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CBO OVER-ALL CHAIRPERSON: Evangeline CoASSISTANT CHAIRPERSON: Rose Lyn Rabanera

ACADEMICS COMMITTEE - HEADS:Reigel Prado, Omar Gabrieles

SECRETARIAT HEAD: Romino ArzadonFINANCE COMMITTEE HEAD: Kyan SiocoLOGISTICS COMMITTEE - HEAD: Janis Ruckenbrod

TAXATION COMMITTEE

HEAD: Jocelyn Manalo

CO-HEAD: Marlyn Reyes

GENERAL PRINCIPLES: Marissa Asencion

INCOME TAXATION: Cheryl HernandezMEMBERS: FatimaKristine Franco, Aries Magpantay

TRANSFER TAXATION: Nieves ElegadoMEMBER: Rosevee Paylip

TAX REMEDIES AND LOCAL TAXATION: Marlyn Reyes,Jocelyn Manalo

MEMBER: Claudine Mayor

SUBJECT ADVISERS:

Justice Japar Dimaampao Atty. Bernard Bandonell


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I n s t i t u t e o f L a wC E N T R A L B A R O P E R A T I O N S 2 0 0 6U n i t e d P u r s u i t o f E x c e l l e n c e

CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS - HEADS:

Reigel Prado, Omar Gabrieles; FINANCE HEAD: Kyan Sioco; LOGISTICS - HEAD:Janis Ruckenbrod

M E M O R Y A I D I N T A X A T I O N

T A X A T I O N

ADVISERS:Justice Japar Dimaampao, Atty. Bernard BandonellTAXATION - HEAD:Jocelyn Manalo; CO-HEAD: Marlyn Reyes

MEMBERS: Marissa Asencion, Nieves Elegado, Fatima Kristine Franco, Cheryl Hernandez, Aries Magpantay, Claudine Mayor, Rosevee Paylip

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TABLE OF CONTENTS

General PrinciplesPage

1

National Taxation

A. Income Taxation 19

B. Transfer Taxes

1. Estate Tax 412. Donors Tax 49

C. Business Tax

1. Value- Added Tax 542. Excise tax 603. Percentage tax 614. Documentary Stamp Tax 62

Tax Remedies 66

Tariff and Customs Code 83

Local Taxation 94

Court of Tax Appeals 104


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I. GENERAL PRINCIPLES

TAXATION

is the inherent power of the state to raiserevenues by impositions to defraygovernment expenses.

as a process, taxation to the manner bywhich the government exercises the powerof taxation from the act of levy until finalcollection of the imposition.

TAXES

enforced proportional contributions frompersons and property, levied by the state by

virtue of its sovereignty for the support ofthe government and for all its public needs.

CHARACTERISTICS OF A TAX: (Code:CPP SP)

1. an enforced contribution2. it is levied onpersons and property3. it is apersonal liabilityof the taxpayer

4. it is imposed by the statewhich hasjurisdiction over the person and property,and

5. it is levied forpublic purpose.

THEORIES OF TAXATION

1. Lifeblood Theory

Taxes are the lifeblood of the governmentand their prompt and certain availability isan imperious need. This implies that:

1) The BIR is justified in availing of themost expedient remedy in the collectionof the tax (CIR vs. Pineda)

2) The BIR is not bound by the mistakes,errors, or omissions of its agents (thus,the Doctrine of Estoppel does not applyto the collection of taxes) (Rivera vs.

Fernandez)3) No court other than the CTA may enjoin

the collection of taxes.

2. Necessity Theory

The existence of the government is anecessity. No government can exist orcontinue without means to pay its expensesand to raise those means.

It has the right to compel all persons andproperty within its limits to contribute.

Although the power to tax is almostunlimited, it must not be exercised in anarbitrary manner. We may seek redress tocourts in case of irregularities.

3. Benefits-Protection Theory

In return for the taxes received, thegovernment only secures to the citizen thatgeneral benefit which results fromprotection to his person and property and

the promotion of those various schemeswhich have for their object the welfare of all.This theory spawned the doctrine ofsymbiotic relationship.

DOCTRINE OF SYMBIOTICRELATIONSHIP

Taxes are what we pay for a civilizedsociety. Without taxes, the government would

be paralyzed for lack of the motive power toactivate and operate it. Hence, despite the

natural reluctance to surrender part of oneshard-earned income to the taxing authorities,every person who is able to must contribute hisshare in the burden of running the government.The government, for its part, is expected torespond in the form of tangible and intangible

benefits intended to improve the lives of thepeople and enhance their material and moral

values.

NATURE OF THE TAXING POWER

a. inherent attribute of sovereignty

The power of taxation is an incident ofsovereignty as it is inherent in the State,

belonging as a matter of right to everyindependent government. It does not needof constitutional conferment. Constitutionalprovisions do not give rise to the power totax but merely impose limitations on what

would otherwise be an invincible power.

No attribute of sovereignty is more

pervading and at no point does the power ofgovernment affect more constantly andintimately all the relations of life thanthrough the exactions made under it.


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[Churchill and Tait vs. Concepcion, 34 Phil.969]

Being attribute of sovereignty, itsrelinquishment is never presumed. [Luzon

Stevedoring Co. vs. CTA, L-30232, July 29,1988]

Tax is an attribute of sovereignty whichemanates from necessity upon whichthe very existence of the government isdependent.

b. legislative in character

"the power to tax is exclusively vested in thelegislature and it cannot be delegated as a

whole."In short, only the legislature can imposetaxes. This is why a person, activity, orproperty is subject to tax because and only

because the law says so.

Further, about local government, taxationremains exclusively legislative. Meaning,only the local legislative body thru an

ordinance may impose taxes.

Inherent limitations

1. Public Purpose2. Inherently Legislative3. Territorial4. International Comity5. Exemption from Taxation of

Government Agencies/Instrumentalities

Constitutional Limitations

1. Due Process Clause (Art. III, Sec. 1)2. Equal Protection Clause (Art. III, Sec. 1)3. Uniformity (Art. VI, Sec. 28[1])4. Progressive system of taxation (Art. VI,

Sec. 28[1])5. Non-impairment of contracts (Art. III,

Sec. 10)6. Non-imprisonment for Non-payment of

Poll Tax (Art. III, Sec. 20)7. Appropriation, revenue and tariff bills

must originate exclusively in the House

of Representatives (Art. III, Sec. 24)8. Presidential veto (Art. VI, Sec. 27[2])9. Presidential power to tax tariff rates

(Art. VIII, Sec. 28[2])10. Freedom of the press (Art. III, Sec. 4)

11. Freedom of religion ((Art. III, Sec. 5)12. Exemption from property tax of

properties of religious, educational,charitable institutions (Art. VI, Sec.28[3])

13. Tax exemptions granted to non-stock,non-profit educational institutions (Art.XIV, Sec. [4,5])

14. No public money or property used for aparticular sect, priest, religious minister,etc. (Art. VI, Sec. 29[1])

15. Grant of tax exemptions (Art. VI, Sec.28[4])

16. Grant of power of taxation to local

government units (Art. X, Sec. 5)17. Money collected for a special purposes

shall be considered a special fund (Art.VI, 29[3])

18. Exclusive appellate jurisdiction of the SCover judgments of lower courts involvingthe legality of taxes, imports,assessments, fees, penalty. (Art. VIII,Sec. 5)

ASPECTS, PROCESS, PHASES OF

TAXATION. (Code: LAP Levying,Assessment, Payment)

a. Levying/Imposition of the tax. This isessentially legislative. It refers to theenactment of tax laws or statutes.

