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San eda College of Law 1

MEMORY AID IN TAXATION LAW

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

Jr., Ryan Co, Edwin Torres :MEMBERS:Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

TAXATION LAW

I. GENERAL PRINCIPLES

POWER OF TAXATIONTAXATION power by which thesovereign through its law-making bodyraises revenue to defray the necessaryexpenses of government from amongthose who in some measure areprivileged to enjoy its benefits and mustbear its burdens.

Two Fold Nature of the Power of

Taxation1. It is an inherent attribute of

sovereignty2. It is legislative in character

Extent of Taxing PowerSubject to constitutional and

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

SCOPE OF LEGISLATIVE TAXING POWER1. Amount or rate of tax

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

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

within its jurisdiction7. Situs of taxation

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

in support of government and for publicneeds.

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

of apportionment; (see theoreticaljustice)

5. imposed by the State within itsjurisdiction;

6. levied for a public purpose.

REQUISITES OF AVALID TAX1. should be for a public purpose2. the rule of taxation shall be uniform3. that either the person or property

taxed be within the jurisdiction ofthe taxing authority

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

5. the tax must not impinge on theinherent and Constitutionallimitations on the power of taxation

THEORIES AND BASES OF TAXATION1. Lifeblood Theory

Taxes are what we pay for civilizedsociety. Without taxes, the governmentwould be paralyzed for lack of themotive power to activate and operate it.Hence, despite the natural reluctance tosurrender part of one's hard-earnedincome to the taxing authorities, every

person who is able to must contributehis share in the running of thegovernment. (CIR v. Algue, Inc.)

2. Necessity TheoryThe power to tax is an attribute of

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

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

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

relationshipwhereby in exchange of thebenefits and protection that the citizensget from the Government, taxes arepaid. (CIR v. Algue, Inc.)

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TAXATION LAW COMMITTEECHAIRPERSON:Charmaine TorresASST.CHAIRPERSON: Rhohail CastroEDP: Rachelle SayaSUBJECT HEADS:Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS:Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

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

commensurate benefit to any particularperson or property.

IS THE POWER TO TAX THE POWER TODESTROY?1. Power to tax is the power todestroy (Marshall Dictum) refers tothe unlimitedness and the degree orvigor with which the taxing power maybe employed to raise revenue.- the financial needs of the State mayoutrun any human calculation, so thepower to meet those needs by taxation

must not be limited even though taxesbecome burdensome or confiscatory.

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

Marshall and Holmes Dictum ReconciledAlthough the power to tax is almost

unlimited, it must not be exercised in anarbitrary manner. If the abuse is so

great so as to destroy the natural andfundamental rights of people, it is theduty of the judiciary to hold such an actunconstitutional.

PURPOSES AND OBJECTIVES OF TAXATION1. Revenue basically, the purpose of

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

2. Non-Revenue (Key: PR2EP)a. Promotion of general welfareb. Regulationc. Reduction of social inequalityd. Encourage economic growthe. Protectionism

POWER OF JUDICIAL REVIEW IN TAXATIONAs long as the legislature, in

imposing a tax, does not violateapplicable constitutional limitations orrestrictions, it is not within the provinceof the courts to inquire into the wisdomor policy of the exaction, the motivesbehind it, the amount to be raised or the

persons, property or other privileges tobe taxed.

The courts power in taxation islimited only to the application and

interpretation of the law.

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

ASPECTS OF TAXATION1. Levy or imposition of the tax (tax

legislation)2. Enforcement or tax administration

(tax administration)

BASIC PRINCIPLES OF A SOUND TAX SYSTEM

(KEY:FAT)1. Fiscal Adequacy sufficiency to

meet government expenditures andother public needs.

2. Administrative Feasibility/Convenience capability of beingeffectively enforced.

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

TAXATIONPOLICEPOWER

EMINENTDOMAIN

1. PurposeTo raiserevenue

To promotepublicpurposethroughregulations

To facilitatethe Statesneed ofproperty forpublic use

2. Amount of ExactionNo limit Limited to

the cost ofregulation,issuance ofthe license orsurveillance

Noexaction;but privateproperty istaken by theState forpublicpurpose

3. Benefits Received

No specialor directbenefit isreceived bythetaxpayer;merelygeneralbenefit ofprotection

No directbenefit isreceived; ahealthyeconomicstandard ofsociety isattained

A directbenefitresults in theform of justcompensationto thepropertyowner

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4. Non-impairment of ContractsContractsmay not beimpaired

Contractsmay beimpaired

Contracts maybe impaired

5. Transfer of Property RightsTaxes paidbecome partof publicfunds

No transferbut onlyrestraint inits exercise

Transfer iseffected infavor of theState

6. ScopeAll persons,property andexcises

All persons,property,rights andprivileges

Onlyupon aparticularproperty

SYSTEMS OF TAXATIONGlobal System Schedular System

A systememployed wherethe tax systemviewsindifferently thetax base andgenerally treats incommon allcategories oftaxable income ofthe individual.

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

A system whichtaxes allcategories of

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

A system whichitemizes the differentincomes and provides

for varied percentagesof taxes, to beapplied thereto.

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

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

August 15,1988)This case reversed the doctrine

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

registration fees are regulatoryexactions and not revenue measures.

b. The tax imposed on videogram

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

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

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

livelihood of the significant segment ofthe population, but also of exportearnings, the sustained growth of whichis one of the imperatives of theeconomic growth. Philippine CoconutProducers Federation, Inc. Cocofed v.Presidential Commission on GoodGovernment (178 SCRA 236, 252)

CONSTRUCTION OF TAX LAWS1. Public purpose is always presumed.2. If the law is clear, apply the law in

accordance to its plain and simple

tenor.3. A statute will not be construed as

imposing a tax unless it does soclearly, expressly andunambiguously.

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

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

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

7. Tax laws are special laws andprevail over a general law.

NATURE OF TAX LAWS1. Not political in character2. Civil in nature, not subject to ex

post facto law prohibitions3. Not penal in character

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TAXES ARE PERSONAL TO THE TAXPAYER1. A corporations tax delinquency

cannot be enforced against itsstockholders. (Corporate Entity

Doctrine)Exception: Stockholders may beheld liable for unpaid taxes of adissolved corporation:a. if it appears that the corporate

assets have passed into theirhands or

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

2. Estate taxes are obligations thatmust be paid by the executor or

administrator out of the net assetsand cannot be assessed against theheirs.Exception: If prior to the paymentof the estate tax due, the propertiesof the deceased are distributed tothe heirs, then the latter issubsidiary liable for the payment ofsuch portion of the estate tax as hisdistributive share bears to the totalvalue of the net estate. (Sec. 9,Rev. Regs. No. 2-2003; see CIR vs.Pineda G.R. No. L-22734.

