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TAXATION LAW REVIEWER

3rd Year UNEP Law Students, 2nd Semester-S/Y 2012-2013


This reviewer covers the following topics: a) general principles of taxation; and, b)Valueadded Tax.

University of Northeastern Philippines UNEP COLLEGE OF LAW San Isidro, Iriga City
(054) 299-5896 5/30/2013

UNEP COLLEGE OF LAW TAXATION LAW REVIEWER


Table of Contents

General Principles: The Power of Taxation .........2 Nature of the power to Tax ............................... 2 Characteristics of Taxes..3 Theories or Bases of Taxation...3 Importance of Taxes....3 Purpose and Objectives of Taxation..3 The scope of legislative power in taxation...4 Characteristics of Taxation4 Distinctions among the three inherent powers of the State.....4 Aspects of Taxation.5 Basic Principles of a Sound Tax System.5 Classification of Taxes..5 Limitations on the Power to Tax.............6 Double Taxation..8 Forms of Escape from Taxation...9 Compensation or Set-Off...11 Construction and Interpretation of Tax Laws.....12 Tax Enforcement and Administration14 Requisites of Tax Regulations....14 Assessment...15 Value-Added Tax: Nature of VAT16 Taxable Transactions..17 Tax Cascading...17 The advantages in imposing VAT..17 Characteristics of VAT..18 Persons liable to Pay VAT..18 Transactions Subject to VAT.18 Elements of VAT...19 Zero-Rated vs. Exempt Transaction.....................19 Transactions deemed sales for VAT purposes..20

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GENERAL PRINCIPLES
May a legislative body enact laws to raise revenues in the absence of constitutional provisions granting said body the power of tax? Explain. Taxation vs. Taxes: 1. Taxation: Power by which the sovereign raises revenue to defray the necessary expenses of the government from among those who in some measure are privileged to enjoy its benefits and must bear its burden. 2. Taxes: Enforced proportional contribution from properties and persons levied by the State by virtue of its sovereignty for the support of government and for public needs. Nature of the power to tax The nature of the power to tax is two-fold: 1. inherent; and, 2. legislative. Why is the power of taxation considered inherent in nature? It is inherent in character because its exercise is guaranteed by the mere existence of the state. It could be exercised even in the absence of a constitutional grant. The power to tax proceeds upon the theory that the existence of a government is a necessity and this power is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent state or government (Pepsi-ColaBottling Co. of the Philippines V. Municipality of Tanauan, Leyte, G.R. No. L-31156, February27, 1976). No sovereign state can continue to exist without the means to pay its expenses; and that for those means, it has the right to compel all citizens and property within its limits to contribute, hence, the emergence of the power to tax. (51 Am. Jur. 42) The moment a state exists, the power to tax automatically exists. Yes.It must be noted that Constitutional provision relating to the power of taxation do not operate as grants of the power of taxation to the government, but instead merely constitute a limitation upon a power which would otherwise be practically without limit. (2005 Bar Question)

THE POWER OF TAXATION

Distinguish National Government from Local Government Unit as regards the exercise of power of taxation. 1. National Government - inherent 2. Local Government Unit not inherent since it is merely an agency instituted by the
State for the purpose of carrying out in detail the objects of the government; can only impose taxes when there is:

a. Constitutionally mandated grant; b. Legislative grant, derived from the 1987 Constitution, Section 5, Article X. Why is the power of taxation legislative in nature? It is legislative in nature since it involves promulgation of laws. It is the Legislature which determines the coverage, object, nature, extent and situs of the tax to be imposed. May the power of taxation be delegated? General Rule: No, since it is essentially a legislative function. This is based upon the principle that taxes are grant of the people who are taxed, and the grant must be made by the immediate representatives of the people. And where the people have laid the power, there it must be exercised. (Cooley) Exceptions: 1. To local governments in respect ofmatters of local concern to be exercised by the local legislative bodies thereof.(Sec. 5, Art. X, 1987 Constitution) 2. When allowed by the Constitution. Note: The Congress may, by law, authorize the President to fix withinspecified limits, subject to such limitationsand restrictions as it may impose, tariffrates, import and export quotas, tonnageand wharfage dues and other duties orimposts Page 2

Basis: The Life-blood Doctrine.