Note: Courts have no power to interfere inthe wisdom, objective, motive or expediencyin the passage of a tax law, as this is purelylegislative in character. To do so would betantamount to a violation of both the letter

and spirit of the organic laws by which thePhilippine Government was brought intoexistence to invade a coordinate andindependent department of the Governmentand to interfere with the legitimate powersand functions of the Legislature.[Tolentino,et al. vs. Secretary of Finance, 235 SCRA630]

b. Assessment and Collection. This isessentially administrative. It is the actof administration and implementation oftax law by the executive branch through its

administrative agencies. Nonetheless, thedelegation must pass the completeness andsufficient standard test in order to preventthe abuse of its exercise.


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c. Payment. This signifies an act ofcompliance by the taxpayer.

SCOPE OF THE LEGISLATIVE POWERTO TAX

[Code: SPASM]

a. Subjects or Objects of Taxation.

Coverage and the kind or nature of the tax.

They may be persons (natural or juridical),property (real or personal); tangible or

intangible), businesses, transactions, rightsor privileges.

It is inherent in the power to tax that a statebe free to select the subjects of taxation, andit has been repeatedly held that inequalities

which result from a singling out of oneparticular class for taxation or exemptioninfringe no constitutional limitation.

[Walter Lutz vs. J. Antonio Araneta, 98Phil. 148]

b. Public Purpose.

The legislature primarily determines thepublic purpose of taxation although thecourts can inquire as to whether the

purpose is really public or private.However, judicial action is limited to thedetermination of the validity of thetax in relation to constitutional precepts orprovisions or the determination in anappropriate case of the application of a taxlaw.

c. Amount or Tax Rate.

The legislature is free to levy a tax on anyamount, provided, it is exercised within the

bounds of constitutional limitations.

Note: Not only is the power to tax unlimited inits reach as to subjects, but in its very nature, itacknowledges no limits and may be carried evento the extent of exhaustion and destruction,thus becoming in its exercise a power todestroy.

d. Situs of taxation.

Taxation shall only be exercised on persons,properties and excises within the taxingpower.

e. Manner, means and agencies ofcollection of the tax.

Corollary to the sole power to tax is the solepower to prescribe the mode or method by

which the tax shall be collected and todesignate the officers through whom its willshall be enforced.

Q. Is the power to tax the power to

destroy?

IT DEPENDS. The power to tax includesthe power to destroy if it is used validly as animplement of police power in discouraging andin effect, ultimately prohibiting certain thingsor enterprises inimical to the public welfare.

But where the power to tax is used solelyfor the purpose of raising revenues, the modern

view is that it cannot be allowed to confiscate ordestroy.

Note:While taxation is said to be the power todestroy, it is no means unlimited. If so great anabuse is manifested as to destroy natural andfundamental rights which no free governmentalcould consistently violate, it is the duty of the

judiciary to hold such an act unconstitutional.Hence, the modification:the power to tax isnot the power to destroy while theSupreme Court sits.

PRINCIPLES OF A SOUND TAX SYSTEM

(Code: FAT)

a. Fiscal Adequacy. The taxes envisioned tobe collected must be sufficient forgovernment expenditures and other publicneeds.

NOTE: Be careful as sometimes... "anapproximate estimate of governmentexpenditures" is sufficient to satisfy therequirement.

Fiscal adequacy... requires that the sourcesof revenues must be adequate to meetgovernment expenditures and their

variations" (Chavez v. Ongpin)


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b. Administrative Feasibility. The tax lawmust be capable of convenient, just,effective and efficient enforcement andadministration. Likewise, tax laws shouldclose-up the loopholes for tax evasion anddeter unscrupulous officials fromcommitting fraud.

Equally applies to taxpayers.. meaning, theymust not have difficulty understanding whatthe tax law is all about.

c. Theoretical Justice. The tax law orsystem must be based on the taxpayers

ability to pay.

Rule of taxation must be uniform andequitable. The State must evolve aprogressive system of taxation.

Q. Will a violation of these principlesinvalidate a tax law?

IT DEPENDS. A tax law will retain itsvalidity even if it is not in consonance with theprinciples of fiscal adequacy and administrative

feasibility because the Constitution does notexpressly require so. HOWEVER, if a tax law

runs contrary to the principle oftheoretical justice, such violation willrender the law unconstitutionalconsidering that under the Constitution,the rule of taxation should be uniformand equitable. [Sec. 28(1), Art. VI, 1987Constitution]

Rule that taxes are personal to thetaxpayer

GEN. RULE: Taxes are personal to thetaxpayer. Corporations tax delinquency cannot

be enforced on the stockholder nor transfertaxes on the estate are assessed on the heirs.

EXCEPTIONS:

1. Stockholdersmay be held liable for unpaidtaxes of a dissolved corporation if corporateassets have passed into their hands;

2. Heirs may be held liable for the transfertaxes on the estate if the properties of thedecedent have been distributed to themprior to the payment of the required

transfer taxes.

TAXATION DISTINGUISHED FROM OTHER INHERENT POWERS AND IMPOSOTIONS

A. Taxation Police PowerPurpose To levied for the

purpose of raisingrevenues

To promote public welfarethrough regulation

Amt of Exaction No limits Limited to the cost ofregulation, issuance of thelicense or surveillance

Benefits No special or directbenefit is receivedby the taxpayerother than that thegovernment securesthe general welfareof the citizens.

No direct benefited, yet ahealthy economic standardof society is maintained.

Contracts Recognized theobligations imposed

by of

Does not apply to policepower

Transfer Taxes paid form partof the public funds

Allows merely the restrainton the exercise of propertyrights.


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B. Taxation Eminent Domain

Purpose To raise public fund Taking of property forpublic useCompensation General benefit of the citizens Just compensation is given

to the owner of theexpropriated property

Person Affected Applies to all persons, propertyand excises that may be subjectthereto

Only particular property iscomprehended.

C. Taxation LicensePower Exercise of the taxing power Exercise of police power

Purpose To raise government fund Imposed for regulatory

purposesAmt. of exaction No limits Limited to the cost ofregulation, issuance of thelicense or surveillance

EXCEPT: when the fees areimposed for the purpose ofregulating non-usefulbusiness, occupation, oractivity, the amount maynow exceed the cost ofregulation.

Imposition If the primary purpose is togenerate funds and regulationmerely incidental

If the primary purpose is toregulate and to generatefunds merely incidental

Scope covers legitimate andillegitimate business, etc...

only legitimate business

Effect of Non-payment Non-payment of tax does notrender business illegal

Non-payment of fee rendersthe business illegal

D. Taxation Special AssessmentNot limited to land Can be levied only on land

As a rule, cannot be made a personal liability ofthe persons assessed Personal liability

Is based wholly on benefitsIt is exceptional both as to time and locality. Acharge imposed only on the property owners

benefited is a special assessment rather than atax.

The imposition of a charge on all property in aprescribed area is a tax not an assessmentalthough the purpose is to make a localimprovement on street or highway.

E. Taxation TollIt is a demand of sovereignty for the purpose ofraising public revenues.

It is a demand of proprietorship, an amountcharged for the cost and maintenance of theproperty used

F. Taxation Penalty

It is a civil liability. Person is criminally liableonly when he fails to satisfy his civil obligationto pay taxes

It is a punishment for the commission of acrime.


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TAX as distinguished from DEBT

TAX DEBT

Basis

Law Contract or judgment.

Effect of non-paymentImprisonment (except in case of poll tax) No imprisonment

Mode of PaymentGenerally payable in money Payable in money, property or services

Assignability

Not assignable Assignable

Set off

May not be a subject of compensation orset-off

May be a subject of compensation or set-off

Interest

Does not draw interest unless delinquent Draws interest if stipulated or delayed

Authority

Imposed by public authority It is a private transaction

Taxes are not debts because a tax does notdepend upon the consent of the taxpayer andthere is no express or implied contract to paytaxes.

