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REVIEWER IN TAXATION
BY: ATTY. DAN A. MACATANGAY Revised April 2007
A. General Principles of Taxation
1. Concept[1], Underlying Basis[2] and Purpose a. Taxation, Taxes Defined
1.2 Attributes or Characteristics of Taxes
Cebu Portland Cement v. CTA, L-29059, 15 Dec 1987, 156 SCRA 535 (Lifeblood of the Government) [1] x
Mun. of Makati v. CA, et al, GR No. 89898, 01 Oct 1990, 190 SCRA 206 (Exempt from execution) [2] x
CIR v. Algue, Inc., et. al., L-28896, 17 Feb 1988, 158 SCRA 9 (Rationale is Symbiotic Relationship; timeliness of assessment/collection) [3] x
BPI Family Savings Bank v. CA, et al, L-122480, 12 Apr 2000 (Mutual observance of fairness & honesty)[4] x
Principles of a Sound Tax System o Fiscal Adequacy o Theoretical Justice o Administrative Feasibility o Will the observance of these principles invalidate the tax law? No, unless other
inherent and constitutional limitations are infringed. Scope of Taxation
No attribute of sovereignty more pervading; unlimited, plenary, comprehensive and supreme
Wide spectrum of the power to tax reaches every trade, or occupation, every object of industry, use or enjoyment, every species of possession
Imposes burden, if not followed could result to seizure and penalty Pervasive affecting constantly and consistently all relations of life It also involves the power to destroy per Justice Marshall [ but Justice
Holmes said no while the US SC sits.] Power to tax involves power to destroy
CIR v Tokyo Shipping Co. L-68252, 26 May 1995[33] x [Claim for refund of tax on GPB from charter of vessel; claim for refund construed strictissimi juris finding of fact by CTA that vessel left without sugar laden; 15 years lapsed without refund though at one point lawyer of BIR said it was approved; kill the goose that lay the golden eggs]
Limitation of Taxation Inherent Limitations
Public purpose Legislative in nature Territorial International Comity
o CIR v Mitsubishi Metal Corp, GR No. 54908 & 80041, Jan 22, 1990 (Exemption of Japanese govt owned bank does not
extend to Jap corp who in turn lent the loan to a local company; exemption construed strictissimi)
Exemption of government from tax Constitutional
Directly affecting taxation o non-imprisonment for non payment of poll tax o rule of taxation should be uniform and equitable; progressive
system taxation to evolve o authorized President to fix limits by Congress o exempt charitable and religious institution from property tax o exempting law must be passed by majority of the all members
of Congress o special purpose tax should be used for said purpose and excess
to revert to general fund o veto power of the president o review power of the SC o grant of power to local government o exemption from taxes on assets and revenues of non-stock
non-profit education institution, etc from taxes Indirectly affecting taxation
o Due Process and Equal Protection Clauses o police power and eminent domain higher can override
constitutional rights, subject to limitations Distinguish Taxation from Police Power and Eminent Domain
o Taxation is subordinate to a. Due process b. Separation of church and state c. Non-impairment clause of contracts d. Free exercise and enjoyment of religious profession
Cases: o Phil Bank of Communications v. CIR, et al, GR 119024, 28
Jan 1999 (Summary collection does not infringe due process) [5] x
o Sison v. Ancheta, GR 59431, 25 Jul 1984, 130 SCRA 654 (Uniformity, Equal Protection and Due Process Clauses not violated BP 135 adopting gross income taxation) [6] x
o Reyes v. Almanzor, 196 SCRA 322 (Arbitrary valuation violated Due Process)[7] x
o Nitafan et. al. v CIR, GR No. 78780, Jul 23, 1987 (Salaries of justices & judges are not exempt from income tax)
o PAL v. Sec of Finance, GR 115852, Aug 25, 1994 (Withdrawal of PAL’s exemption from VAT without being mentioned in title not violative of bill embracing one subject)
o Tolentino v. Sec of Finance & CIR, GR 11545, 65 SCAD 352, 249 SCRA 248 (Does VAT law violate the “progressivity rule of taxation” given that VAT is regressive?; equality & uniformity rule?)
