (C) and (D) of this Section

derived for each taxable year from all sources

within and without the Philippines be every

individual citizen of the Philippines residing

therein;

(b) On the taxable income defined in Section 31


under Subsections (B), (C) and (D) of this Section


within the Philippines by an individual citizen o

the Philippines who is residing outside of the

Philippines including overseas contract workers

referred to in Subsection(C) of Section 23 hereof

and

(c) On the taxable income defined in Section 31


under Subsections (b), (C) and (D) of this Section


TAXPAYER SOURCES OF

TAXABLE

INCOME

TAX BASE TAX RATE

RC Within and

without

Net Income 5% - 32&

NRC Within Net Income 5% - 32%

OCW Within Net Income 5% - 32%

RA Within Net Income 5% - 32%

NRA-ETB Within Net Income 5% - 32%

NRA-NETB Within Gross Income 25%


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within the Philippines by an individual alien who

is a resident of the Philippines.

(2) Rates of Tax on Taxable Income of Individuals The tax

shall be computed in accordance with and at the rates

established in the following schedule:

Xxx

For married individuals, the husband and wife,

subject to the provision of Section 51 (D) hereof,shall compute separately their individual income

tax based on their respective total taxable

income: Provided, That if any income cannot be

definitely attributed to or identified as income

exclusively earned or realized by either of the

spouses, the same shall be divided equally

between the spouses for the purpose of

determining their respective taxable income.

Provided, That minimum wage earnersas defined

in Section 22 (HH) of this Code 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 andhazard pay received by such minimum wage

earners shall likewise be exempt from income tax.

xxx.

SEC. 25. Tax on Nonresident Alien Individual. -

(A) Nonresident Alien Engaged in trade or Business Within the

Philippines. -

(1) In General. - A nonresident alien individual engaged in

trade or business in the Philippines shall be subject to an

income tax in the same manner as an individual citizen and

a resident alien individual, on taxable income received

from all sources within the Philippines. A nonresident alien

individual who shall come to the Philippines and stay

therein for an aggregate period of more than one hundred

eighty (180) days during any calendar year shall be

deemed a 'nonresident alien doing business in the

Philippines'. Section 22 (G) of this Code notwithstanding.

Xxx

(B) Nonresident Alien Individual Not Engaged in Trade or Business

Within the Philippines. -There shall be levied, collected and paid for

each taxable year upon the entire income received from all sources

within the Philippines by every nonresident alien individual not

engaged in trade or business within the Philippines as interest, cash

and/or property dividends, rents, salaries, wages, premiums,

annuities, compensation, remuneration, emoluments, or other fixed

or determinable annual or periodic or casual gains, profits, and

income, and capital gains, a tax equal to twenty-five percent (25%)

of such income. Capital gains realized by a nonresident alien

individual not engaged in trade or business in the Philippines from

the sale of shares of stock in any domestic corporation and real

property shall be subject to the income tax prescribed under

Subsections (C) and (D) of Section 24.

c.

Gross Income vs. Net Income

Gross income means income, gain or profit subject to

tax. It includes compensation for personal and professional services,

business income, profits, and income derived from any source

whatever (whether legal or illegal), unless exempt from tax under

the Constitution, tax treaty or statute. In other words, gross income

is derived at without deducting expenses.

Net income means gross income less statutory

deductions and exemptions. It is referred to as taxable income.Net income must be computed with respect to a fixed period. That

period is twelve months ending December 31st

of every year, excep

in the case of a corporation filing returns on a fiscal year basis, in

which case net income will be computed on the basis of such fisca

year.

VI. Graduated Income Tax

Section 28(1)(c), NIRC

TAXABLE INCOME INCOME TAX

Not over P10,000 5%

Over P10,000 but not over

P30,000

P500+10% of the excess ove

P10,000


P70,000

P2,500+15% of the excess ove

P30,000


P140,000

P8,500+20% of the excess ove

P70,000


P250,000

22,500+25% of the excess ove

P140,000


P500,000

50,000+30% of the excess ove

P250,000

Over P500,000 P125,000+34% of the excess ove

P500,000

*Based on Ability to Pay Principle in that, the higher the taxable income, the

higher the tax rate

EXAMPLE: how to get the tax base for one engaged in selling of

merchandise/goods?

Gross Sales 200,000

Cost of Goods Sold 100,000)

Gross Income 100,000

Less:

Allowable Deductions/Operating Expense (40,000)

Personal Exemptions (50,000)

Net Income [taxable net income / basis (5-32%)] 10,000


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VII. Income vs. Capital

The essential differences between capital and income are

as follows:

1. Capital is a fund, while income is a flow;

2.

A fund of property existing at an instant of time is called

capital, while a flow of services rendered by that capital by

the payment of money from it or any other benefit

rendered by a fund of capital in relation to such fundthrough a period of time is called income;

3. Capital is wealth, while income is the service of wealth;

4. Capital is the tree, while income is the fruit; labor is a tree,

income the fruit; property is a tree, income the fruit.