Exceptions:

1. tax collection being enforceable by courtaction[ Sambrano v. TA, 101 Phil. ]

2. in the application of certain statutes oflimitation [ Rep. Far Eastern American,Co., 7 SCRA 399]

3. in the matter of deductible items from grossincome [ Commissioner v. Prieto, 109 Phil.

592] ( Vitug Book)4. when it is secured by a bond, the tax is

considered as a bond.

SET-OFF

General Rule:Taxes cannot be the subjectof compensation or set-off.

Reasons:1. Lifeblood theory2. Taxes are not contractual obligation but

arise out of duty to the government.

3. The government and the taxpayers are notmutually creditors and debtors of eachother.

Exception:Where both claims already becameoverdue and demandable as well as fullyliquidated, or where the government and thetaxpayer are in their own right reciprocallydebtors and creditors of each other,compensation takes place by operation of law.

Doctrine of EQUITABLE RECOUPMENTnot followed in the PhilippinesThus, a tax presently being assessed against ataxpayer may not be recouped or set-offagainst an overpaid tax the refund of which isalready barred by prescription

REQUISITE OF A VALID TAX. (Code:PUJAN)

a. It should be forpublic purpose

b. The rule of taxation should be uniformc. That either the person or property taxed be

within the jurisdiction of the taxingauthority


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d. That the assessment and collectionbein consonance with the due process clause.

e. The tax must not infringeon the inherentand constitutional limitations of the powerof taxation.

PURPOSES OF TAXATION

a. Primary to raise revenues

b. Secondary/non-revenue purposes(RIPE)

1. To reduce social inequality2. To implement the police power of the

State (regulatory purpose)3. To protect our local industriesagainst

unfair competition4. To encourage the growth of local

industries

EXTENT/SCOPE OF THE TAXINGPOWER (CUPS)

a. It is comprehensive. It covers persons,businesses, activities, professions, rightsand privileges.

b. It is unlimited. The power to imposetaxes is one so unlimited in force and sosearching in extent that the courts scarcely

venture to declare that it is subject to anyrestrictions whatever, except such as rest inthe discretion of the authority whichexercises it

c. It is plenary as it is complete.

d. It is supreme. Taxation, although

referred to as the strongest of all the powersof the government, cannot be interpreted tomean that it is superior to the otherinherent powers of the government, onlythat it is supreme insofar as the selection ofthe subject is concerned

LIMITATIONS ON THE TAXING POWER

A. Inherent limitations of the taxingpower

1. Public purpose

Taxation is for public purpose when:

a. the thing to be furthered by theappropriation of public revenue issomething which is the duty of thegovernment to provide; or

b. When the proceeds of the tax will directlypromote the welfare of the community inequal measure

NOTE: Incidental advantage to the public orto the State, which results from the promotionof private enterprise or business, does not

justify their aid by the use of public money.

Q. Who may determine publicpurpose?

A. This is a legislative prerogative. The power todetermine whether the purpose of taxation ispublic or private resides in Congress.However, this will not prevent the court fromquestioning the propriety of such a statute onthe ground that the law enacted is not for publicpurpose;but once it is settled that the law is fora public purpose, the court may no longerinquire into the wisdom, expediency or

necessity of such tax measure.

It is the purpose which determines thepublic character of the tax law, not the numberof persons benefited. As long as the ultimateresult favors the welfare of the public in general,the appropriation of public revenue is deemeddone for the public purpose.

Q. When must public purpose exist?

A. "It must exist at the time the tax proceeds

are being used or a tax law is being passed for acertain purpose, whichever comes first.[Pascual vs. Sec. of Public Works]

2. International Comity - principle ofsovereign equality among states and oftheir freedom from suit without theirconsent limit the authority of thegovernment to effectively impose taxes on asovereign state and its instrumentalities, as

well as on its property held, and activitiestaken in that capacity.

Thus, if a tax law violates certaininternational laws, it is not only invalid butit is also UNCONSTITUTIONAL becausethe constitution says " the Philippines....


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adopts the generally accepted principles ofinternational law as part of the law of theland.... etc.."

3. Non-delegationof taxing power

GEN. RULE: Power of taxation is vested inCongress and may not be delegated.

EXCEPTIONS:

a. Local taxing power granted by theConstitution (Art. X, Sec. 5);

Suppose this provision does not exist,may LGU exercise the power oftaxation?

Yes, under the Doctrine of ImpliedNecessity... meaning, the power to createmunicipal corporations carries with it bynecessary implication the power to compelupon it the power to tax.

Now, the importance of this provision nowis: in case of doubt as to whether the LGUhas the power to tax or not, all doubts must

be resolved in favor of the existence of suchpower. This is not the rule without suchprovision in the Constitution.

b. Authority of the President, under theConstitution, to fix tariff rates, import andexport quotas (Art 6, Sec. 28[2])

c. When delegation relates merely toadministrative implementation that maycall for some degree of discretionary powersunder a set of sufficient standards expressed

by law.

NOTE: Some authors often include thisbecause when you talk of enforcement, it is nolonger legislative in character; thus, there isnothing to delegate. In the ordinary set-up ofour bureaucracy, Congress makes the law(impose the tax), the Executive (BIR) executesthe law.

Whether Congress likes it or not, it can'tcollect the tax! So, what's being delegated?

4. Territoriality or situs of taxation persons or property must be within the

jurisdiction of the taxing power.

The territoriality rule does not merely relateto "geographical" location, but to the juralconcept or nexus or bond between thetaxing authority and the taxpayers. And thisnexus depends on the type of taxes imposed,the personal circumstances of the taxpayers,and also the location of the subject oftaxation.

Rules Observed in Fixing Tax Situs

a. POLL/CAPITATION/COMMUNITY TAX

Poll or capitation, or community taxes

are based upon the residence of thetaxpayer, regardless of the source of incomeor location of the property of the taxpayer.

b. PROPERTY TAX

b.1. Real Property- is subject to taxationin the state or country where it is located,regardless of whether the owner is aresident or a non-resident. [First National

Bank vs. Marine, 284 U.S. 321. 77 ALR 401]

b.2. Personal Property- the situs iswherever it was actually kept or located, washeld to be the domiciled of its owner,following the age-old Doctrine of Mobiliasequuntur personam (movables followthe person).

MOBILIA SEQUUNTUR PERSONAM

Although a mere fiction of law, withoutany constitutional foundation, it is neverthelessapplied when convenient, provided it is not

inconsistent with express provisions of the law.To acquire a situs in a state other than thedomicile of the owner, tangible property musthave a definite location there, accompanied bysome degree of permanency; mere temporary ortransient presence in the state is not sufficient.

Exception:

Actual or business situs [Wells Fargo v. CIR]which has been codified in Section 104, R.A.8424 enumerates certain properties which

acquired actual situs in the Philippines, viz:

b.2.1. franchise exercised in the Philippines;

b.2.2 shares of stock, obligations, bondsissued by domestic corporations organized


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and constituted in accordance withPhilippine laws;

b.2.3 shares, obligation, bonds issued byforeign corporation where 85% of its

business is located in the Philippines. It issubject to donors tax and estate tax;

b.2.4. shares/right in a partnership businessor industry established in the Philippines;

b.2.5. shares, obligations, bonds, issued byforeign corporations which acquired

business situs, when such have been used inthe furtherance of the business of the

foreign corporation.