o ABAKADA Guro v. Exec Secretary, GR 168056, etc., Sep 1, 2005 & Oct 18, 2005
o Aspects of Taxation
Levy CIR v Botelbo Shipping Corp 20 SCRA 487[8] x Tan v Del Rosario, Jr., 237 SCRA 324 (1994[3]) [Legislative
discretion to determine nature (kind), object (purpose), extent (rate), coverage (subject), \and situs (place) SNITS is valid; ][9] x
Assessment & collection Payment
Classification of Taxes According to subject matter (Capitation Tax, Property Tax, Excise Tax) According to burden or incidence [Direct or Indirect]
Maceda v Macaraeg 223 SCRA 217[10] x ABAKADA Guro v. Exec Secretary, GR 168056, etc., Sep 1, 2005
& Oct 18, 2005 According to determination of amount [Ad valorem or specific]
Tan v Mun of Pagbilao, GRL-14264, Apr 30, 1963, 7 SCRA 887[11] x
According to purpose [General or special] PAL v Romeo Edu, GR 41383, 15 Aug 1988, 164 SCRA 320 (exempt
from taxes)[12] x ESSO Std Eastern v CIR GR 28508-9, 7 Jul 1989, 175 SCRA 149
(Margin fee a license – police power, not taxing)[13] x Lozano v. Energy Regulatory Board, GR 95119-21, 18 Dec 1990, 192
SCRA 363 (OPSF not a tax)[14] x According to authority imposing the tax [National or Local]
Meralco Securities v Central Board of Assessment Appeals, L-46245, 31 May 1982, 114 SCRA 260 (Real Property under Real Property Tax Code a national tax; no longer true with the enactment of the LGC placing RPT under the local government units)[15] x am/pm
According to gradation (tax base/tax rate) [progressive, regressive, flat] Distinguished from other exactions
License P&G v Mun of Jagna, 94 SCRA 894 (nature and amount of license)
[16] x Golden Ribbon Lumber v City of Butuan, 12 SCRA 611 (non
payment is illegal)[17] x Toll
City of Ozamiz v Lumapas, 65 SCRA 33[18] x Special Assessments [now called Special Levy under the Local Government
Code] Apostolic Prefect v. Treasurer of Baguio, 71 Phil 547
Debt or an ordinary obligation Victoria Milling v. Phil Ports Authority, GR 73705, 27 Aug 1987,
153 SCRA 317 (share of govt from earnings of arrastre and stevedoring from contractual compensation not tax) [19] x
CIR v Prieto, 109 Phil 592[20] x Interpretation and Construction of Tax Statutes
o How are tax laws interpreted or construed? a. Rules of statutory construction are applied, legislative intent is primordial b. In case of doubt, construed in favor of taxpayer c. But for exemptions, construed against taxpayer
i. Except when it applies to government ii. Special class of subjects under special conditions
iii. When the law says so o Cases
CIR v CA, Central Vegetable Mfg Co. & CTA GR 107135, 23 Feb 1999[21] x
Luzon Stevedoring v CTA, GR 30232, 29 Jul 1988, 163 SCRA 647[22] x CIR v Gotamco & Sons, GR 31092, 27 Feb 1987, 148 SCRA 36[23] x CIR v CA, CTA and Ateneo de Manila, GR 115349, 18 Apr 1997, 271
SCRA 605[24] x How are the rules applied? Apply first the doctrine that imposition is a
burden thus construed strictly vs. govt, then if applicable the burden shifts to taxpayer to prove he is exempt.
Classifications of Exemptions Express i. Sec 30 of NIRC
ii. Sec. 105 of Tariffs and Customs Code iii. Sec. 234 of the Local Government Code iv. Special laws, like the Omnibus Investment Code Implied or by Omission i. Gov is impliedly not subject to tax but it can tax itself
ii. Equity iii. Contractual
Prov of Mizamis Oriental v. Cagayan Electric, GR 45355, Jan 12, 1990, 181 SCRA 38[25]
Instances exemptions construed liberally The law says so Special classes of persons under special circumstances
CIR v CA, ROH Auto Products Phils & CTA, GR 108358, 20 Jan 1995, 240 SCRA 368[26] x
In favor of the government, etc. Maceda v Macaraeg 197 SCRA 771[27] x
Exemptions granted to traditional exemptees, such as religious/charitable Certain Doctrines in Taxation
Prospectivity of tax laws Hydro Resources v CA, L-80276, 21 Dec 1990, 192 SCRA 604[28] x
[ad valorem tax imposed by law passed after transfer of ownership not applicable; contract of sale subj to suspensive condition; LC issued prior to law is not subj to ad valorem; no retro effect unless stated by law]
Central Azucarera de Don Pedro v CTA, 20 SCRA 344[29] x [interest on deficiency tax was imposed by a law passed after the deficiency was incurred is not a retroactive application]
How may tax laws be applied? General rule, prospective, but the law can provide that it has retro effect and it is still valid, except if too harsh and oppressive as to violate due process clause of the constitution
Is the government bound by the error of its agents? While the government is not bound by the error of its agent in issuing a ruling, in the interest of justice and fair play, reversal of ruling may not be given retro effect (CIR v Benguet Corp, 463 SCRA 28 (2005); CIR v Bursmeiters & Wain Scandinavian, GR 153205, Jan 2007)
Non-prescriptive - CIR v. Ayala Securities Corp. L-29485, 21 Nov 1980[30] x [tax on undue accumulation of income does not prescribe]
Do taxes prescribe? No, but the law can provide for its prescription, such as NIRC, Customs and LGC
Double taxation What is double taxation? Is it valid or constitutional?
o Direct duplicate taxation -same taxing authority, same subject, same year
o Indirect duplicate taxation – when otherwise o What is meant by International juridical double taxation?
Pepsi Cola v. Tanauan 69 SCRA 460[31] x [mun ordinance impose 01. per gallon per RA is not undue delegation; no double taxation; not specific tax]
CIR v S C Johnson & Sons 309 SCRA 87 (1999)[32] x [Most favored Nation Clause; double taxation; claim for refund in the nature of exemption; construction of RP-US Tax Treaty – tax rate on royalty US v Germany; international juridical double taxation defined] x
Measures to avoid double taxation? o Treaty o Reciprocity o Tax credit
Power to tax involves power to destroy CIR v Tokyo Shipping Co. L-68252, 26 May 1995[33] x [Claim for
refund of tax on GPB from charter of vessel; claim for refund construed strictissimi juris finding of fact by CTA that vessel left without sugar laden; 15 years lapsed without refund though at one point lawyer of BIR said it was approved; kill the goose that lay the golden eggs]
Means of escaping taxation: Tax avoidance/tax evasion CIR v. Rufino, L-33665-68, 27 Feb 1987, 148 SCRA 42[34] x [tax
exempt merger of two corporations] Delpher Trades Corp v. IAC, 157 SCRA 349[35] x [tax exempt
transfer of property to a corporation resulting to control] CIR v Benigno Toda, 438 SCRA 290 (2004) - meaning of fraud; tax
avoidance/evasion] Is equitable recoupment allowed though prescription has set in?