September 15, 1967))

CLASSIFICATION OF TAXES1. As to subject matter:

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

b. Property Tax assessed onproperty of a certain class

c. Excise Tax imposed on theexercise of a privilege

d. Customs Duties duties chargedupon the commodities on theirbeing imported into or exportedfrom a country.

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

of or liability for the payment ofthe tax as well as the impact orburden of the tax falls on thesame person.

b. Indirect Tax - The incidence ofor liability for the payment of

the tax falls on one person butthe burden thereof can beshifted or passed on to another.

3. As to purpose:

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

b. Special Tax levied for specialpurposes

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

of the tax or the rates of the taxis already provided for by law.

b. Ad ValoremTax tax upon thevalue of the article or thingsubject to taxation; theintervention of another party is

needed for the computation ofthe tax.

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

National Governmentb. Local Tax levied by the local

government6. As to rate:

a. Progressive Tax rate oramount of tax increases as theamount of the income or earningto be taxed increases.

b. Regressive Tax tax rate

decreases as the amount ofincome to be taxed increases.

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

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

and maintenance of the propertyused.

2. Penalty punishment for thecommission of a crime.

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

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

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

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6. Margin Fee exaction designed tostabilize the currency.

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

by judgment.8. Subsidy a legislative grant ofmoney in aid of a private enterprisedeemed to promote the publicwelfare.

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

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

11. Impost in its general sense, it

signifies any tax, tribute or duty. Inits limited sense, it means a duty onimported goods and merchandise.

Tax SpecialAssessment

Imposed on persons,property and excises

Levied only on land

Personal liabilityattaches on theperson assessed incase of non-payment

Cannot be made apersonal liability ofthe person assessed

Not based on anyspecial or directbenefit

Based wholly onbenefit

Levied and paidannually

Exceptional both asto time and locality

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

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

Special Assessment.

Tax License Fee

Based on the powerof taxation

Emanates frompolice power

To generaterevenue

Regulatory

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

and surveillance

Normally paid afterthe start of abusiness

Normally paidbeforecommencement ofbusiness

Taxes, being thelifeblood of theState, cannot besurrendered exceptfor lawfulconsideration

License fee may bewith or withoutconsideration

Non-payment doesnot make thebusiness illegal butmaybe a ground forcriminalprosecution

Non-paymentmakes the businessillegal

TEST IN DETERMINING IF THE IMPOSITION IS ATAX OR A LICENSE FEE

If the purpose is primarily revenueor if revenue is, at least, one of the realand substantial purposes, then theexaction is a tax. If the purpose isregulatory in nature, it is a license.(PAL v. Edu)

Tax Debt

An obligation

imposed by law

Created by contract

Due to thegovernment in itssovereign capacity

May be due to thegovernment but inits corporatecapacity

Payable in money Payable in money,property or services

Does not drawinterest except incase of delinquency

Draws interest ifstipulated ordelayed

Notassignable Assignable

Not subject tocompensation orset-off

Subject tocompensation orset-off

Non-payment ispunished byimprisonmentexcept in poll tax

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

Imposed only bypublic authority

Can be imposed byprivate individual

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TEST IN DETERMINING IF THE IMPOSITION IS ATAX OR A LICENSE FEE

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

and substantial purposes, then theexaction is a tax. If the purpose isregulatory in nature, it is a license.(PAL v. Edu)

Tax Debt

An obligationimposed by law

Created by contract

Due to thegovernment in itssovereign capacity

May be due to thegovernment but inits corporatecapacity

Payable in money Payable in money,property or services

Does not drawinterest except incase of delinquency

Draws interest ifstipulated ordelayed

Notassignable Assignable

Not subject tocompensation orset-off

Subject tocompensation orset-off

Non-payment ispunished byimprisonmentexcept in poll tax

Noimprisonment incase of non-payment (Art. III,Sec. 20 1987Constitution)

Imposed only bypublic authority

Can be imposed byprivate individual

COMPENSATION OR SET-OFFGeneral Rule: Taxes cannot be thesubject of compensation or set-off.

Reasons:

1. lifeblood theory2. taxes are not contractual

obligation but arise out of dutyto the government

3. the government and thetaxpayer are not mutuallycreditors and debtors of eachother. (Francia v. IAC)

Exception: When both obligations aredue and demandable as well as fullyliquidated and all the requisites for avalid compensation are present,

compensation takes place by operationof law. (Domingo v. Garlitos)

DOCTRINE OF EQUITABLE RECOUPMENT NOT

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

Tax Toll

Enforcedproportionalcontributions frompersons and property

A sum of money forthe use ofsomething, aconsideration whichis paid for the use ofa property which isof a public nature;e.g. road, bridge

A demand ofsovereignty

A demand ofproprietorship

No limit as to theamount of tax

Amount of tolldepends upon thecost of constructionor maintenance ofthe publicimprovement used

Imposed only by theState

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

individuals orentities

Tax Penalty

Enforcedproportionalcontributions frompersons andproperty

Sanction imposed asa punishment forviolation of a lawor acts deemedinjurious; violation

of tax laws may giverise to imposition ofpenalty

Intended to raiserevenue

Designed to regulateconduct

May be imposedonly by thegovernment

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

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Tax Tariff

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

A kind of taximposed on articleswhich are tradedinternationally

TAXPAYERSSUITA case where the act complained of

directly involves the illegal disbursementof public funds derive from taxation(Justice Melo, dissenting in Kilosbayan,Inc vs Guingona, Jr.)

TAXPAYERS AND PUBLIC OFFCIALS HAVE LOCUS

STANDIREQUISITES FOR TAXPAYERSSUITa. The tax money is being extracted

and spent in violation of specificconstitutional protections againstabuses of legislative power.

b. That public money is being deflectedto any improper purpose (Pascual vsSecretary of Public Works)

c. That the petitioner seeks to restrainrespondents from wasting publicfunds through the enforcement of aninvalid or unconstitutional law

LIMITATIONS ON THE TAXINGPOWER

A. INHERENT LIMITATIONS (KEY:SPINE)1. Territoriality or Situs of taxation2. Public purpose of taxes3. International comity4. Non-delegability of the taxing

power5. Tax Exemption of the government

(1) TESTS IN DETERMINING PUBLIC PURPOSEa. Duty Test whether the thing to be

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

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

(2) NON-DELEGABILITY OF THE TAXING POWER

General Rule: The power of taxation ispeculiarly and exclusively exercised bythe legislature. (See Scope ofLegislative Taxing Power, supra)

- refers to tax legislationExceptionsto Non-delegability:1. Flexible Tariff Clause: Authority of

the President to fix tariff rates,import and export quotas, tonnageand wharfage dues, and other dutiesor imposts. (Art. VI, Sec.28(2), 1987Constitution)