Thus, the RULE: irrespective of the owner,donors tax or estate tax can be imposed uponthese properties. EXCEPT where the foreigncorporation grants exemption or does notimpose taxes on intangible properties ofFilipino citizen.

c. BUSINESS TAX- place of business

d. EXCISE TAX- Where the act is performedor where occupation is pursued

e. SALES TAX- where the sale isconsummated

f. INCOME TAX- consider citizenshipresidence and sources of income (Sec. 42,R.A. 8424)

g. TRANSFER TAX- residence or citizenshipof the taxpayer or location of property

h. FRANCHISE TAX- state which granted thefranchise

i. VALUE ADDED TAX- DestinationPrincipleis followed

5. Tax-exemption of the Government as a matter of public policy, property of theState or any of its political subdivisionsdevoted to government uses and purposesare generally exempt from taxation.However, nothing can prevent Congressfrom decreeing that even instrumentalitiesor agencies of the government performingfunctions may be subject to tax.[ MCIAA vs.

Marcos, 261 SCRA 667]

Agencies performing governmental functions distinguished from proprietary functions

Agencies performinggovernmentalfunctions

Agencies performingproprietary functions

Tax-exempt unless expressly taxed Subject to tax unless expressly exempted.

Government-owned and controlled corporations perform proprietaryfunctions; hence, they are subject to taxation.

General Rule: government is taxable.Exception:when there is a law which says that it is exempt from tax.From these rules, you now make a distinction:

1) agencies performing governmental function as a rule are tax exempt(by reason of public policy) UNLESS expressly subject to tax; and,2) agencies performing proprietary function are subject to tax UNLESSexpressly exempt. (Posadas vs. Standard Well)

Now, with respect to government properties,NDC vs. Cebu City,enunciated these principles:

1. Properties owned by the Republic of the Philippines AND agencieswithout separate and distinct personality are exempt from taxation. (Inother words, those agencies with charter are treated for tax purposes in

accordance with the provisions of their respective charters.)

2. The exemption of public properties from taxation does not extend tothe improvements introduced upon them by the present occupants attheir expense.


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B. Constitutional limitations of thetaxing power:

1.DUE PROCESS OF LAW

No person shall be deprived of life, libertyor property without due process of law.(Art 3, Sec.1 of the Constitution)

Requisites of Due Process:

Substantive Limitation- The interests of thepublic generally as distinguished from thoseof a particular class require the interventionof the State; and

Procedural Limitation- The meansemployed must be reasonably necessary tothe accomplishment of the purpose and notunduly oppressive.

The requirement of due process whethertaken from the substantive to the proceduralaspect simply means one thing --reasonableness of the legislation.

Substantive means that it should not beharsh, confiscatory, unjust and oppressive.Procedural means that it must providenotice and opportunity to be heard. Thus,they simply mean that the law must bereasonable.

There must be evidence to support a claimof violation of this constitutional provision.

Without proof, the presumption ofconstitutionality of law applies.

However, due process is violation by any ofthese situations: (Code: VCORP)

1. where the law is in violation of inherentlimitations

2. if the tax amounts to a confiscation ofproperty

3. if the subject of confiscation is outside thejurisdiction of the taxing authority

4. if the law which is applied retroactivelyimposes unjust and oppressive taxes

5. if the law is imposed for a purpose other

than public purpose

2.EQUAL PROTECTION OF THE LAW

Nor shall any person be denied the equalprotection of the law. (Art. 3, sec.1 of theConstitution)

Note: it merely requires that all personssubjected to such legislation shall be treatedalike, under like circumstances and conditions,

both in the privileges conferred and in theobligations imposed.

Requisites for a valid Classification:

a. It must be based on SUBSTANTIALdistinctions

b. It must APPLY to both present and futureconditions

c. It must be GERMANE to the purposes of thelaw

d. It must apply EQUALLY to all members ofthe same class

Substantial distinction - it must be real,material and not superficial distinction [Seecases of Punzalan, Association of Customs

Brokers, Hiu Tsong Pao, Ormoc Sugar, etc...]

3. UNIFORMITY OF TAXATION

The rule of taxation shall be uniform andequitable. (Art. 6, Sec.28(1) of theConstitution)

Uniformity in taxation is similar to equalityin taxation, but equitable taxation meansthat the taxes must be reasonable, fair, etc...and therefore, ... ability to pay. [See case of

Almanzor to illustrate this.]

UNIFORMITY AND EQUALITYDISTINGUISHED

EQUALITY INTAXATION UNIFORMITY

Is accomplished whenthe burden of the tax

falls equally andimpartially upon allthe persons andproperty subject to it

Equitabilityachieved when the

burden of taxationfalls to those betterable to pay.

A tax is considereduniform when it operates

with the sameforce/effect in everyplace where the subjectmay be found.

All property belonging tothe same class shall etaxed alike.


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Constitutional Equality in Taxation

means that all persons who are similarlysituated should be treated alike both in theprivilege conferred and burdens imposed.

the application of the concept of equalprotection of the laws which prohibitsdiscrimination other than those instances

where there is valid classification.

Thus, persons who are similarly situated, orwho belong to the same class, should begiven by law the same protection and

privileges as well as imposed the sameburdens and obligations.

Uniformity of taxation NOT the same asequality in taxation

Uniformity of taxation means that allarticles or properties of the same class shall

be taxed at the same rate. Different articlesor other subjects like transactions, business,right, etc. may be taxed at different ratesprovided that the rate (not necessarily the

amount) is uniform in the same classeverywhere.

4. PROGRESSIVE SYSTEM OFTAXATION

Congress shall evolve a progressive system oftaxation (Art.6, Sec.28 (1) of the Constitution)

Tax rate increases as tax base increases.

The Constitution provides that the Congress

shall evolve a progressive system oftaxation. However, this provision is merelya directive to Congress, NOT a rightenforceable before the courts.

Q. Is a tax adopting a regressive systemof taxation is valid?

A. Yes. The Constitution does not reallyprohibit the imposition of indirect tax is whichlike the VAT are regressive. The Constitutionprovision means simply that indirect taxes shall

be minimized. The mandate to Congress is notto prescribe but to evolve a progressive taxsystem. [EVAT En Banc Resolution, Tolentino,et.al vs. Secretary of Finance, Oct. 30, 1995]

5.NON-IMPAIRMENT CLAUSE

No law impairing the obligation of contractsshall be passed.(Art. 3, Sec.10 of theConstitution)

Non-impairment clause of theConstitution constitutes a limitation onthe power of taxation

The obligation or contract is impaired whenits terms or conditions are changed by lawor by a party without consent of the otherthereby weakening the position of the latter.

Thus, there is impairment by law when a taxexemption based on a contract is revoked bya later taxing statute.

It may be well to point out that the non-impairment clause will only be violated if and

when the taxing authority was a party to thecontract in question.

Note: The rule, however, does not apply topublic utility franchises on right since they are

subject to amendment, alteration or repeal bythe Congress when the public interest sorequires. [Cagayan Electric and Light Co., Inc.vs. Commissioner, G.R. no. 60216, September25, 1985]

NOTE: This provision was NOT REALLYthought of as a limitation on the power oftaxation EXCEPT in case where tax exemptionwas granted for a valuable consideration. Sothe question now should be are tax exemptions

falling under the subject constitutional

provision revocable? You have to qualify, if theexemption is granted via a franchise, it can berevoked because of Section 11 Article 12 of theConstitution. However, if the exemption is viaa contract, it cannot be revoked. Why thedistinction? Because in the grant of franchise,the government is exercising a governmental

function (thus, in so doing in the first place, itconsidered public good etc...) while in contract,the government merely exercises a proprietary

function (presumably there was no priordetermination of public good, etc...)