Collector v UST, 104 Phil 1062 (rejected this common law doctrine)[36]
Set off of taxes Philix Mining v. CIR, L-125704, 28 Aug 1998 (General rule: no
offsetting)[37] x [Refundable VAT v. Excise Tax] Republic v Sampaguita Pictures, L-35238, 21 Apr 1989, 172 SCRA
623[38] x [Offset of Percentage and amusement taxes v. matured backpay certificates] ;Domingo v. Garlitos, 8 SCRA 443 [1963](exception: allowed) [39] x [Estate and Inheritance taxes v. specifically appropriated fund for the payment of obligation to the estate]
Taxpayer suit may be filed When disbursement of public funds involved But not
o To enjoin Comelec to call election o Funds were not raised through taxation
Maceda v. Macaraeg, 197 SCRA 771[40] x [Exemption of NPC from taxes]
Are compromises allowed? Yes, by the BIR under NIRC and by Customs under TCCP. No
similar provisions under the LGC, thus Civil Code applies suppletorily.
Are tax laws political or penal and nature? No., it applies to territory and not by reason of occupying forces
B. THE NATIONAL INTERNAL REVENUE CODE
1. Taxes imposed under the NIRC
2. Bureau of Internal Revenue (Secs 2 to 20, NIRC)
a. Powers and Duties of the Bureau of Internal Revenue b. Exclusive and original power to interpret tax laws, subject to review by Sec of
Finance c. Assess & collect
i. CIR v. Pascor Realty & Dev Corp, 309 SCRA 402 (1999), Meaning of Assessment [1]
ii. Marcos II v. CA, 270 SCRA 47(1997)Burden of Proof on taxpayer to prove erroneous assessment[2]
iii. Meralco Securities Corp v Savellano, 117 SCRA 804 (BIR cannot be compelled by Mandamus to issue assessment) [2]
2.4 Enforce forfeitures, penalties & fines, execute decision of CTA & ordinary courts
i. Republic v CA 366 SCRA 489(2001); Aznar v CIR 58 SCRA 519 (1974); CIR v Benigno Toda, 438 SCRA 290 (2004) ( meaning of fraud]
2.5 Effect police powers
2.6 Obtain information, etc.
2.6.1 Sy Po v CTA, GR No. 81446, 18 Aug 1988 (best evidence to support assessment)[4]; CIR v Hantex Trading L 136975, Mar 31, 2005.
2.6.2 Bache & Co. v. Ruiz, 37 SCRA 823 (requirement for a search warrant)[5]
3. BIR Rules and Regulations o CIR v CA, ROH Auto Products Phil, Inc. and CTA, GR No. 108358, 20 Jan 1995,
240 SCRA 368. (Nature of administrative rules & regulations)[6] x o CIR v CA, CTA and Fortune Tobacco Corp, GR No. 119761, 29 Aug 1996, 261
SCRA 236 (Extent of BIR interpretative rule)[7] o CIR v Burroughs, Ltd., GR No. 66653, 19 Jun 1986, 142 SCRA 324 (Effect of
revocation of ruling)[8] o PBC v CIR, GR No. 112024, 29 Jan 1999 (wrong interpretation will not prejudice
the government)[9] o ABS-CBN v CTA & CIR GR52306 Oct 12, 1981 [Circulars or rulings prospective]
o CIR v Benguet Corporation, 463 SCRA 28 (2005) – Non-retroactivity of ruling; while government is not bound by the error of its agents issuing ruling, in the interest of justice and fair play, it may not be given retro effect. [same holding in Sy Po v CTA, GR No. 81446, 18 Aug 1988:
o CIR v Bursmeiters & Wain Scandinavian, GR 153205, Jan 2007) – Non retroactivity of BIR ruling; 0% VAT on export of services.
C. INCOME TAXATION (Secs 22 to 83, NIRC)
1. Definitions of Terms (Sec. 22, NIRC) 2. General Principles (Sec 23, NIRC)
a. CIR v BOAC 149 SCRA 395 [1] x - Source of income of airlines - [ sale of airline tickets of an offline airline considered income derived from Phil by majority of SC; source rule discussed; minority considered airline tickets as contract of carriage or service, thus situs is where rendered; characterization becomes moot given the new tax provision on 2 ½ % Phil Gross Billings regardless of where sold or paid provided cargo or passenger originates from Phil.]
b. NDC v CIR, 151 SCRA 472 [1987][2] x - Source of interest income – [Exemption strictly construed; Sec. 37 {now Sec 42} – Income from sources within the Philippines applied; also exclusions from gross income.
c. CIR v Lednicky 11 SCRA 603 [3] x - Partnership Theory – the right to tax income emanates from partnership in the production of income by providing protection, resources, incentives and climate to produce income. [Was income tax paid to fx govt by resident alient deductible though income exclusively came from the Phils.? No.]
d. Madrigal v. Rafferty GR12287 aug71918 38 Phil 14 [4] x - Functions of income tax - The aim has been to mitigate the evils arising from the inequalities of wealth by a progressive scheme of taxation, which places the burden on those best able to pay.; income distinguished from capital. Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital is a fund; income is a flow. Capital is wealth, while income is the service of wealth. "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." Madrigal Espouses reported income from conjugal partnership separately resulting to lower tax due. SC said under law at the time they shld report jointly. The partnership is not a bus partnership; right of espouses enchoate.
CIR v Isabela Cultural Corp GR 17223 TD Feb 12, 2007 – All-Events Test applied in recognizing income or liability under accrual method of accounting. Expenses incurred in prior year cannot be claimed as expense in another. For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability.
a. e. Meaning of Income
3.1 Fisher v Trinidad GR17518 Oct 30, 1922 43 Phil 973 [5] x – Income defined; stock dividends construed]
3.2 CONWI V CTA, G.R. No. 48532, August 31, 1992, 213 SCRA 83 [6] x Income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as a flow of the fruits of one's labor. The issue here is which exchange rate to use on $-denominated salaries of P&G employees earned abroad. RR issued by Sec Finance required application of floating rate is applicable in this case not the CB Circular. Thus, refund claim is denied.