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

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

agencies for implementation and

collection.- merely refers to tax administration

or implementation

(3) SITUS OR TERRITORIALITY OF TAXATIONThe power to tax is limited only to

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

FACTORS THAT DETERMINE THE SITUS:a. Kind or classification of the tax being

levied

b. Situs of the thing or property taxedc. Citizenship of the taxpayerd. Residence of the taxpayere. Source of the income taxedf. Situs of the excise, privilege,

business or occupation being taxed

APPLICATION OF SITUS OF TAXATIONKind of Tax Situs

Personal orCommunity tax

Residence ordomicile of thetaxpayer

Real property tax Location of property(Lex rei sitae)

Personal propertytax

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

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Business tax Place of business

Excise or Privilegetax

Where the act isperformed or where

occupation ispursued

Sales tax Where the sale isconsummated

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

Transfer tax Residence orcitizenship of the

taxpayer or locationof property

Franchise Tax State which grantedthe franchise

SITUS OF TAXATION OF INTANGIBLE PERSONALPROPERTYGeneral Rule: Domicile of the ownerpursuant to the principle of the mobiliasequuntur personam or movables followthe person.Exceptions:

1. When the property has acquired abusiness situs in another jurisdiction;

2. When an express provision of thestatute provide for another rule.Illustration: For purposes of estateand donors taxes, the followingintangible properties are deemedwith a situs in the Philippines:(1) franchise which must be

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

issued by any corporationorganized or constituted in the

Philippines in accordance withits laws;

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

(4) shares, obligations or bondsissued by any foreign corporationif such shares, obligations orbonds have acquired a businesssitus in the Philippines; and

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

(4) EXEMPTION OF THE GOVERNMENTAs a matter of public policy,

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

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

RULES:1. Administrative Agencies

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

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

2. GOCCsGeneral Rule: Income is taxable atthe rate imposed upon corporations

or associations engaged in a similarbusiness, industry, or activity.Exception: GSIS, SSS, PHIC, PCSOand PAGCOR. (Sec. 27(C), NIRC)

3. Government Educational Institutionsa. Property or real estate tax

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

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

4. Income derived from any publicutility or from the exercise of anyessential governmental functionaccruing to the Government of thePhilippines or to any political

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subdivision thereof is notincluded ingross income and exempt fromtaxation. (Sec. 32(B)(7)(b), NIRC)

5. Donations in favor of governmental

institutions are considered as incomeon the part of the donee. However,it is not considered as taxableincome because it is an exclusionfrom the computation of grossincome. (Sec.32 (B)(3), NIRC)

6. The amount of all bequests,legacies, devises or transfers to orfor the use of the Government orany political subdivision forexclusively public purposes isdeductible from the gross estate.(Sec.86 (A)(3), NIRC)

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

8. Local government units areexpressly prohibited by the LGCfrom levying tax upon NationalGovernment, its agencies, andinstrumentalities, and localgovernment units. [Sec. 133 (o),

LGC]9. Unless otherwise provided in the

Local Government Code (LGC), taxexemptions granted to all persons,whether natural or juridical,including GOCC, except local waterdistricts, cooperatives dulyregistered under RA No. 6938, non-stock and non-profit institutions, arewithdrawn upon effectivity of theLGC. (Sec. 193, LGC)

10.Real property owned by theRepublic of the Philippines or any of

its political subdivisions except whenthe beneficial use thereof has beengranted, for consideration orotherwise, to a taxable person shallbe exempt from payment of realproperty tax. (Sec. 234, LGC)

(5) INTERNATIONAL COMITYThese principles limit the authority

of the government to effectively imposetaxes on a sovereign state and itsinstrumentalities, as well as on itsproperty held and activities undertaken

in that capacity. Even where one entersthe territory of another, there is animplied understanding that the formerdoes not thereby submit itself to the

authority and jurisdiction of the other.

B. CONSTITUTIONAL LIMITATIONSA.GENERALORINDIRECTCONSTITUTIONAL LIMITATIONS

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

a.The interests of the public asdistinguished from those of aparticular class require theintervention of the State.

(Substantive limitation)b.The means employed must be

reasonably necessary to theaccomplishment of the purposeand not unduly oppressive.(Procedural limitation)

The constitutionality of a legislativetaxing act questioned on the ground ofdenial of due process requires theexistence of an actual case orcontroversy.

2. Equal Protection Clause (Art. III,

Sec. 1, 1987 ConstitutionRequisites of a Valid Classification:

a. based upon substantialdistinctions

b. germane to the purposes of thelaw

c. not limited to existing conditionsonly

d. apply equally to all members ofthe class

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

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

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

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A license tax or fee constitutes acurtailment of religious freedom ifimposed as a condition for itsexercise. (American Bible Society vs.

City of Manila, GR No. L-9637, April30, 1957)

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

No law impairing the obligationof contract shall be passed. (Sec. 10,

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

apply to public utility franchises orright since they are subject toamendment, alteration or repeal bythe Congress when the public

interest so requires. (CagayanElectric & Light Co., Inc. v.Commissioner, GR No. 60216,September 25, 1985)

RULES:a. When the exemption is bilaterally

agreed upon between thegovernment and the taxpayer itcannot be withdrawn withoutviolating the non-impairmentclause.

b. When it is unilaterally granted by

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

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

6. Presidential power to grantreprieves, commutations andpardons and remit fines andforfeitures after conviction (ART.VII, SEC. 19, 1987 CONSTITUTION)Due

ProcessEqual

ProtectionUniformity

Taxpayermay notbedeprivedof life,liberty orpropertywithoutdueprocess oflaw.Notice

Taxpayersshall betreated alikeunder likecircumstancesand conditionsboth in theprivilegesconferred andliabilitiesimposed.

Taxablearticles, orkinds ofproperty ofthe sameclass, shallbe taxed atthe samerate. Thereshouldtherefore,be no direct

must,therefore, be givenin case offailure to

pay taxes

doubletaxation

B. SPECIFIC OR DIRECTCONSTITUTIONAL LIMITATIONS

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

2. Rule Requiring That Appropriations,Revenue And Tariff Bills ShallOriginate Exclusively From The

House Of Representatives (Art. VI,Sec. 24, 1987 Constitution)

3. Uniformity, Equitability AndProgressivity Of Taxation (Art. VI,Sec. 28(1), 1987 Constitution)Uniformity all taxable articles orkinds of property of the same classare taxed at the same rate.Equitability the burden falls tothose who are more capable to pay.Progressivity rate increases as thetax base increases.