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6. NON-IMPRISONMENT FOR NON-PAYMENT OF POLL TAX

No person shall be imprisoned for non-payment of a debt or poll tax. (Art 3, Sec.20 ofthe constitution)

NOTE: But if acts, violative of laws werecommitted in the issuance and payment of thecedula, imprisonment is allowed. For instance,if a taxpayer was issued a cedula thrumisrepresentation or falsification, the taxpayercould be imprisoned for falsification of publicdocument.

7. BILLS TO ORIGINATE EXCUSIVELYFROM THE HOUSE OFREPRESENTATIVES

All appropriation, revenue or tariff bills, billsauthorizing the increase of the public debt, billsof local application and private bills, shalloriginate exclusively in the House ofRepresentatives, but the senate may propose orconcur with amendments. (Art. 3, Sec. 24, ofthe Constitution)

NOTE: It is the BILL and not the LAW thatshould originate from the lower house. In otherwords, if the final version is substantially thatbill passed by the Senate, for as long as theinitiatory bill was commenced by the lowerhouse, it's totally OK.

8. THE VETO POWER OF THEPRESIDENT

The president shall have the power to

veto any particular item or items in anappropriation, revenue or tariff bill but the vetoshall not affect the item or items to which hedoes not object. (Art. 6, Sec. 27(2) of theConstitution)

9. PRESIDENTS DERIVATIVE POWERTO TAX

The Congress may, by law, authorize thePresident to fix within specified limits andsubject to such limitations and restrictions it

may impose, tariff rates, import and exportquotas, tonnage and wharfage dues and otherduties or imposts within the framework of thenational development program of the

government.(Art. 8, Sec.28 (2) of theConstitution)

The term FLEXIBLE TARIFFCLAUSE refers to the authority given to thePresident to adjust tariff rates under Section401 of the Tariff and Customs Code, which isthe enabling law that made effective thedelegation of the taxing power to the Presidentunder the Constitution.

10. TAXATION AND THE FREEDOM OFTHE PRESS

No law shall be passed abridging thefreedom of speech, of expression or of thepress.(Art.3, Sec. 4 of the Constitution)

There is curtailment of press freedom andfreedom of thought and expression if a tax islevied in order to suppress this basic right andimpose a prior restraint. [Tolentino, et.al vs.secretary of Finance, 235 SCRA 630]

11. TAXATION AND FREEDOM OFRELIGION

No law shall be made respecting anestablishment of religion or prohibiting the freeexercise thereof. The free exercise andenjoyment of religious profession and worship

without discrimination or preference shallforever be allowed. No religious test shall berequired for the exercise of civil or politicalrights. (Art.3,Sec.5, of the Constitution)

The income of such organizations from anyactivity conducted for profit or from any of

their property, real or personal, regardlessof the disposition made of such income, istaxable.

12. TAX EXEMPTION OF PROPERTIESACTUALLY, DIRECTLY ANDEXCLUSIVELY USED FORRELIGIOUS, CHARITABLE ANDEDUCATIONAL PURPOSES (Art.6,sec.28(3) of the Constitution)

REASON FOR THE RULE:

Cemeteries are exempt from the payment oftaxes because of the difficulty of collecting a taxthereon and the obvious impropriety of selling


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the graves of the dead to defray the expenses ofcarrying on the government of the living.

Churches and parsonages or conventsappurtenant thereto, etc. are exempt fromtaxation because such institutions perform

work which would otherwise have to be carriedon by the public at the expense of the taxpayersand that the expenses of such institutions fromtaxation lessens rather than increases the

burden upon other taxpayers.

CONTROLLING DOCTRINE ONEXEMPTION FROM TAXATION OF

REAL PROPERTY OF RELIGIOUS,CHARITABLE AND EDUCATIONALINSTITYUTIONS

In the recent case of Lung Center of thePhilippines vs. Q.C and Constantino p. Roxas,City Assessor of Q.C., G.R. no. 144104, June 29,2004, 433 SCRA 119, the prevailing rule on theapplication of tax exemption to propertiesincidentally used for religious, charitable andeducational purposes, as enunciated in the caseof Herrera vs. QC-BAA, 3 SCRA 187, has now

beenABANDONED. In resolving the issue ofwhether or not the portions of the real propertyof Lung Center that are leased to private entitiesare exempt from real property taxes, the SCreexamined the intent of the Constitutionalprovision granting tax exemption of properties

ACTUALLY, DIRECTLY AND EXCLUSIVELYUSED FOR RELIGIOUS, CHARITABLE ANDEDUCATIONAL PURPOSES.

Thus, the records of the ConstitutionalCommission reveal that what is exempted is not

the institution itself; those exempted from realestate taxes are lands, buildings andimprovements actually, directly and exclusivelyused for religious, charitable or educationalpurposes.

What is meant by actual, direct andexclusive use of property for charitable,religious and educational institutions is thedirect and immediate and actual application ofthe property itself to the purposes for which thecharitable institution is organized. It is not the

use of the income from the real property that isdeterminative of whether the property is usedfor tax-exempt purposes. [St. Louis MensChristian association vs. Genher, 47

S.W.2d776]

NOTE: The rule remains that it is the USE andnot ownership that determines the exemptcharacter of the property. What is meant by"use" remain a litigious issue, but shouldalways be measured under the constitutional

prescription of Actually-Directly-Exclusivelypurposes.

13. TAX EXEMPTIONS GRANTED TONON-STOCK, NON-PROFITEDUCATIONAL INSTITUTIONS

All revenues and assets of non-stock, non-profiteducational institution used actually, directly

and exclusively for educational purposes shallbe exempt from taxes and duties. Upon thedissolution and cessation of the corporateexistence of such institution, their assets shall

be disposed of in the manner provided by law.(Art. 14, Sec.4 (3) of the Constitution)

Subject to the conditions prescribed bylaw, all grants, endowments, donation orcontributions used actually, directly andexclusively for educational purposes shall beexempt from tax. (Art. 14, Sec.4 (4) of the

Constitution)

ART. 14 and ART. 6 OF THE 1987CONSTITUTION DISTINGUINSHED

ART 14,SEC. 4(3)

ART 6,SEC. 28(3)

GRANTEE Non-stock,non-profiteducationalinstitution

Religious,educational,charitableinstitutions

TAXES

COVERED

Income tax

CustomdutiesProperty tax (DECS OrderNo. 137-87)

Property tax

14. NO PUBLIC MONEY OR PROPERTYUSED FOR A PARTICULAR SECT,PRIEST, RELIGIOUS MINISTER,ETC. (Art. 6,Sec.29(1)Constitution)

GEN. RULE: No public money or propertyshall be appropriated, applied, paid oremployed directly or indirectly for the use,

benefit or support of any sect, church,denomination, sectarian institution, or system


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of religious or of any priest, preacher, minister,or other religious teacher, or dignitary.

EXCEPT: when such priest, preacher,minister or dignitary is assigned to the armedforces or to any penal institution or governmentorphanage or leprosarium

15. GRANT OF TAX EXEMPTIONS

No law granting any tax exemption shallbe passed without the concurrence of amajority of all the members of Congress.(Art. 6, Sec.28 (4) of the Constitution)

GEN. RULE: NO EXEMPTION

EXCEPT: When a statute provides that certainperson or property is immune from taxation.

Rule on Construction of Exemption:

1. Exemptions from taxation are notpresumed.

2. He who claims as exemption must be able tojustify his claim by the clearest grant oforganic or statute law by words too plain to

be mistaken. If ambiguous, there is noexemption.