3.3 Received by mistake is income. - Javier v CA 199 SCRA 824 [7] x
3.4 Constructive receipt of rent income1958 deposited in court in 1957 withdrawn in – Limpan Investment Corp v. CIR 17 SCRA 703 [1966][8] x
3.5 Book error not income - Fernandez v CIR 29 SCRA 553 [9][liability to an insurance co. overstated, thus when corrected the net worth went up. This is not taxable.
3.6 Claim of right doctrine – illegally acquired (extortion) is income, Rutkin v US 343 U.S. 130
3.7 Severance test theory – separation from capital of something w/c of exchangeable value; refers to taxability of stock dividends, Eisener v Macomber, 252 US 189; CIR v CA 301 SCRA 52
3.8 Control test – power to procure the payment of inc and enjoy the benefit thereof determines who is subject to tax on coupon bond donated to his son. , Helvering v. Horst 311 U.S. 112
4. INCOME TAXPAYERS
4.1 Individuals (Secs 24 to 26, NIRC)
a. Individual Taxpayers i. Citizens
4.2.1.1 Residents
4.2.1.2 Non-residents
4.2.2 Aliens
4.2.2.1 Resident
1. Non-residents a. Engaged in business b. Not engaged
4.3 Corporate Taxpayers (Secs 27-30, NIRC)
4.3.1 Meaning of Corp or partnership
i. Sharing not taxable - Pascual v CIR, 166 SCRA 560 [1988][10] x ii. Co-ownership is not taxable - Ona v CIR, 45 SCRA 74 [11]; Obillos v CIR
139 SCRA 436 [1985][12] x Cited Ona, Evangelista cases. iii. Afisco Insurance v. CIR, L-112675, 25 Jan 1999[13] x Taxed a corporation
the pool of insurance companies. iv. Joint Emergency Operations – Col v Batangas 54 OG 6724 [14]
4.4 Kinds of corporation
4.4.1 Domestic (Sec 27)
1. Profit-oriented (32%); effective July 1, 2005 – 35% per RA 9337. 2. Proprietary educ & non-profit hospital – 10% of taxable inc, except
passive income; contrast with a tax exempt non-stock and non-profit educational institution. (It is not clear if the phrase “which are non-profit” applies to proprietary educ institutions. He says if it’s not-profit, it’s exempt from income tax. [H. S. De Leon, NIRC ANNOTATED, Vol. 1, 2003 ed., p. 173))
3. Govt corps - SSS, GSIS, PHIC, PAGCOR & PCSO [PAGCOR IS NOW TAXABLE UNDER RA9337]
4.4.2 Foreign (Sec 28)
1. Resident – engaged in business 2. Non-resident
a. Estate under judicial settlement – must be under judicial administration; entitled to deduction for single individual and distribution of heirs.
b. Trusts irrevocable both as to corpus and as to income c. TAX BASE AND TAX RATES FOR INDIVIDUALS
i. Resident citizens 1. All sources – compensation, business & other income, (except passive
income & capital gains – subj to final taxes) a. Tan v Del Rosario 237 SCRA 324 (1994) Global Taxation
[15] b. RR No. 2-98, as amended by RR 8-98, 12-98, 3-99, 8-2000,
10-2000, 6-01,12-01, 3-02 and 14-03 – Withholding taxes c. RR 3-98 – Fringe Benefits Tax
i. Convenience of employer rule, Coll v Henderson, 1 SCRA 649
d. What is compensation income? e. What is ordinary income (Sec 22[z]
2. How taxable is computed? a. Gross compensation, less additional and personal exemptions
and premiums on health and hospitalization (subj to conditions)
b. Business and other income taxed at net taxable income (net income = GI less Deductions (see Sec 34 of NIRC)
c. Above items subject 5, 10, 15, 20, 25, 30 to 32% graduated tax rates (10 K, 30K, 70K, 140K, 250K, 500K)
d. Passive income i. Royalties– 20% (except books, literary, musical at
10%) ii. Prizes exceeding 10K – 20% (except Lotto, PCSO);
10K or less subj to ordinary tax rates iii. Other winnings – 20% iv. Interest (peso) – 20% v. Interest (fx) – 7.5%
vi. Interest (5 yrs) – exempt vii. Int. Preterm, <3-20, <4-12, <5-5%
viii. Dividends from domestic corp and taxable partnership, 6, 8, 10% (1998, 1999, 2000 +)
1. Stock Dividend, CIR v CA, 301 SCRA 152 [16]
2. Recipient other than shareholder, Bachrach v Siefert, 87 Phil 483 [17]
3. Treasury stock CIR v Manning 66 SCRA 14 [18]
ix. Dividends from fx corp. subject to regular income tax e. Dealings in Properties classified as capital assets
i. Capital gains from sale of real property located in Phil – 6% or 5 to 32% (option when sold to government)
ii. RR 13-99 – Exemption of residence from CGT iii. Other capital gains – 5 to 32%
f. Sale of stocks of domestic corp i. Listed and thru stock exchange – exempt from income
tax, but to bus tax ½ of 1% (non deductible from gross income)
ii. Not listed or if listed not thru stock exchange – 5, 10% (100K, >100K)
g. Cash reward to informers – 10%
i. Non-resident citizen 1. Within Phil – same as resident citizen 2. Without Phil – exempt
ii. Resident alien – same as resident citizen, but only from within Phil iii. Non-resident alien
1. Engaged in business (183 days) – same as resident alien with respect to compensation, business, other income and passive income, but not entitled to additional exemption, except:
a. Div from domestic corp – 20% [Sec 25(A)(2)] 2. Not engaged – 25% on gross income (but entitled to preferred rates
for sale of shares and real property) a. Div from domestic corp – 25% b. Royalties, prizes & winnings – 25%
3. Employed by Offshore, RHQ, ROHQ, Petroleum service contractors/subcon (same treatment to Filipino of same rank & job– 15% based on gross
iv. Income of non-residents, whether individual or corp from transactions with depositary banks under expanded foreign currency deposit system – exempt from income tax [Sec 27(D)(3)]
v. Types of Income of Individual 1. Compensation 2. Fringe Benefits 3. Income from Trade/Business 4. Exercise of profession 5. Passive Income 6. Other Dealings in Property
vi. Computation of income tax due of individual who earns bus, compensation and other income
Gross Sales/Receipts Less: Returns & Discounts Net Sales Less: Cost of Sales/Service Gross Income from bus or exercise of profession Compensation income Other income (other than those subj to final tax) Total Gross Income Less: Itemized or optional deductions
Exemptions/Exemptions Taxable Income Tax Due (Tax table 5% to 32%) Creditable W/Tax Tax still due/refund
4.7.9 Gross Income – Individuals subject to 5% to 32% Tax
Compensation Trade/Business Exercise of Profession Prizes/Winnings – P10K or less Capital gains on real property sold to govt – 6% or 5% to 32% Other capital gains from dealings in property
4.7.10 Income of individuals subject to final tax
Passive Income
Prizes/winnings > P10K
Except from PCSO/, etc. Dividends Royalties Interest Capital gains from sale or exchange of shares of stock (outside of stock exchanges) Capital gains from sale of real property Compensation from ROHQ, OBU, etc. Informer’s reward
a. TAX BASE AND TAX RATES APPLICABLE TO CORP i. DOMESTIC – subject to tax on income earned from all sources (within &
without the Phil) 1. N.V. Reederif Amsterdam v CIR, GR No. 46029, 23 Jun 1988 [19]
x 2. On taxable income (other than passive income) – 34%, 33% or 32%
starting 2000; 35% starting Jul 1, 2005 see RA 9337. 3. On Passive income
a. Royalty – 20% b. Interest/Yield from bank deposits, deposit substitutes, Trust
Fund and similar arrangement – 20% [CIR v Solidbank GR 148191 Nov 25, 2003 – GRT v FWT no double taxation; accrued v constructive] 19a x
c. Interest inc (expanded fx) – 7.5% d. Interest inc from deposits in fx & loans to residents of
depositary banks (10%) e. Interest inc from non-residents, whether ind or corp - exempt f. Interest (5 yrs or more maturity) – exempt
i. Pre-terminate, <3-20, <4-12, <5-5% g. Dividends from domestic corp and taxable partnership –
exempt from income tax h. Dividends from fx corp. subject to regular income tax i. Capital gains from sale of real property located in Phil – 6% j. Sale of stocks of domestic corp
i. Listed and thru stock exchange – exempt from income tax, but to bus tax ½ of 1%
ii. Not listed or if listed not thru stock exchange – 5, 10% (100K, >100K)
4. 2% MCIT BASED ON GROSS INCOME (GI)[see Rev Reg 9-98, Aug 25, 1998; RR 7-2003 Cap assets v Ord assets]
a. Beg immediately on the 4th taxable year from start of operations; compare tax based on 32% and at 2%, whichever is higher
b. Carry Forward of Excess MCIT vs regular tax for 3 immediately succeeding years
c. Relief due to prolonged labor disputes, force majeure, other legit bus reverses
d. GI means GS less sales returns, disc & allo. & COGS. COGS include all expenses to produce the goods to bring them to present location & use; For trading or msding, CIF & duties; For mfg, COGMS, cost of producing FG. For seller of services, Gross Receipts less sales returns, discounts, allowances & cost of services, facilities, salaries, benefits, equipment, rent, supplies. For banks, include interest expense.
5. When 15% of Gross Income is an option a. tax effort ratio = 20% of GNP b. Inc tax collected = 40% total revenues c. VAT = 4% of GNP d. Consolidated Public Sector Financial Position = 0.9% of GNP
ii. RESIDENT FOREIGN CORP
1. 32% (35% effective July 1, 2005 RA 9337) - Same as domestic corp, except that taxable income should come from Phil sources
2. International Carrier – 2 ½% of Gross Phil Billings a. Air Carrier – continuous and uninterrupted flight originating
from Phil regardless of place of issue and payment, exchange with other airlines; but in transshipment, only the leg from Phil
b. Shipping originating from Phil up to final destination, regardless of sale or payment of document
3. 10% - Offshore banking units – income fx transactions with local and res. Banks, including from fx loans with residents
4. 15% - Branch Profits Remittances based on total profits applied or earmarked for remittance w/o deduction of tax component paid via withholding system.