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

A: Yes. The Constitution does notreally prohibit the imposition of indirecttaxes which, like the VAT, areregressive. The Constitutional provisionmeans simply that indirect taxes shall beminimized. The mandate to Congress isnot to prescribe, but to evolve, aprogressive tax system. (EVAT En BancResolution, Tolentino, et al vs Secretaryof Finance, October 30, 1995)

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

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

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The constitutional provision(above cited) which grants taxexemption applies only to propertyor realty taxes assessed on such

properties used actually, directlyexclusively for religious, charitableand educational purposes. (Lladocvs. Commissioner, GR No. L-19201,

June 16, 1965)The present Constitution

required that for the exemption oflands, buildings andimprovements, they should not onlybe exclusively but also actuallyand directly used for religious andcharitable purposes. (Province of

Abra vs. Hernando, GR No. L-49336,

August 31, 1981)The test of exemption from

taxation is the use of the propertyfor the purposes mentioned in theConstitution. (Abra Valley CollegeInc. vs. Aquino, GR No. L-39086,

June 15, 1988)

EXCLUSIVE BUT NOT ABSOLUTE USEThe term exclusively used does

not necessarily mean total or absoluteuse for religious, charitable andeducational purposes. If the property is

incidentally used for said purposes, thetax exemption may still subsist. (AbraValley College Inc. vs. Aquino, Gr No. L-39086, June 15, 1988)

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

ART. XIV,SEC 4(3)

ART. VI,SEC 28(3)

Grantee Non- stock,

non profiteducationalinstitution

Religious,

educational,charitableinstitutions

Taxescovered

Income taxCustomDutiesProperty tax(DECS OrderNo. 137-187)

Property tax

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

1987 Constitution)

7. Non-Impairment Of TheJurisdiction Of The Supreme CourtIn Tax Cases (Art. VIII, Sec. 2 And5(2)(B), 1987 Constitution)

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

OTHER SPECIFIC TAX PROVISIONS INTHE CONSTITUTION1. Power of the President to veto any

particular item or items in anappropriation, revenue, or tariff bill.

(Art VI, Sec. 27(2), 1987Constitution)

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

3. Non-appropriation of public moneyor property for the use, benefit, orsupport of any sect, church, orsystem of religion. (Art. VI, Sec. 29(2), 1987 Constitution)

4. Treatment of taxes levied for aspecial purpose. (Art. VI, Sec. 29

(3), 1987 Constitution)5. Internal revenue allotments to local

government units. (Art. X, Sec. 6,1987 Constitution)

DOUBLE TAXATION

DOUBLE TAXATION taxing the sameproperty twice when it should be taxedbut once.

IS DOUBLE TAXATION PROHIBITED IN THEPHILIPPINES?

No. There is no constitutionalprohibition against double taxation. It isnot favored but permissible. (Pepsi ColaBottling Co. v. City of Butuan, 1968).

KINDS OF DOUBLE TAXATION(1) Direct Duplicate Taxation /

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

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Elements:a. the same property or subject matter

is taxed twice when it should betaxed only once.

b. both taxes are levied for the samepurposec. imposed by the same taxing

authorityd. within the same jurisdictione. during the same taxing periodf. covering the same kind or character

of tax.(Villanueva vs. City of Iloilo)

(2) Indirect Duplicate Taxation notlegally objectionable. The absenceof one or more of the above-

mentioned elements makes thedouble taxation indirect.

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

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

REMEDIES OF DOUBLE TAXATION1. Tax Sparing Rule same dividend

earned by a NRFC within the Phil. isreduced by imposing a lower rate of15% (in lieu of the 35%), on thecondition that the country to whichthe NRFC is domiliced shall allow acredit against the tax due from theNRFC, taxes deemed to have beenpaid in the Phil. (Sec.28 B 5b) (CIRvs Procter & Gamble) (GR No.66838, Dec. 2, 1991)

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

3. Tax creditsInstances under the NIRC:

For VAT purposes, the tax oninputs or items that go into themanufacture of finished products(which are eventually sold) may becredited against or deducted fromthe output tax or tax on the finishedproduct.

Foreign income taxes may be

credited against the Phil. Income

tax, subject to certain limitations,by citizens, including members ofgeneral professional partnerships orbeneficiaries of estates or trusts

(pro rata), as well as domesticcorporations.

A tax credit is granted for estatetaxes paid to a foreign country onthe estate of citizens and residentaliens subject to certain limitations.

The donors tax imposed upon acitizen or a resident shall becredited with the amount of anydonors tax imposed by the authorityof a foreign country, subject to

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

METHODS RESORTED TO BY ATAX TREATY INORDER TO ELIMINATE DOUBLE TAXATION

FIRST METHOD:The tax treaty sets outthe respective rights to tax by the stateof source or situs and by the state ofresidence with regard to certain classesof income or capital. In some cases, anexclusive right to tax is conferred in one

of the contracting states; however, forother items of income or capital, bothstates are given the right to tax althoughthe amount of tax that may be imposedby the state of source is limited.SECOND METHOD:The state of source isgiven a full or limited right to taxtogether with the state of residence. Inthis case, the treaty makes it incumbentupon the state of residence to allowrelief in order to avoid double taxation.

TWO METHODS OF RELIEF ARE USED UNDER THE

SECOND METHOD:

1. The exemption method- the incomeor capital which is taxable in the stateof source or situs is exempted in thestate of residence, although in someinstances it may be taken into accountin determining the rate of tax applicableto the tax payers remaining income orcapital.(This may be done using the taxdeduction method which allows foreignincome taxes to be deducted from gross

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income, in effect exempting thepayment from being further taxed.)2. The credit method- although theincome or capital which is taxed in the

state of source is still taxable in thestate of residence. The tax paid in theformer is credited against the tax, leviedin the latter.(Commissioner of InternalRevenue v. S.C Johnson and Son, Inc. etal., G.R No. 127105, June 25, 1999)

ExemptionMethod

Credit Method

Focus is on theincome or capitalitself

Focus is on the tax

NOTE: Computational illustrationbetween a tax deduction and a taxcredit:

Tax deduction methodGross incomeLess: allowable deductionsincludingforeign taxes paidIncome subject to taxMultiplied by rateIncome tax due

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

FORMS OF ESCAPEFROM TAXATION

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

IMPACT OF TAXATION point on which tax isoriginally imposed.

INCIDENCE OF TAXATION point on whichthe tax burden finally rests or settlesdown.Illustration: Value added tax. The

seller is required by law to pay tax, butthe burden is actually shifted or passedon to the buyer.