3. He who claims exemption should prove byconvincing proof that he is exempted.

4. Taxation is the rule; tax exemption is theexception.

5. Tax exemption must be strictly construedagainst the taxpayer and liberally in favor ofthe taxing authority.

6. Constitutional exemption is self-executing.

7. Tax exemptions are personal.

STRICT CONSTRUCTION RULE- It simplymeans that if, after the application of all rules ofinterpretation for the purpose of ascertainingthe intention of the legislature, a well foundeddoubt exists, then the ambiguity occurs whichmay be settled by the rule of strict construction.

EXCEPTION to Strict Construction Rule:

a. The rule on strict construction rule does notapply where the statute granting theexemption expressly provides for liberalinterpretation;

b. The rule does not apply to special taxesrelating to special cases and affecting onlyspecial classes of persons;

c. In case of property owned by the state anexpress exemption should not be construed

with the same degree of strictness thatapplies to exemptions contrary to publicpolicy of the state, since as to such propertyexemption is the rule and taxation theexemption

d. Exemptions to traditional exemptees, suchas religious and charitable institution;

e. The rule does not apply in the case ofexemptions in favor of governmentalpolitical subdivision or instrumentality

[Maceda vs. Macaraig, jr., 197 SCRA 771]

f. If the taxpayer falls within the purview ofexemption by clear legislative intent. [CIRvs. Arnoldus Carpentry Shop, G.R. no.71122, March 25, 1988]

TAX AMNESTY TAX EXEMPTION

Is an immunity fromall criminal and civilobligations arisingfrom non-payment oftaxes.

It is a general pardongiven to all taxpayers

Is an immunity fromthe civil liability only.

16. GRANT OF POWER OF TAXATION TOLOCAL GOVERNMENT UNITS

Each local government unit shall havethe power to create its own sources of revenuesand to levy taxes, fees and charges subject tosuch guidelines and limitations as the Congressmay provide, consistent with the basic policy oflocal autonomy. Such taxes, fees and chargesshall accrue exclusively to the localgovernments. (Art. 10, Sec. 5, Constitution)

Congress cannot abolish the local

governments power to tax as it cannotabrogate what is expressly granted by thefundamental law.


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17. SPECIAL FUND

All money collected on any tax levied fora special purpose shall be treated as aspecial fund and paid out for such purposeonly. If the purpose for which a special fund

was created has been fulfilled or abandoned,the balance, if any, shall be transferred tothe general funds of the government. (Art.6, Sec.29 (3), Constitution)

18. SUPREME COURTS JURISDICTIONOVER TAX CASES (Art. VIII, Sec. 5)

Supreme Court may review, revise, reverse,modify or affirm on appeal or certiorari as thelaw or the Rules of Court may provide all casesinvolving the legality of any tax, impost,assessment or toll, or any penalty imposed inrelation thereto.

KINDS OF TAXES DIFFERENTIATED

DIRECT INDIRECT

Tax for which a taxpayer is directly liable on thetransaction or business it engages in

Tax primarily paid by persons who can shiftthe burden upon someone else

SPECIFIC AD VALOREM

Imposed and based on weight or volumecapacity or any other physical unit ofmeasurement

Based on selling price or other specified valueof goods

GENERAL SPECIAL

Imposed solely to raise revenue for thegovernment

Imposed and collected to achieve a particularlegitimate object of government

NATIONAL LOCAL

Imposed by the national government Levied and collected by the local government

PERSONAL PROPERTY

Is of fixed amount imposed on individuals,whether citizens or not, residing within aspecified territory, without regard to theirproperty or occupation

Imposed on property, real or personal, inproportion to its value.

PROGRESSIVE REGRESSIVE

Tax rate increases as the tax base increases Tax rate decreases as the tax base increases


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DOUBLE TAXATION

Double taxation- strictly, taxing twice sameobject/subject, same taxing jurisdiction, samepurpose, same tax, same year.. this is called"direct duplicate"; should one of these is notthe same, i.e., say not same year, then it iscalled "indirect duplicate"... in either case,there is no law which prohibits the same. thereis not even a prohibition by the constitution as

you say it.

However, in case of direct duplicate, if itamounts to confiscation of property for beingunjust, oppressive, unfair, etc... then it isunconstitutional not on the ground of doubletaxation but for being violative of the dueprocess clause.

Note: there is no constitutional prohibitionagainst double taxation. It is not favored butpermissible. [Pepsi Cola Bottling Co. vs. City of

Butuan, 24 SCRA 789]

Kinds of Double Taxation

1. DIRECT -Occurs when thesame property istaxed twice when itshould be taxedonce

-objectionable orprohibited sense

2.INDIRECT Allowed it the taxesare of differentnature orcharacter, imposed

by different taxingauthority

-permissibledouble taxation

3. DOMESTIC Arises when the

taxes are Imposedby the local ornationalgovernment

4. INTERNATIONAL Refers to theimposition ofcomparable taxesin two or morestates on the sametaxpayer in respectof the same subjectmatter and foridentical periods.

TREATY AS A MODE OF ELIMINATINGDOUBLE TAXATION

1. EXEMPTION METHOD - the income orcapital which is taxable in the state of source orsitus is exempted in the state of residence

- the focus is on the income or the credititself

2. CREDIT METHOD the tax paid in thestate of source is credited against the tax leviedin the state of residence.

- focuses upon the tax.

FORMS OF ESCAPE FROM TAXATION(Key: ESCATE)

1. Shifting2. Capitalization3. Transformation4. Avoidance5. Exemption6. Evasion-unlawful

A. Shifting

Process by which tax burden is transferredfrom statutory taxpayer (impact oftaxation) to another (incident of taxation)

without violating the law.

Illustration: Value added tax. The seller isrequired by law to pay the tax, but the burden isactually shifted or passed on to the buyer.

Impact of taxation point on which tax

is originally imposed.

Incidents of taxation point on whichthe tax burden finally rests or settles down.


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B. Capitalization

Reduction in the price of the taxed objectequal to the capitalized value of future taxes

which the purchaser expects to be calledupon to pay.

C. Transformation

The manufacturer or producer upon whomthe tax has been imposed, fearing the loss ofhis market if he should add the tax to theprice, pays the tax and endeavors to recouphimself by improving his process of

production, thereby turning out his units ata lower cost.

D. Tax Avoidance

exploitation by the taxpayer of legallypermissible alternative tax rates ormethods of assessing taxable property orincome, in order to avoid or reduce taxliability.

E. Tax Evasion

Use by the taxpayer of illegal orfraudulent meansto defeat or lessen thepayment of the tax.

Indicia of Fraud in Tax Evasion

1. failure to declare for taxation purposestrue and actual income derived from

business for two consecutive years; or2. substantial under declaration of income

tax returns of the taxpayer for four

consecutive years coupled withintentional overstatement of deductions.

F. Tax Exemption

A grant of immunity, express or implied, toparticular persons or corporations from theobligation to pay taxes.

Kinds of Tax Exemptions

As to basis:

1. Constitutional: Immunities from taxationwhich originate from the constitution2. Statutory: Those which emanate from

legislation

As to form:

1. Express: Expressly granted by organicor statute law

2. Implied: When particular persons,properties, or excises are deemedexempt as they fall outside the scope ofthe taxing provision itself.

As to extent:

1. Total: Connotes absolute immunity.2. Partial: One where a collection of a part of

the tax is dispensed with.