a. Except activities registered with PEZA b. Items of income, int, rent, div, salaries, remuneration, capital
gains, royalty, etc if not effectively connected with the conduct of its traded or business in the Phil
c. CIR v Marubeni 177 SCRA 500 [20] 5. 10% - RHQ, AHQ, ROHQ - Sec 22DD & EE for definitions 6. 20% on interest & royalties 7. 7.5% on int from expanded fx in a depositary bank 8. 10% on int from expanded fx earned by depositary bank 9. Capital gains from stocks – 5%/10% 10. Inter-corporate div from domestic corp - exempt
iii. NON-RESIDENT FOREIGN CORP 1. 32% (35% effective Jul 1, 2005) based on gross income 2. 25% cinema film owner, lessor or distributor 3. 4 ½% on rentals to owner or lessor of chartered vessels to Phil
nationals 4. 7 ½% - rentals of aircraft, machineries & other equipment 5. 20% on fx loans contracted on or after Aug 1, 1986 6. Capital gains on shares of stocks – 5/10% or ½% if sold through stock
exchange 7. Royalty subject to tax treaty
a. Most Favored Nation (CIR v S C Johnson & Sons 309 SCRA 87 (1999)[21]
8. 15% on div from domestic corp provided a tax credit = to 20, 19, 18, or 17% (20% effective Jul 1, 2005) is granted to non res corp for tax deemed paid
a. CIR v Procter & Gamble, 204 SCRA 378, GR 66838, Dec 2, 1991 [22], Persons liable to tax v. persons subject to tax; rate of tax at 15% v 35%[53]
iv. 10% IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) (See Rev Reg No. 2-2001, Feb 12, 2001) implementing Sec 29 of NIRC)
1. Applies to domestic corps 2. Exemptions
a. Publicly held corp b. Banks & non bank FI c. Insurance companies d. Gen prof partnership e. Non-taxable JV
f. PEZA, CDA entities 3. Prima facie if personal holding or investment company 4. Evidence determinative if permitted to accum beyond the reasonable
needs of the purpose to avoid tax upon shareholders unless contrary is proved
5. Div must be declared and paid w/in 1 yr from close of tax year, otherwise tax shall be paid w/in 15 days thereafter
6. How computed: Taxable Income during the year + exempts, exclusions, final tax, NOLCO – div & income tax paid, and reasonable needs X 10%
7. Reasonable needs includes anticipated needs a. 100% of paid up capital b. definite expansion with board resolution c. Loan agreements d. WC requirements, meet competition, anticipated losses or
reverses, hazards and emergencies e. Legal prohibition f. Subsidiaries of fx corp earmarked for investments g. Bardahl formula and Immediacy Test (Cynamid Phils Inc
v CA, 322 SCRA 639 (2000) [23] h. Investments in unrelated bus, bonds and LT securities are not
deemed reasonable 8. IAET is only imposed once on specific earnings but still subject to
div tax to individuals v. EXEMPT CORPORATIONS (SEC 30, NIRC) [see RMC No. 76-2003,
Nov 14, 2003] 1. Labor, agrix & horticultural not principally for profit 2. Non-stock, non-profit mutual and coop banks for mutual purpose &
w/o profit 3. Beneficiary society, order, assoc, frat benefits of members 4. Exclusive cemetery for members 5. Non-stock religious, charitable, scientific, cultural no income inure to
its members or any specific persons. [Art VI, Sec 28(3), Constitution exemption to religious, non-profit cemeteries, charitable, educational covers property tax]
6. Business league, chamber or trade assoc 7. Civic league, org 8. Non-stock, non-profit educational[Art XIV, Sec 4(3) of Constitution
exempts them from duties and taxes all revenues and assets]; substantial evidence to prove that it falls under classification and that income is used actually, directly and exclusively for educ purposes. (See Rev Memorandum Circular No. 76-2003, Nov 14, 2003)
9. Govt educational institutions 10. Farmers’ or other mutual typhoon or fire insurance co, mutual ditch,
irrigation or coop telegraph, only fees, assessments, are for meeting expenses
11. Farmers’ fruit growers assoc for marketing products 12. Notwithstanding the foregoing, income of whatever kind or nature
from properties or activities conducted for profit regardless of disposition shall be subj to tax
a. Int inc of religious org subj to inc tax regardless of disposition; bank deposits are personal property (BIR ruling
512, Oct 21, 1998; Ruling No. 58, Apr 5, 1991); rental income is taxable regardless of disposition (CIR v. CA, 298 SCRA 83, Oct 14, 1998)**[24]
b. Gain from sale of land & bldg of religious org used for same purpose is an isolated transaction, thus exempt from inc tax; it’s rents, div, interest, profits from business are taxable. (Manila Polo Club, CTA No. 293, Aug 31, 1959; BIR Rulings No. 569, Nov 29, 1988; No. 115, Apr 2, 1992)
c. Application of Sec 30 (h) - YMCA, CIR v CA 298 SCRA 83. [25] – YMCA’s income is not exempt from income tax. It’s not educational institution referred to in the constitution.
vi. GENERAL PROFESSIONAL PARTNERSHIP (Sec 26) 1. Exempt from income tax but its partners are taxable on their share
whether distributed or not 2. Its exclusion is a classification clause not an exemption thus
construed in favor of taxpayer, CIR v Ledesma, 31 SCRA 95, Jan 30, 1970. [26]
b. MEANING OF TAXABLE INCOME (Sec 31) – Items of gross income less deductions and personal exemptions, if any, authorized by NIRC or special laws.
c. Computation of Gross Income (Sec 32) i. Sec 32(A) Definitions of Gross Income, includes compensation for services,
conduct of trade or bus or prof, gains from dealings in property, interest, rents, royalties, div, annuities, prizes, winnings, pensions, partners distributive share in gen prof partnership.
ii. SEC 32(B) EXCLUSIONS FROM GI - Excluded and exempts from taxation.
1. Life insurance proceeds payable to heirs or beneficiaries, but if held by insurer to pay int, the int is taxable; Question: If beneficiary is the taxpayer itself, is the proceeds taxable or not? Justice Dimaampao says yes.