KINDS OF SHIFTING

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

b. Backward shifting- when burden istransferred from consumer throughfactors of distribution to the factors

of productionc. Onward shifting- when the tax is

shifted 2 or more times eitherforward or backward

(2) CAPITALIZATION a mere increase inthe value of the property is not incomebut merely an unrealized increase incapital. No income until after the actualsale or other disposition of the propertyin excess of its original cost.EXCEPT: if by reason of appraisal, thecost basis of property increased and the

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

(3) TRANSFORMATION the manufactureror producer upon whom the tax has beenimposed, fearing the loss of his market ifhe should add the tax to the price, paysthe tax and endeavors to recoup himself

by improving his process of production,thereby turning out his units at a lowercost.

(4) TAX AVOIDANCE the exploitation bythe taxpayer of legally permissiblealternative tax rates or methods ofassessing taxable property or income, inorder to avoid or reduce tax liability.Example: estate planning(conveyance of property to a familycorporation for shares) (Delpher TradesCorp. vs. IAC, 157 SCRA 349)

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(5) TAX EVASION use by the taxpayer ofillegal or fraudulent means to defeat orlessen the payment of the tax.

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

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

purposes true and actual income derivedfrom business for 2 consecutive years(Republic vs Gonzales, L-17962)2. Substantial under-declaration ofincome tax returns of the taxpayer for 4consecutive years coupled withintentional overstatement of deductions(CIR vs Reyes, 104 PHIL 1061)

TAXAVOIDANCE

TAXEVASION

Validity Legal and not

subject tocriminal penalty

Illegal and

subject tocriminalpenalty

Effect Minimization oftaxes

Almostalwaysresults inabsence oftax payments

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

LEGAL BASIS: No law granting any taxexemption shall be passed without theconcurrence of a majority of all themembers of Congress (ART VI.SEC 28(4)OFTHE 1987CONSTITUTION)

KINDS OF TAX EXEMPTION1. As to source

a. Constitutional immunities fromtaxation that originate from theconstitution.

b. Statutory those which emanatefrom legislation

Examples of Statutory ExemptionsSec. 27, NIRCSec. 105 Tariff and Customs

Code

Sec. 234 Local Government CodeSpecial Laws, such as theOmnibus Investment Code of 1987(EO 226), Philippine OverseasShipping Act (RA 1407 as amended),Fertilizer Industry Act (RA 3050, asamended), Mineral ResourcesDevelopment Decree of 1974 (PD 463as amended), Cottage Industry Act(RA 318, as amended) andexemptions in Housing for LowIncome Group (PD 1205, asamended)

c. Contractual- agreed to by thetaxing authority in contractslawfully entered into by themunder enabling laws

d. Treatye. Licensing Ordinance

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

organic or statute law(2) Implied when particular

persons, property or excises aredeemed exempt as they falloutside the scope of the taxing

provision itself.3. As to extent

(1) Total absolute immunity(2) Partial one where a collection

of a part of the tax is dispensedwith

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

favor of certain persons(2) Impersonal granted directly in

favor of a certain class ofproperty

PRINCIPLES GOVERNING TAX EXEMPTIONa. Exemptions from taxation are

highly disfavored in law and arenot presumed.

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

c. He who claims exemption shouldprove by convincing proof that heis exempted.

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

e. Tax exemption must be strictlyconstrued against the taxpayer and

liberally in favor of the taxingauthority.f. Tax exemptions are not presumed.g. Constitutional grants of tax

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

THE FOLLOWING PARTAKE THE NATURE OFTAX EXEMPTION1. Deductions for income tax purposes2. Claims for refund3. Tax amnesty4. Condonation of unpaid tax liabilities

NOTE: must be strictly construedagainst the taxpayer

WHEN EXEMPTIONS ARE CONSTRUED LIBERALLYIN FAVOR OF GRANTEE1. When the law so provides for such

liberal construction.2. Exemptions from certain taxes,

granted under special circumstancesto special classes of persons.

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

4. Exemptions to traditionalexemptees, such as those in favor ofreligious and charitable institutions.

5. If exemptions refer to the publicproperty

Q: May a tax exemption be revoked?A: Yes. It is an act of liberality whichcould be taken back by the governmentunless there are restrictions. Sincetaxation is the rule and exemptiontherefrom is the exception, theexemption may be withdrawn by the

taxing authority. (Mactan CebuInternational Airport Authority vs.Marcos, 261 SCRA 667)

RESTRICTIONS ON REVOCATION OF TAXEXEMPTIONSa. Non impairment clause. Where the

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

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

amendment onlyc. Where the tax exemption grant is inthe form of a special law and not bya general law even if the terms ofthe general act are broad enough toinclude the codes in the general lawunless there is manifest intent torepeal or alter the special law(Province of Misamis Oriental vsCagayan Electric Power and LightCo. Inc)

NATURE OF TAX AMNESTY

1. General or intentional overlooking bythe state of its authority to imposepenalties on persons otherwise guiltyof evasion or violation of a revenueor tax law.

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

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

RULES ON TAX AMNESTY

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

favored nor presumedb) construed strictly against the

taxpayer (must show completecompliance with the law)

2.Government not estopped fromquestioning the tax liability even ifamnesty tax payments were alreadyreceived.Reason: Erroneous application andenforcement of the law by public

officers do not block subsequentcorrect application of the statute. Thegovernment is never estopped bymistakes or errors of its agents.Basis: Lifeblood Theory

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

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Tax amnesty Tax exemption

Immunity from allcriminal, civil andadministrativeliabilities arisingfrom non paymentof taxes

Immunity from civilliability only

Applies only to pasttax periods, henceretroactiveapplication

Prospectiveapplication

DOCTRINE OF IMPRESCRIPTIBILTYAs a rule, taxes are imprescriptible

as they are the lifeblood of the

government. However, tax statutes mayprovide for statute of limitations.The rules that have been adopted

are as follows:a.) National Internal Revenue Code

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

assess is within ten yearsfrom discoveryof the omission, fraud or falsity.

The period to collect tax is withinthree yearsfrom date of assessment. Inthe case, however, of omission to file orif the return filed is false or fraudulent,the period to collect is within ten yearsfrom discovery without need of anassessment.

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

statute of limitation; it provided,

however, that when articles haveentered and passed free of duty or finaladjustment of duties made, withsubsequent delivery, such entry and

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

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

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

be assessed within five (5) years fromthe date they became due. In case of

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

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

TAX ENFORCEMENT ANDADMINISTRATION

SOURCES OF TAX LAWS (Key: SPEC2TRABLT)1. Statutes2. Presidential Decrees3. Executive Orders4. Constitution5. Court Decisions6. Tax Codes7. Revenue Regulations8. Administrative Issuances9. BIR Rulings10.Local Tax Ordinance11.Tax Treaties and Conventions

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

NOTE: Administrative regulations mustalways be in harmony with theprovisions of the law. In case ofdiscrepancy between the basic law andthe implementing rule or regulation, theformer prevails.