As to object:

1. Personal: granted directly in favor ofcertain persons

2. Impersonal: granted directly in favor of acertain class of property

TAX EVASION vs. TAX AVOIDANCE

TAX EVASION TAX AVOIDANCE

Connotes fraudthrough the use ofpretenses andforbidden devices tolessen or defeat taxes

Legal means used bythe taxpayer toreduce taxes

Scheme used outsideof those lawful means

Tax saving devicewithin the meanssanctioned by law

Rule of No Estoppel Against theGovernment

General Rule: The Government is notestopped by the mistakes or errors of its agents;erroneous application and enforcement of law

by public officers do not block the subsequentcorrect application of statutes.

Exception: In the interest of justice and fairplay, as where injustice will result to thetaxpayer.


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DOCTRINE OF IMPRESCRIPTIBILITY

As a rule, taxes are imprescriptibly as theyare the lifeblood of the government. However,tax statutes may provide for statute oflimitations.

The rules that have been adopted are as follows:

a. National Internal Revenue Code- thestatute of limitation for assessment of tax ifa return is filed is within three (3 )yearsfrom the last day prescribed by law for thefilling of the return or if filed after the last

day, within three years from date of actualfilling. If no return is filled or the return isfalse or fraudulent, the period to assess is

within ten (10) years from discovery of theomission, fraud or falsity.

b. Tariff and Customs Code- it does notexpress any general statute of limitation; itprovides, however, that when articles have

been entered and passed free of duty of finaladjustments of duties made, withsubsequent delivery, such entry and passage

free of duty or settlements of duties will,after the expiration of three (3) years fromthe date of the final payment of duties, inthe absence of fraud or protest orcompliance audit pursuant to the provisionsof this code be final and conclusive upon allparties, unless the liquidation of the importentry was merely tentative.

c. Local Government Code- Local taxes, fees,or charges shall be assessed within five (5)

years from the date they become due. In

case of fraud, or intent to evade the paymentof taxes, fees, or charges the same may beassessed within ten (10) years fromdiscovery of such. They shall also becollected either by administrative or judicialaction within five (5) years from the date ofassessment.

PRINCIPLE OF PROSPECTIVITY OF TAXLAWS

The general rule under the Civil Code that

laws shall have prospective application appliesto tax laws.Retroactive application of revenue laws

may be allowed if it will not amount to denial ofdue process.

TAXPAYERS SUIT

Requires illegal expenditure of public money.

A. INCOME TAXATION

Definitions

1. Income Tax tax on all yearly profitsarising 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 grossor net. (27 Am. Jur. 308)

2. Income all wealth which flows into thetaxpayer other than as a mere return of capital.

3. Capital resource of person which can beused in producing goods and services.

Income Capital

All wealth whichflows into thetaxpayer other thanas a mere return ofcapital.

Fund or property whichcan be used inproducing goods orservices

Flow of Wealth Fund or property

Source of wealth Wealth

Requisites for Income to be Taxable

1. There must be a gain or profit.2. The gain must be realized or received.

3. The gain must not be excluded by law ortreaty from taxation.

Tests on Taxability of Income

1. Flow of Wealth Test The determiningfactor for the imposition of income tax is

whether any gain was derived from thetransaction.

2. Realization Test - unless the income isdeemed "realized," there is no taxable

income.

3. Economic-Benefit Principle - flow ofwealth realized is taxable only to the extentthat the taxpayer is economically benefited.

NATIONAL TAXATION


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Classification of Taxpayers

a. Individuals1) citizens

1.1 resident citizens (RC)1.2 non-resident citizens (NRC)

2) aliens2.1 resident aliens (RA)2.2 non-resident aliens (NRA)

2.2.1 engaged in trade or businesswithin the Philippines. (NRAETB)

2.2.2 Not engaged in trade orbusiness within the Philippines(NRANETB)

b. Corporations1) Domestic (DC)2) Foreign

2.1 resident foreign corporation (RFC)2.2 non-resident foreign corporation(NRFC)

c. Estatesd. Trustse. Partnerships

INDIVIDUALS

Situs of Taxation (Who are taxable?)

1. Resident Citizen2. Non-resident Citizen

A non-resident citizen means, aFilipino citizen:

a. who establishes to the satisfaction of theCommissioner the fact of their physicalpresence abroad with a definiteintention to reside therein;

b. who leaves the Philippines during thetaxable year to reside abroad, either asan immigrant or for employment on apermanent basis;

c. who works and derives income fromabroad and whose employment thereatrequires him to be physically presentabroad most of the time during thetaxable year;

d. who is previously considered as a non-resident and who arrives in thePhilippines at anytime during thetaxable year to reside thereatpermanently shall be considered non-resident for the taxable year in which hearrives in the Philippines with respect tohis income derived from sources abroaduntil the date of his arrival[Sec.22 (E)]

3. Resident alien - means an individualwhose residence is within the Philippinesand who is not a citizen thereof.[Sec.22 (F)]

4. Non-resident alien engaged in tradeor business within the Philippines.(Key: NRAETB)

A non-resident alien means anindividual whose residence is not within thePhilippines and who is not a citizen thereof.

[Sec.22 (G)]

The term trade or business includesthe performance of the functions of a publicoffice.[Sec. 22 (S)]

The term trade, business orprofession shall not include performanceof services by the taxpayer as an employee.

[Sec. 22 (CC)]

A non-resident alien individual whoshall come to the Philippines and staytherein for an aggregate period of more than180 days during any calendar year shall bedeemed a non-resident alien doing businessin the Philippines Section 22(G)notwithstanding [Sec. 25(A)(1)]

5. Non-resident aliens not engaged intrade or business within thePhilippiness. (Key: NRANETB)

Note: ONLY RESIDENT CITIZENS aretaxable for income derived from sourceswithinand without the Philippines. All otherindividual income taxpayers are taxable only forincome derived from sources within the

Philippines.

Note: An overseas contract worker(OCW)is taxable only on income derived fromsources within the Philippines. [Sec. 23 (B)(C)]

Note: A seaman is considered as an OCWprovided the following requirements are met:

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

2. such vessel is engaged exclusively ininternational trade.


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CORPORATIONS

Jurisdiction to Taxation (who are taxable?)1. Domestic Corporation created or

organized in the Philippines. or under itslaw[Sec. 22(C)]

2. Resident Foreign Corporation engaged in trade or business within thePhilippines[Sec. 22(H)]

3. Non-resident Foreign Corporation not engaged in trade or business within thePhilippines[Sec. 22(I)]

Corporation Includes:

1. Partnerships, no matter how created ororganized;

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

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

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

the purpose of undertaking constructionprojects or engaging in petroleum, coal,geothermal and other energy operationspursuant to an operating or consortiumagreement under a service contract withthe Government;

3. Co-ownership.

Corporations exempt from incometaxation (for income realized as such)under RA 8424

1. Those enumerated underSec. 30.

Exempt corporations are subject toincome tax on their income from any oftheir properties, real or personal, or fromany other activities conducted for profit,regardless of the disposition made ofsuch income.

2. With respect to GOCCs, the general rule isthat these corporations are taxable as anyother corporation except:

a. GSISb. SSSc. PHIC

d. PCSO [Sec. 27 (C)]

NOTE: Sec. 27 (c) of the NIRC amended byRA 9337, therefore, PAGCOR is not includedin the GOCCC exception and subject to tax.

3. Regional or Area Headquarters under Sec.22 (DD)

NOTE: Regional operating headquarters(ROH) underSec. 22(EE)shall pay a tax of

10% of their taxable income.

Note: ONLY DOMESTICCORPORATIONS are taxable for incomederived from sources within and withoutthePhilippines. All other corporate incometaxpayers are taxable only for income derivedfrom sources withinthe Philippines.


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ESTATES AND TRUSTS

Estate refers to the mass of properties left bya deceased person.