2. Return of premiums or cash surrender value under diff types of life insurance
3. Gifts, bequests, devisees of property, but income from such property, & gifts, etc. of income from any prop , in cases of transfers of divided interests, are taxable
4. Compensation for injuries or sickness, plus damages whether by suit or agreement
5. Exempt by treaty 6. Retirement, pensions, gratuities, etc. under RA7641 and from
reasonable private benefit plan (50/10/once; non-diversion of corpus & profits)
7. Amount received as consequence of separation due to sickness,death, other physical disability, or causes beyond control
8. Social security, retirement, gratuities, pensions received by Filipinos or aliens who reside permanently in Phil from fx govt, other institution, public or private
9. Received by any person residing in Phil from US Veterans Admin 10. SSS, GSIS benefits and gratuities 11. Income by fx govts, their financing institutions, & international
finance institution 12. Income from public utility and essential functions of Phil govt and pol
subdivisions
13. Prizes & awards as recognitions for religious, charitable, scientific, educ, art, literary, civic if selection is w/o action on his part to enter the contest or proceedings and does not require substantial future service
14. Prizes and awards to athletes from local and international competition recognized by local sports association
15. 13th month pay & other benefits under this par. not more P30K such as govt employees under RA 6686, benefits not covered by PD 851 as amended by MO no. 28, Aug 13, 1986, productivity incentives and Christmas bonus. Ceiling may be increased by RR
16. SSS, GSIS, Medicare, Pagibig, Union Dues by individuals 17. Gains from sale of bonds, debentures, cert of indebtedness with
maturity of > 5 years 18. Gains from redemption of mutual funds company shares defined in
Sec 22(BB).
a. ALLOWABLE DEDUCTIONS
nItemized deductions (Sec 34, NIRC)
n10% Standard Deductions (Sec. 34[L])
nPremiums on medical & hospitalization (Sec. 34[M])
nPersonal exemptions (Sec. 35)
4.11.1 Personal and Additional Exemptions
nStatus & amounts
uMarried – P32 K
uHF – P25 K
uS – P20 K
uDependent – P8K/ but not > 4
nChange in status
uMarriage
uBirth/Death
uOf age
uGainfully employed
4.11.2 10% Standard Deductions
n10% of Gross Income of business income
nAllowed only to citizens and resident aliens engaged in business or profession
nNo need to support expenses
nElection irrevocable for the year
nUnless indicated, itemized is deemed elected
4.11.3 Not allowed to claim deductions
Individuals receiving compensation income (except premiums on medical/hospitalization subj to limitations)
Non-resident aliens not engaged in bus Aliens employed in ROHQ, AHQ, OBU, Petroleum contractors Non-resident foreign corporations Income subject to final tax
4.11.4 Itemized Deductions (Sec. 34)
There must be a law allowing them (Atlas Consolidated Mining v. CIR 102 or 120 SCRA 246) [27]
Ordinary, necessary, reasonable, not against law, etc.
- Ordinary, necessary, directly, including:
Salaries, bonuses, emoluments, allowances, incentives, Fringe Benefits Travel expenses Rental (without equity; operating lease) Entertainment, amusement, recreation, subj to a ceiling Ordinary and necessary means reasonable
It appeared sale of property was effected by a broker hence bonus to company officer disallowed (Aguinaldo v CIR, 112 SCRA 136 [1982] [28]
Algue case. On the substantive issue, SC allowed the deduction as reasonable citing Rev Reg No. 2: It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its controlling stockholders. The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed.
CIR v Isabela Cultural Corp. GR 172231 Feb 12, 2007 – All events test applied in determining whether expenses booked on accrual basis should b claimed as deductible expense.
Must be connected with business, except Contributions/donations Premium on health/hospitalization Allowed to corporations, individuals, partnerships Must be incurred during the year Substantiated (Esso v. CIR, 175 SCRA 149 [1989] [29]
Cohan Rule – there is showing that expenses were incurred but cannot be ascertained due to absence of documentary evidence (RMC 23-2000)
Subjected to withholding tax, where applicable
FEBTC v CA, CTA & BIR GR 129130 (Dec 2005) – To sufficiently support claims for tax refund of excess creditable withholding tax, BIR Form 1743 must be submitted, Confirmation Receipts and ITRs are not sufficient. Having failed to do so, the claims were correctly denied. Under withholding tax system, it is the payor who withholds the tax and not the payee. The OR/CR did not indicate the nature and amount of the payment. “The findings of fact of the CTA, a special court exercising particular expertise on the subject of tax, are generally regarded as final, binding and conclusive[8] upon this Court, especially if these are substantially similar to the findings of the CA which is normally the final arbiter of questions of fact.[9] The findings shall not be reviewed nor disturbed on appeal[10] unless a party can show that these are not supported by evidence,[11] or when the judgment is premised on a misapprehension of facts, or when the lower courts failed to notice certain relevant facts which if considered would justify a different conclusion.[12]”
4.11.4.1 Travel expenses
Excess over 1st class not deductible subj to FBT Excess over fixed allowance $150/100 not deductible; taxable to employee or to FBT Home leave not taxable to employee Family expenses taxable to employee to be deductible to employer
4.11.4.2 Meals & housing
Generally taxable to employee, except when for the convenience of the employer or form part of Fringe Benefits of the employee
Cash Advance/Reimbursement system
4.11.4.3 Entertainment, amusement or recreation (EAR) facilities
Directly related to business Directly in furtherance of bus
Not contrary to law, etc. Ceiling ½% of 1% of Net sales or Net revenues Substantiation in name of taxpayer & subject to w/tax, where applicable Only one athletic club per officer Guests other than company officers, etc.