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

misstates or omits material factsfrom his return or any documentrequired of him by the BIR.

2. Where the facts subsequentlygathered by the BIR is materially

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different from the facts on whichthe ruling is based.

3. Where the taxpayer acted in badfaith.

PRINCIPLE OF LEGISLATIVE APPROVAL OF ANADMINISTRATIVE INTERPRETATION THROUGHREENACTMENT

Where a statute is susceptible of themeaning placed upon it by a ruling ofthe government agency charged with itsenforcement and the legislaturethereafter reenacts the provisionwithout substantial change, such actionis to some extent confirmatory that theruling carries out the legislative purpose.

RULE OF NO ESTOPPEL AGAINST THEGOVERNMENTGeneral Rule: The Government is notestopped by the mistakes or errors of itsagents; erroneous application andenforcement of law by public officers donot bar the subsequent correctapplication of statutes. (E. Rodriguez,Inc. vs. Collector, L-23041, July 31,1969)Exception: In the interest of justice andfair play, as where injustice will resultto the taxpayer. (see CIR vs. CA, GR No.

117982, Feb. 6, 1997; CIR vs. CA, GR No.107135, Feb. 3, 1999)

AGENCIES INVOLVED IN TAX ADMINISTRATION1. Bureau of Internal Revenue

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

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

enforcement3. Provincial, city and municipal

assessors and treasurers local andreal property taxes

ORGANIZATION AND FUNCTION OF THEBUREAU OF INTERNAL REVENUE (BIR)

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

POWERS AND DUTIES OF THE BIRAssessment and collection of all

national internal revenue taxes, fees,and charges

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

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

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

ASSESSMENT a finding by the taxing

authority that the taxpayer has not paidthe correct taxes. It is also a writtennotice to a taxpayer to the effect thatthe amount stated therein is due as atax and containing a demand for thepayment thereof.General rule: Taxes are self-assessingand thus, do not require the issuance ofan assessment notice in order toestablish the tax liability of a taxpayer.

Exceptions:

1. Tax period of a taxpayer is

terminated [Sec. 6(D), NIRC]2. Deficiency tax liability arising from a

tax audit conducted by the BIR [Sec.56(B), NIRC]

3. Tax lien [Sec. 219, NIRC]4. Dissolving corporation [Sec. 52(c),

NIRC]

SIGNIFICANCE OF ASSESSMENTa. In the proper pursuit of judicial and

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

b. In the application of statute oflimitations,

c. In the establishment of tax liens,and

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

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POWERS AND DUTIES OF THE COMMISSIONERI.SECTION4 (power to interpret tax lawand decide tax cases)

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

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

fees and chargesc)penalties imposed in relation

theretod)other matters arising from this

Code or other laws or portionsthereof administered by the BIR

subject to the exclusive appellatejurisdiction of the CTA (Sec. 4)

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

3. For the Commissioner to ascertain:(a) correctness of any return or in

making a return where none hasbeen made

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

correcting such liability(c) tax compliance

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

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

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

under investigation orii. any office or officer of the

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

3. to Summoni. the person liable for tax or

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

person oriii. any person having in his

possession/custody/care-- the books of accounts,

-- accounting records of entriesrelating to the business of theperson liable for tax or any otherperson

-- to produce such books,papers, records, and other dataand to give testimony

4. to take the Testimony of the personconcerned, under oath as may berelevant to the inquiry

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

Nothing in Section 5 shall beconstrued as granting the Commissionerthe authority to inquire into bank

deposits other than as provided forunder sec. 6 (F) of the Code.

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

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

Commissioner or hisrepresentative may authorize

i. the Examination of anytaxpayer and

ii. the Assessment of thecorrect amount of tax;

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

assessed shall be paid uponnotice and demand from theCommissioner or hisrepresentative

* Any return, statement ordeclaration filed in anyauthorized office shall not bewithdrawn; but within threeyears from date of filing, thesame may be modified,changed or amended;provided that no notice foraudit or investigation of suchreturn, has in the meantime,been actually served upon thetaxpayer.

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10.Authority to Register tax agents(a) The Commissioner shall accredit

and Register, individuals andgeneral professional partnerships

and their rep. who prepare andfile tax returns and other papersor who appear before the BIR

(b) The Commissioner shall createnational and regionalaccreditation boards.

Those who are deniedaccreditation may appeal the sameto the Sec. Of Finance who shall ruleon the appeal within 60 days fromreceipt of such appeal. Failure to doso within the prescribed period shall

be deemed as approval foraccreditation.

11. Authority to Prescribe AdditionalRequirements

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

IV.SECTION 7 (Authority to Delegate

Power )12.The Commissioner may delegate the

powers vested in him to- subordinate officials with rank

equivalent to Division Chief orhigher, subject tolimitations/restrictions imposedunder the rules and regulations

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

promulgation of rules andregulations by the Sec. of

Financeb) power to Issue rulings of first

impression or to Reverse, revokemodify any existing rule of theBIR

c) power to Compromise or Abateany tax liability

provided however that theregional evaluation board maycompromise:1. assessments issued by

regional offices involvingdeficiency taxes of P500,000or less and

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

3. discovered by regional anddistrict officials

Regional Evaluation Board iscomposed of:i. Regional Director as Chairmanii. Asst. Regional Director

iii. Heads of the Legal, Assessmentand Collection Div.

iv. Revenue District Officer havingjurisdiction over the taxpayer

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

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

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

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

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

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

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

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ARE LEGAL OFFICERS OF THE BIR AUTHORIZEDTO INSTITUTE APPEAL PROCEEDINGS WITHOUTTHE PARTICIPATION OF THE SOLICITORGENERAL?

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

4, 2002)

SOURCES OF REVENUEThe following taxes, fees and

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

may be imposed and collected bythe Bureau of Internal Revenue.

II. NATIONAL TAXATION

A. INCOME TAXATION

DEFINITIONSINCOME TAX tax on all yearly profits

arising from property, possessions,trade or business, or as a tax on a

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

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

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

CAPITAL resource of person, which canbe used in producing goods andservices.

Income Capital

All wealth, whichflows into the

taxpayer other thanas a mere return ofcapital.

Fund or propertywhich can be used

in producing goodsor services

Flow of Wealth Fund or property

Source of wealth Wealth

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

received.3. The gain must not be excluded by

law or treaty from taxation.

TESTS ON TAXABILITY OF INCOME1. Flow of Wealth Test The

determining factor for theimposition of income tax iswhether any gain was derivedfrom the transaction.

2. Realization Test- unless the incomeis deemed "realized," there is notaxable income.

3. Economic-Benefit Principle Test-flow of wealth realized is

taxable only to the extent thatthe taxpayer is economicallybenefited.