Rules on Taxability of Estate:

1. An estate under administration or judicialsettlement is a taxable entity.

2. An estate, the settlement of which is not theobject of judicial testamentary or intestateproceedings is not a taxable entity. The incomethere of is taxable directly to the heir or

beneficiary.

Estates under Judicial Settlement

General Rule: An estate under judicialsettlement is subject to income tax in the samemanner as individuals. Its status is the same asthe status of the decedent prior to his death.

Exceptions:

1. The entitlement to personal exemption islimited only to P20, 000.

2. No additional exemption is allowed.

3. The distribution to the heirs during thetaxable year of estate income is deductiblefrom the taxable income of the estate. Suchdistributed income shall form part of therespective heirs taxable income.

Where no such distribution to the

heirs is made during the taxable year thatthe income is earned, and such income issubjected to income tax payment by theestate, the subsequent distribution thereofis no longer taxable on the part of therecipient.

Estates NOT under judicialsettlement subject to income tax as co-ownership.

The tax treatment of co-ownership is

similar to general professional partnership.Hence, the tax liability on income is levieddirectly on the co-owners. The co-ownershipincome and deductions are simply apportionedto the co-owners to the extent of their respectiveinterests therein, regardless of whether suchincome is distributed or not.

Irrevocable Trusts (irrevocable bothas to corpus and as to income) taxed exactlyin the same way as estates under judicial

settlement and its status as an individual is thatof the trustor. It is entitled to the minimumpersonal exemption (P20, 000) anddistribution of trust income during the taxable


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tear to the beneficiaries is deductible from thetrusts taxable income.

Revocable Trusts the trustor, notthe trust itself, is subject to the payment ofincome tax on the trust income.

PARTNERSHIPS

General Rule: Partnerships, no matter howcreated, are subject to corporate income tax.

General co-partnerships (GCP) arepartnerships which are by law assimilated to be

within the context of, and so legallycontemplated as, corporations. The partnershipitself is subject to corporate taxation. Theindividual partners are considered stockholdersand, therefore, profits distributed to them bythe partnership are taxable as dividends.

Exception: General ProfessionalPartnerships (GPPs)as such are not subjectto income tax. GPP means:

1. a partnership formed by persons for the sole

purpose of exercising their commonprofession; and

2. no part of the income of which is derivedfrom engaging in any trade or business[Sec.22(B)].

GPPs, however, are required to filereturns of their income for the purpose offurnishing information as to the share in the netincome of the partnership which the partnersshall include in their individual returns

Members of the GPP are liable forincome tax only in their separate andindividual capacity. Each partner shall reportas gross income his distributive share, actuallyor constructively received, in the net income ofthe partnership.

KINDS OF INCOME TAXES

UNDER R.A. 8424

(1) Net Income Tax

(2) Gross Income Tax(3) Final Income Tax(4) Preferential Rates or Special Rates of

Income Tax(5) Improperly Accumulated Earnings Tax

(6) Minimum Corporate Income Tax(7) Fringe Benefits Tax(8) Optional corporate Income tax

(1) NET INCOME TAX

Definition: Means gross income lessdeductions and/or personal and additionalexemptions (Sec. 31, RA 8424)

Net Income Tax Formula

Entire Income

Less: Exclusions and Income subject to Final

Tax(e.g. Passive Income)

Gross Income

Less: Deductions (Personal and/or AdditionalExemptions)

Net Taxable Income

X Tax Rates

Net Income Tax Due

Less: Tax Credit, if any

Tax Still due, if any/ Tax Payable

GROSS INCOME

Definition: Means all income derived fromwhatever source, including but not limited tothe following(Sec. 32); (Key: CIG2AR2-P2D)

1. Compensation;2. Gross income from profession, trade

or business;

3. Gains form dealings in property;4. Interests;5. Rents;6. Royalties;7. Dividends;8. Annuities;9. Prizes and winnings;10. Pensions;11. Partners share in the net income of

the general professional partnership

all income derived from

whatever source- embraces all income notexpressly exempted within the class of taxableincome under the law, irrespective of the

voluntary or involuntary action of the taxpayer


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in producing the gains, and whether derivedfrom legal or illegal sources, such as:

1. Gains arising from expropriation ofproperty which constitute income fromdealings in property;

2. Income derived from illegal sources,such as gambling, theft, embezzlement,and smuggling;

3. Compensation for damages if itrepresents payment for loss of expectedprofits;

4. Bad debts previously charged-off butafterwards recovered;

5. Contest awards and prizes forcommercial or non-commercialcontests; and

6. Taxes previously deducted as anexpense and subsequently refunded.

Exclusions from Gross Income

1. proceeds of life insuranceNOTE: if the proceeds are retained by theinsurer, the interest thereon is taxable;

2. Return of insurance premium;

3. Gift, bequest or deviseNOTE: income there from is taxable;

4. Compensation for personal injuries orsickness, whether by suit or agreement

NOTE: The phrase personal injuriesshould be given a restrictive meaning torefer only to physical injuries;

5. Income exempt under Treaty;6. Retirement benefits, pension, gratuities, etc.7. Miscellaneous items

Retirement Benefits, Pension,Gratuities, Etc.

1. those derived under R.A. 7641 (pertains toprivate firms without retirement trustfund);

2. those received by officials and employees ofprivate employers in accordance with areasonable private benefit plan;

Requisites:

a) in the service of the same employerfor at least 10 years;

b) at least 50 years old;c) must be availed of only onced) plan approved by the BIR (R.R.2-

98);

3. separation pay because of death, sickness,or other physical disability or for any cause

beyond the control of the official oremployee (e.g. retrenchment);

4. social security benefits, retirementgratuities, pensions and other similar

benefits received by citizens and aliens whocome to reside permanently here fromforeign sources private or public;

5. benefits due to residents under the laws ofthe U.S. administered by the U.S. Veterans

Administration6. SSS benefits; and7. GSIS benefits.

Miscellaneous Items

1. Passive income derived by foreigngovernment in the Philippines;

2. Income derived from any public utility orfrom the exercise of any governmentalfunction;

3. Prizes and awards made primarily inrecognition of charitable, civic achievement,literary, artistic, religious, educational, andscientific. (Code: C2LARES)

Requisites:

a. recipient selected without any actionon his part; and

b. recipient not required to rendersubstantial future services.

4. Prizes and awards granted to athletes insports competitions and sanctioned by theirnational sports association ;

5. 13th month pay and other benefits up toP30,000.00;

6. GSIS,SSS, Medicare and union dues ofindividuals;

7. Gains derived from debt securities with amaturity of more than 5 years;

8. Gains from redemption of shares in MutualFund.

DEDUCTIONS

Definition: Items or amounts which the lawallows to be deducted from gross income inorder to arrive at the taxable income.

Basic Principles governing Deductions


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1. The taxpayer seeking a deduction mustpoint to some specific provisions of thestatute authorizing the deduction; and

2. He must be able to prove that he is entitledto the deduction authorized or allowed.(Atlas Consolidated Mining & Dev. Corp.vs. Comm.)

3. Any amount paid or payable which isotherwise deductible from, or taken intoaccount in computing gross income or for

which depreciation or amortization may beallowed, shall be allowed as deduction onlyif it is shown that the tax required to bededucted and withheld there from has been

paid to the BIR. (Sec. 34[K])

Note: Deductions for income tax purposespartake of the nature of tax exemptions; hence,if tax exemptions are to be strictly construed,then it follows that deductions must also bestrictly construed.

Taxpayers who cannot avail ofdeductions from gross income

1. Citizens and resident aliens whose income ispurely compensation income (except forpremium payments on health and/orhospitaliza

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