(Madrigal vs. Rafferty);

5. Return of capital is not subject to income tax, while

income is subject to tax.

VIII. Situs of Taxation

The source rules to determine whether the income shall

be treated as income from within or outside the Philippines can be

found in Section 42 of the 1997 Tax Code. Determining the situs or

incidence or place of taxation leads to the determination on

whether the income is taxable or not.

TYPE OF INCOME SITUS

Interest Income Residence of the Debtor

- If the obligor or debtor is a

resident of the Philippines, the

interest income is treated as

income within the Philippines.

It does not matter whetherthe loan agreement is signed

in the Philippines or abroad or

the loan proceeds will be used

in a project inside or outside

the country.

Dividend Income from

Domestic Corporation

Income within

Dividend Income from

Foreign Corporation

a. Income within, if 50% or more

of the GI of the FC for the

preceding 3 years prior to the

declaration of the dividend

was derived from sources

within the Philippines.

b.

Income without, if less than50% of the GI of the FC for the

preceding 3 years prior to the

declaration of the dividend

was derived from sources

within the Philippines

Service Income Place of Performance of the Service

- If the service is performed in

the Philippines, the income is

treated as from sources within

the Philippines.

Rent Income Location of Property

Royalty Income Place of use of intangible

Gain on Sale of Real

Property

Location of Real Property

- If the real property sold is

located within the Philippines

the gain is considered as

income from the Philippines

Gain on Sale of Personal

Property

Purchase of personal property within

and its sale without the Philippines, or

purchase of personal property withoutand its sale within the Philippines:

- Any gain, profit or income

shall be treated as derived

entirely from sources within

the country in which sold

Accordingly, if the goods are

shipped in a foreign por

under Free-on-Board (FOB

shipping point arrangement

title to the goods is

transferred at the foreign por

and any gain from the sale o

such goods to a Philippine

importer shall be treated asincome from sources outside

the Philippines

Personal property produced (in whole

or in part) by the taxpayer within the

Philippines and sold without the

Philippines, or produced (in whole or in

part) by the taxpayer without and sold

within the Philippines:

-

Any gain, profit or income

shall be treated as derived

partly from sources within and

partly from sources withou

the Philippines

Gain on Sale of

Domestic Shares of

Stock

Income within

-

Gain, profit or income is

treated as derived entirely

from sources within the

Philippines, regardless o

where the said shares are

sold. Thus, a NRA who owns

shares of stocks of a domestic

corporation acquired through

a foreign stock exchange is stil

liable to the Philippine income

tax even if such shares are

sold also through a foreign

stock exchange.

EXAMPLES:

1. INTEREST INCOME

Q: Mr. AAA (Non-Resident Citizen) lent money to Mr. BBB (residen

of Germany). Is the interest an income in the Phils? Taxable?

A: NO. Source of income is Germany (for interest income, situs o

taxation is the residence of the debtor)


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Mr. AAA is the income earner (a Non-resident citizen). The source

of income is outside the Phils. NRC can only be taxed for income

within the Phils. Since situs of taxation is Germany, then such

interest income is not taxable in the Philippines.

Q: What if AAA is a Resident Citizen?

A: Then he is taxable. The income earner is a resident citizen and

thus, is taxed for income within and without the Philippines. Source

of income is Germany. Mr. X is taxed for worldwide income. Hence,

such interest income is taxable.

2. DIVIDEND INCOME

Q: Shareholder of San Miguel, San Miguel now distributes

dividends to Mr. X (NRC), taxable?

A: YES. NRC is taxable for income within. Dividend income received

from San Miguel is an income within. Situs is within the Phils. Then

dividend income is taxable.

Q: Mr. X (NRC) has shares in Coca Cola, will X be taxable for

dividends received?

A: First, determine if Coca Cola is domestic or not. It is foreign.

Hence, it is income without the Phils. Since Mr. X, being an NRC is

only taxed for income within, then the dividend from a foreign

corporation is not taxable in the Phils.

Q: if X is a Resident Citizen, will he be taxed for Coca Colas

dividend?

A: YES. Taxable for income from all sources. GLOBAL.

3.DIVIDEND INCOME FROM FOREIGN CORPORATION

Ex.: If Coca Cola declared dividends in 2011, for it to be considered

as income within, dapat ang Gross Income from 2008, 2009, 2010

derived from Phils is 50% or more sa iyang Global Income kay

majority of its income is derived from Phils. But if its less than 50%,it will not be considered as within but without.

Problem: Total Global Income of Coca Cola for the preceding 3

years prior to the declaration of dividends is 1B dollars; income

derived from Phils within that preceding 3 years is 501M. Income

within?