CRITERIA IN IMPOSING INCOME TAX1. Citizenship Principle A citizen ofthe Philippines is subject to Philippineincome tax (a.) on his worldwideincome, if he resides in the Philippines,or (b.) only on his income from sourceswithin the Philippines, if he qualifies asnonresident citizen.2. Residence Principle resident alien

is liable to pay income tax on his incomefrom sources within the Philippines butexempt from tax on his income fromsources outside the Philippines.3. Source PrincipleAn alien is subjectto Philippine income tax because hederives income from sources within thePhilippines. Thus, a nonresident alien isliable to pay Philippine income tax onhis income from sources within thePhilippines such as dividend, interest,rent, or royalty, despite the fact that hehas not set foot in the Philippines.

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CLASSIFICATION OF TAXPAYERS

Individualsa. citizens

(1) resident citizens (RC)(2) non-resident citizens (NRC)

b. aliens(1) resident aliens (RA)(2) non-resident aliens (NRA)

(a) engaged in trade orbusiness within thePhils. (NRAETB)

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

Corporations

a. Domestic (DC)b. Foreign

(1) resident foreign corporation(RFC)

(2) non-resident foreigncorporation (NRFC)

EstatesTrustsPartnerships

A. INDIVIDUALS

WHO

ARE

TAXABLE

?1. Resident Citizen2. Non-resident Citizen

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

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

b. who leaves the Philippinesduring the taxable year to resideabroad, either as an immigrant

or for employment on apermanent basis;c. who works and derives income

from abroad and whoseemployment thereat requireshim to be physically presentabroad most of the time duringthe taxable year;

d. who is previously considered as anon-resident and who arrives inthe Philippines at anytime duringthe taxable year to residethereat permanently shall be

considered non-resident for thetaxable year in which he arrivesin the Philippines with respect tohis income derived from sources

abroad until the date of hisarrival [Sec.22 (E), NIRC]

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

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

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

2. such vessel is engaged exclusivelyin international trade.

Based on the above provisions,there are three (3) types ofnonresident citizens, namely: (1)immigrants; (2) employees of a foreignentity on a permanent basis; and(3) overseas contract workers.Immigrants and employees of a foreignentity on a permanent basis aretreated as nonresident citizens fromthe time they depart from the

Philippines. However, overseascontract workers must be physicallypresent abroad most of the timeduring the calendar year to qualify asnonresident citizens.

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

4. Non-resident alien engaged intrade or business within thePhilippines. (NRAETB)

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

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

The term trade, business orprofession shall not includeperformance of services by thetaxpayer as an employee. [Sec. 22(CC)]

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

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

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

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

within the Philippines.

Tax Rates:Please refer to Annex A.

B. CORPORATIONS

WHO ARE TAXABLE?1. Domestic Corporation created or

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

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

3. Non-resident Foreign Corporationnot engaged in trade or businesswithin the Philippines [Sec. 22(I),NIRC]

A Corporation Includes:1. Partnerships, no matter how created

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

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

NIRC].

Excludes:1. General professional partnerships;2. Joint venture or consortium formed

for the purpose of undertakingconstruction projects or engaging inpetroleum, coal, geothermal andother energy operations pursuant toan operating or consortiumagreement under a service contractwith the Government.

CORPORATIONS EXEMPT FROM INCOMETAXATION (FOR INCOME REALIZED AS SUCH)UNDER NIRC1. Those enumerated under Sec. 30.

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

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

a. GSISb. SSSc. PHIC

d. PCSOe. PAGCOR [Sec. 27 (C)]

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

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

ONLY DOMESTIC CORPORATIONS aretaxable for income derived from sourceswithin and without the Philippines. All

other corporate income taxpayers aretaxable only for income derived fromsources withinthe Philippines.

Tax Rates: Please refer to Annex B.

C. ESTATES AND TRUSTS

ESTATErefers to the mass of propertiesleft by a deceased person.

RULES ON TAXABILITY OF ESTATEWhen a person who owns property

dies, the following taxes are payableunder the provisions of the income taxlaw:1. Income tax for individual under Sec.

24 and 25 (to cover the periodbeginning January to the time ofdeath);

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

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ESTATES UNDER JUDICIAL SETTLEMENTA. During the Pendency of the

SettlementGeneral Rule: An estate under

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

exemption is limited only toP20,000.

2. No additional exemption isallowed.

3. The distribution to the heirsduring the taxable year of estate

income is deductible from thetaxable income of the estate.Such distributed income shallform part of the respectiveheirs taxable income.

Where no suchdistribution to the heirs is madeduring the taxable year that theincome is earned, and suchincome is subjected to incometax payment by the estate, thesubsequent distribution thereofis no longer taxable on the part

of the recipient.

B. TERMINATION OF THE JUDICIALSETTLEMENT (WHERE THE HEIRS STILL DONOT DIVIDE THE PROPERTY)1. If the heirs contribute to the

estate money, property, orindustry with intention to dividethe profits between/amongthemselves, an unregisteredpartnership is created and theestate becomes liable for thepayment of corporate income

tax. (Evangelista vs. Collector,GR No. L-9996, October 15,1957; Oa vs. Commissioner, GRNo. L-19342, May 25, 1972)

2. If the heirs, without contributingmoney, property or industry toimprove the estate, simplydivide the fruits thereofbetween/among themselves, aco-ownership is created, andindividual income tax is imposedon the income received by eachof the heirs, payable in their

separate and individualcapacity. (Pascual vs.Commissioner, GR No. L-78133,October 18, 1988; Obillos vs.

Commissioner, GR No. L-68118,October 29, 1985)

ESTATES NOTUNDER JUDICIAL SETTLEMENTPending the extrajudicial

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

property, or industry to the estatewith the intention of dividing theprofits between/among themselves,an unregistered partnership iscreated and the estate becomes

liable for the payment of corporateincome tax; or

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

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

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

accumulated2. A trust in which the fiduciary may, at

his discretion, either distribute oraccumulate the income.

RULES ON TAXABILITY OF THE INCOME OF ATRUST

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

filing and payment of tax lie on thebeneficiaries.

2. The income of the trust which is tobe accumulated or held for futuredistribution whether consisting ofordinary income or gain from thesale of assets included in the"corpus" of the estate filing ofreturn and payment of tax become

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(1) NET INCOME TAX

DEFINITION: Means gross income lessdeductions and/or personal and

additional exemptions (Sec. 31, NIRC)

NET INCOME TAX FORMULAEntire IncomeLess: Exclusions and Income subject

to Final Tax (e.g. PassiveIncome)

Gross IncomeLess: Deductions (and/or additional

exemptions, if applicable)Net Taxable IncomeMultiply by:Tax Rate (%)

Net Income Tax DueLess:Tax Credit, if any

Tax Still due, if any

GROSS INCOME

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

or business;c. Gains form dealings in property;

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

the general professional partnership

See Annex Dfor detailed discussionof items.