4.11.4.3.1 Exclusions from EAR
Treated as compensation or FB Charitable or fund raising events Bona fide business meetings of directors, etc Business league or prof organization meet Promotion, Ad and marketing Shifting to other accounts to hide - prohibited Separate item in ITR or note to FS
4.11.4.4 Interest [Rev Reg 13-2000, Nov 20, 2000 - Requisites]
Use, forebearance or detention of money Requisites There is debt and interest is agreed in writing Interest paid or incurred in connection with bus during the year Legally due Not between related parties Not incurred for petroleum operations Not capitalized Limitations on Interest Interest is reduced by 41% (42% effective Jul 1, 2005), 39% and 38% of interest income
subj to final w/tax
Interest of bus taxes not subj to limit
Although cash basis, int paid in adv deductible only in the year debt is paid in full or corresponding to amortized principal
4.11.4.5 Taxes
Connected with trade or business, except o Income Tax – Local
Not an item of operating expenses because it does not help generate revenue, nor does it redound to benefit customers, thus not to be considered in fixing rates of public utility (Republic v Meralco, GR 141369, Nov 15, 2002) [30]
o Income tax paid to foreign govt (tax credit/deduction) o Gift & Estate tax o Special Assessment
If allowed as deductible then refunded, tax benefit rule applies Limitations on tax credit
CIR v. Central Luzon Drug Corp (Mercury), 456 SCRA (2005) – 20% Senior Citizens Discount is a tax credit deductible from tax liability
4.11.4.6 Losses
Fires, shipwreck, theft other casualties Connected with trade or busines Not compensated by insurance or otherwise Not claimed in the estate tax return Declared within 30 to 90 days to BIR NOLCO (requisites)
Losses from wash sales of stock & securities (Sec 38)
Capital losses (Sec 39)
4.11.4.7 Bad Debts (See Rev Reg No. 5-99, Mar 10, 1999, as amended by Rev Reg No.
25-2002, Nov 19, 2002, amending Sec.3 of Rev Reg No. 5-99)
Charged off during the year [ see PRC v CIR 256 SCRA 667] [31] Connected with business Not related parties Effort to collect failed Legal debt Tax benefit rule applies
4.11.4.8 Depreciation
a. Definition – Gradual diminution in the uselfu service value of tangible property used in business. (Basilan Estates Inc. v CIR, 21 SCRA 17 (1967) [32]
4.11,4.9 Depletion
a. Definition – Exhaustion of natural resources like mines and oil and gas wells as a result of a production or serverance from such mines or wells.
4.11.4.10 Charitable & Other Contributions
a. Requisites b. In full and subject to limitations
4.11.4.11Research &Development
a. Requisites for deductibility b. Limitations on deductions
1. Pension Trust Contributions a. Nature and requisites b. Limitation on deduction
1. Items not deductible (Sec. 36) a. Personal & Living expenses b. Capital expenditures
c. Premiums on insurance where beneficiary is the payor-taxpayer d. Losses between related parties
i. Special provisions re income and deductions of insurance companies (Sec. 37)
ii. Losses from wash sales of stocks or securities (Sec. 38) 1. What are wash sales and how are they treated for income tax purposes
iii. Rules on capital gains and losses (Sec 39) 1. What are capital gains and losses 2. How are they treated in the hands of individuals and corporation
a. INCOME TAX TREATMENT ON THE SALE OR EXCHANGE OF PROPERTY (SEC. 40)
i. General rule on recognition of gain or loss in an sale or exchange of property ii. Exceptions
iii. Factors relevant to determination of gain or loss iv. How is gain or loss computed v. What is the basis to be used
vi. When are gains recognized but not losses vii. What are tax implications of merger, consolidation, & acquisition of 80%
assets 1. Give examples
viii. What are requisites for taxable and tax free transfer of property resulting to majority ownership of the corporation
ix. When stocks or securities are subsequently sold, how are gains or losses computed
x. How are corporate dividends, stocks and bonds treated for income tax purposes (Sec. 73)
xi. How are installment and deferred payment sales treated for income tax purposes
a. Inventories (Sec. 41) b. Income from Sources within the Philippines (Sec. 42) c. Accounting Methods (Sec. 43)
i. What accounting methods are acceptable to BIR ii. How are inventories treated
iii. What are accounting periods and their relevance d. Returns and Payments
i. What returns should be filed ii. Who are required to file the returns
iii. When, where and how are returns filed iv. Effects if returns are not filed on time or not at all.
e. Estates and Trusts a. Estate – Refers to the mass of property left by a decedent
i. Taxable as a separate taxpayer like an individual if under judicial testate or intestate proceedings, otherwise, income from said property taxable to heirs
ii. Entitled to deductions 1. Personal exemption = P20,000 2. Distribution to heir during the year. If no distribution, subsequent
distribution of said income no longer taxable to heirs 3. Distribution to guardian for the benefit of infant 4. Trust administered in forex country not entitled to deductions
b. Trust – Property held by one person for the benefit of another i. Taxable –
1. Trust - if income is to be accumulated or if the trustee has discretion to accumulate or distribute to beneficiaries
2. Beneficiary - if it received income from trust during the taxable year pursuant to the trust agreement
3. Grantor – if revocable or held for grantor’s benefit or to his designate ii. Deductions – same as Estate.
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[1] What is the concept of taxation? It can be viewed in two ways, namely: (a) as a power to tax and (b) as the act or process by which taxing power is exercised.
[2] What is the theory or underlying basis of taxation? It is a necessity without which no government could exist; revenues collected are intended to finance government and its activities. It can reach what traditionally are within police power measures to attain:
i. Social justice ii. Equitable distribution of wealth
iii. Economic progress iv. Protection of local industries, public welfare and the like
[3] Tan v. Del Rosario, 237 SCRA 324 (1994) – This is a challenge to the validity of Simplified Net Income Taxation applied to general professional partnerships; uniformity of taxation merely requires that all subjects or objects of taxation similarly situated are to be treated alike both in privileges confered and liabilities imposed.