YES, because it is more than 50%.

4. SERVICE INCOME

Q: Mr. B (NRA-ETB) is a singer hired by Mr. X (NRC) in party held in

the Phils. Will Mr. B be taxed for income he receives for singing?

A: YES. Mr. B is the income earner; Since an NRA-ETB is taxed for

income within and the situs of service income is where B sang

which is in the Phils., then income from the singing is taxable.

Q: if he sang in Hong Kong, will he be subject to tax?

A; NO, because he is an NRA-ETB and performing the service

outside the Phils and we said NRA-ETB will be tax only for sources

within.

5. RENT INCOME

Q: Mr. X (RC) has properties in Australia and rents it out, will he be

taxed for such income?

A: Yes. Although situs is outside, he is a resident citizen. Hence, he

is taxed for income from within and without.

Q: if Mr. X (NRC, RA, NRA-ETB, NRA-NETB)?

A: No. Only taxed for income within.

6. ROYALTY INCOME

Q: Haruki Murakami (NRA-NETB) will now be receiving royalties for

the books sold in the Phils, will he be taxed for the royalties income

derived here?

A: YES, within. Situs is place of the intangibles (as in this case

where he receives the royaltiesPhils.)

Another example is franchise.

Q: Bos Coffee will expand in US, earnings there will now g ive

royalties to Bos in Phils. If owner is RC, will he be taxed fo

royalties?

A: Yes. RC taxed for global income.

Q: if the owner is a Filipino Citizen residing in Canada for 185 days

will he be taxed for US royalties?

A: NO. He is a now a Non Resident Citizen and only taxed for

income within.

7. GAIN ON SALE OF REAL PROPERTY

Q: RC having properties abroad and sold it for a profit. Taxable?

A: YES. He is a RC.

Q: NRC having properties abroad and sold it for a profit. Taxable fo

that profit?

A: NO. NRC will be tax only for sources derived within the Phils.

8. GAIN ON SALE OF PERSONAL PROPERTY where it was

purchased (location of sale)

Q: bought laptop in the US and sell it in Phils, RC will be tax?

A: YES. Doesnt matter, worldwide income.

Q: if NRC?

A: YES.

9. GAIN ON SALE OF PERSONAL PROPERTY

Q: bought laptop in the US and sold it in the Phils, RC will be tax?

A: YES. Doesnt matter, worldwide income.

Q: if NRC?


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A: YES. Place of sale is in the Phils.

NOTE: You must analyze what kind of taxpayer he is and where

that income is derived.

CIR v. Callejo

President (German) asking for a refund because her alleged

income derived from abroad was withheld with tax. Shes saying

that since shes not a Resident Citizen, she should only be paying

taxes from source derived in the Phils. We said if its a service,situs is where the service is performed. She said she performed

the service in Germany, why should the company withhold? I

should not pay tax! SC said, yes you are correct that if performed

outside, individuals other than RC will not be taxed as a rule. The

problem was that she could not prove that the services she

performed were indeed made in Germany. Court denied the

refund. Had she proven it, she should be entitled to the refund.

Why need to be proved? Because tax refund is similar to tax

exemptions (construed strictissimi juris)

IX. Taxable Income

a. Meaning

Taxable incomemeans the pertinent items of

gross income specified in the Tax Code, less the

deductions and/or personal and additional exemptions, if

any, authorized for such types of income by the Tax Code

or other special laws. (Sec. 31, NIRC)

b. All Sources Of Income (whether legal or illegal)

Wilcox Doctrine Embezzled money does not

constitute taxable income to the embezzler in

the year of embezzlement for the reason that

the money embezzled does not belong to the

embezzler.

James DoctrineEmbezzled money is a taxable

income of the embezzler. The rule is founded on

the reason that the embezzler has no intention

of returning the money.

Claim of Right Doctrine 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 that which would otherwise constitute a

gain. To collect a tax would give the government

an unjustified preference as to the part of the

money that rightfully and completely belongs to

the victim. The embezzlers title is void.

X. Gross Income (Section 32, NIRC)

a.

Means all income from whatever source derived including

(but not limited to):

i. COMPENSATION for services (including fees

commissions, and similar items);

ii. GAINS derived from dealings in property;

iii. INTEREST;

iv. RENTS;

v. ROYALTIES;

vi. DIVIDENDS;

vii. ANNUITIES;

viii.

PRIZES and winnings;

ix. PENSIONS;

x.

PARTNERs distributive share of the gross incomeof GPPs.

MEMORY TEASER: C.G.I.R.R.D.A.P.P.P.

*The enumeration is not exclusive

Special treatment:

a. Forgiveness of indebtednesssubject to donors tax no

income tax since the debt is forgiven without you doing

something in return [it now becomes an act of liberality.

However, if forgiveness of debt is due

Documents

02 Tax 1 Midterms