KINDS OF DIVIDENDS1. Cash and Property Dividends

Individual Taxpayera. From Domestic Corporations

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

NRAETB 20%(Sec. 25A2)

NRANETB 25% on grossincome (Sec. 25B)

b. From Foreign Corporations

RC, NRC, RA, NRAETB 5-32%(Sec. 24, 25A1)

NRANETB 25% on grossincome (Sec. 25B)

Corporate Taxpayer

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

b. Domestic to Domestic Corp. Exempt; intercorporatedividends (Sec. 27D)

c. Domestic to Foreign Corp. -

Resident Foreign Corp. Exempt(Sec. 28 [A] 7d)

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

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

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

(1) there is redemption or

cancellation(2) the transaction involves

stock dividends, and(3) the time and manner of

the transaction makes itessentially equivalent to adistribution of taxabledividends. (seeCommissioner vs. Court of

Appeals, Court of TaxAppeals & ANSCOR, GR No.108576, Jan. 30, 1999)

b. the recipient is other than theshareholder (Bachrach vs.Seifert, GR No. L-2659, October12, 1950)

c. change in the stockholdersequity results by virtue of thestock dividend issuance.

3. Liquidating Dividends When acorporation distributes all of itsassets in complete liquidation ordissolution, the gain realized orloss sustained by the

stockholder, whether individual

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cause beyond the control of theofficial or employee (e.g.retrenchment, redundancy orcessation of business);

for any cause beyond thecontrol of said official oremployee connotesinvoluntariness on the part ofthe official or employee;separation must not be asked orinitiated by the official oremployee.

d. social security benefits,retirement gratuities, pensionsand other similar benefitsreceived by citizens and alienswho come to reside permanently

here from foreign sourcesprivate or public;

e. benefits due to residents underthe laws of the U.S.administered by the U.S.Veterans Administration

f. SSS benefits; andg. GSIS benefits.

7. Miscellaneous itemsa. Passive income derived in the

Philippines by:(1) Foreign governments;

(2) Financing institutionsowned, controlled orenjoying refinancing fromforeign governments

(3) International or regionalfinancial institutionsestablished by foreigngovernments

b. Income derived from any publicutility or from the exercise ofany governmental function;

c. Prizes and awards madeprimarily in recognition ofreligious, charitable, scientific,educational, artistic, literary, orcivic achievementRequisites:

(1) recipient was selectedwithout any action on hispart; and

(2) recipient is not required torender substantial futureservices.

d. Prizes and awards granted toathletes in sports competitions

and sanctioned by their nationalsports association ;

e. 13th month pay and otherbenefits up to P30,000.00;

f. GSIS,SSS, Medicare and uniondues of individuals;g. Gains derived from debt

securities with a maturity ofmore than 5 years;

h. Gains from redemption of sharesin Mutual Fund.

EXCLUSIONS VS.DEDUCTIONS

Exclusions[Sec. 32(B)]

Deductions[Sec. 34]

Refer to flow ofwealth which are nottreated as part ofgross incomebecause:(1) exempted by thefundamental law; (2)exempted by statute;(3) do not comewithin the definitionof income

Refer to theamounts which thelaw allows to besubtracted fromgross income inorder to arrive atnet income

Pertain to thecomputation of gross

income

Pertain to thecomputation of the

net income

Something earned orreceived by thetaxpayer which donot form part of grossincome

Something spent orpaid in earning ofgross income

DEDUCTIONS

DEFINITION: Items or amounts which thelaw allows to be deducted from gross

income in order to arrive at the taxableincome.

BASIC PRINCIPLES GOVERNING DEDUCTIONSa. The taxpayer seeking a deduction

must point to some specificprovisions of the statute authorizingthe deduction; and

b. He must be able to prove that he isentitled to the deduction authorizedor allowed. (Atlas ConsolidatedMining & Dev. Corp. vs.

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Commissioner, GR No. L-26911,January 21, 1981)

c. Any amount paid or payable which isotherwise deductible from, or taken

into account in computing grossincome or for which depreciation oramortization may be allowed, shallbe allowed as deduction only if it isshown that the tax required to bededucted and withheld therefromhas been paid to the BIR. [Sec.34(K), NIRC]

NOTE: Deductions for income taxpurposes partake of the nature of taxexemptions; hence, if tax exemptionsare to be strictly construed, then it

follows that deductions must also bestrictly construed.

TAXPAYERS WHO CANNOT AVAIL OFDEDUCTIONS FROM GROSS INCOME1. Citizens and resident aliens whose

income is purely compensationincome (except for premiumpayments on health and/orhospitalization insurance);

2. Non-resident aliens not engaged intrade or business in the Philippines;and

3. Non-resident foreign corporation

CLASSES OF DEDUCTIONS1. Individuals

a. with gross compensation incomefrom employer-employeerelationship only(1) premium payments on health

and/or hospitalizationinsurance

(2) personal additionalexemptions

b. gross income from business orpractice of profession(1) Optional Standard Deduction

(OSD)(2) Itemized deductions(3) premium payments on health

and/or hospitalizationinsurance

(4) personal additionalexemptions

2. Corporations Itemized Deductions

KINDS OF DEDUCTIONSa. Optional standard deductions (OSD)

10% of the gross income.The OSD may be availed of

only by individuals (exceptnonresident alien) who are notpurely compensation incomeearners.

b. Personal and additional exemptionsAvailable only to individuals

(business income and compensationincome earners).

NRAETB may be entitled topersonal exemptions (only) subjectto reciprocity, i.e.,a. the country of which he is a

subject or citizen has an incometax law; and

b. the income tax law of hiscountry allows personalexemption to citizens of thePhilippines not residing therein,but deriving income therefromand not to exceed the amountallowed in NIRC.

The personal exemption shall beequal to that allowed by the incometax law of his country to a citizen of

the Philippines not residing therein,or the amount provided in the NIRC,whichever is lower.

Individuals not entitled to theseexemptions:a. Non-resident Alien not engaged

in trade or businessb. Alien individual employed by

Regional or Area Headquarters ofMultinational Companies

c. Alien individual employed byOffshore Banking Units

d. Alien individual employed byPetroleum Service Contractorand Subcontractor

c. Itemized deductionsa. ordinary and necessary

expensesb. interestsc. taxesd. lossese. bad debtsf. depreciation of property;

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TAXATION LAW COMMITTEECHAIRPERSON:Charmaine TorresASST.CHAIRPERSON: Rhohail CastroEDP: Rachell

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