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within the framework of thenational development program of thegovernment. (Sec. 28 [2], Art. VI, 1987Constitution) 3. When the delegation relates merely to administrative implementation that may call for some degree of discretionary powers under a set of sufficient standard expressed by law (Cervantes v. Auditor General, G.R. No. L4043, May 26, 1952) or implied fromthe policy and purpose of the act. (Maceda v. Macaraig, G.R. No. 88291, June 8, 1993) Note: Technically, this does not amount toa delegation of the power to tax because the questions which should be determined by Congress are already answered by Congress before the tax lawleaves Congress.
a. Marshall Dictum Power to tax is the power to destroy describes the unlimitedness of the power and the degree of vigor with which the taxing power may be employed in order to raise revenue. b. Oliver Wendell Holmes Dictum Power to tax is not the power to destroy while this court (US Supreme Court)sits power to tax knows no limits except those expressly stated in the Constitution.

Marshall and Holmes Dictums Reconciled: Although the power to tax is almost unlimited, it must not be exercised in an arbitrary manner. We have courts to which people may seek redress in case of irregularities. 3. Benefits-Protection Theory There exist reciprocal duties of protection and support between State and its inhabitants. Inhabitants pay taxes and in return receive benefits and protection from the State. Importance of Taxes Taxes are the lifeblood of the government and so should be calculated without unnecessary hindrance; therefore, their prompt and imperious availability is an imperious need. General Rule: Taxes are personal to the taxpayer. Illustrations: 1. Corporations tax delinquency cannot be enforced against the stockholder (Corporate Entity Doctrine). Exception: Stockholders may be held liable for unpaid taxes of a dissolved corporation if the corporate assets have passed into their hands. 2. Transfer tax on the estate cannot be assessed against the heirs. Exception: Heirs may be held liable for the transfer tax on the estate, if prior to the payment of the same, the properties of the decedent have been distributed to the heirs. Purpose and Objectives of Taxation: 1. Revenue 2. Non-Revenue (still a tax but imposed under its non-revenue objective) KEY: PR2EP a. Regulation; Page 3

Characteristics of Taxes:
1. forced charge; 2. generally payable in money;

3. levied by the legislature; assessed with some reasonable rule of apportionment; imposed by the State within its jurisdiction; 4. levied for public purpose.

Theories or bases of taxation: 1. Lifeblood Theory The nature of the power to tax is two-fold: Taxes are the lifeblood of the nation. Without revenue raised from taxation, the government will not survive, resulting in detriment to society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. (CIR vsAlgue, Inc., et. al.) Illustrations of Lifeblood Theory: a. Collection of taxes may not be enjoined by injunction. b. Taxes could not be the subject of compensation and set-off. c. A valid tax may result in destruction of the taxpayer's property. 2. Necessity Theory Existence of a government is a necessity and cannot continue without any means to pay for expenses.

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b. Promotion of general welfare; c. Reduction of social inequity; d. Encouragement of economic growth; and e. Protectionism. The scope of legislative power in taxation The following are the scope of legislative power in taxation: 1. The determination of: [SAPMAKS] a. Subjects of taxation (persons, property, occupation, excises or privileges to be taxed, provided they are within the taxing jurisdiction); b. Amount or Rate of tax; c. Purposes for which taxes shall be levied provided they are public purposes; d. Method of collection; Note: This is not exclusive to Congress. e. Apportionment of the tax (whether the tax shall beof generalapplication or limited to a particular locality, or partly general and partly local); f. Kind of tax to be collected; g. Situs of taxation 2. The grant tax exemptions andcondonations. 3. The power to specify or provide for administrative as well as judicial remedies (Philippines Petroleum Corporation v. Municipality of Pililla, G.R. No.85318, June 3, 1991). Q: In order to raise revenue for the repair and maintenance of the newly constructed City Hall of Makati, the City Mayor ordered the collection of P1.00, called elevator tax, every time a person rides any of the high-tech elevators in the City Hall during the hours of 8am to 10am and 4pm to 6pm. Is the elevator tax a valid imposition? A: No. The imposition of a tax, fee or charge or the generation of revenue under the Local Government Code, shall be exercised by the Sanggunian of the local government unit concerned through an appropriate ordinance [Sec. 132, LGC]. The city mayor alone could not order the collection of the tax; as such, the elevator tax is an invalid imposition. (2003 Bar Question) UNEP COLLEGE OF LAW CHARACTERISTICS OF TAXATION Q: What are the characteristics of the power to tax? A. - 1. Comprehensive It covers persons businesses, activities, professions, rights and privileges. 2. Unlimited - It is so unlimited in force and searching in extent that courts scarcely venture to declare that it is subject to any restrictions, except those that such rests in the discretion of the authority which exercises it. (Tio v. Videogram Regulatory Board, G.R. No. 75697, June 18, 1987) 3. Plenary - It is complete. Under the NIRC,the BIR may avail of certain remedies to ensure the collection of taxes. 4. Supreme - It is supreme insofar as theselection of the subject of taxation is concerned. Q: Explain wide spectrum of taxation. A: It means that taxation is one that extends to every business, trade or occupation; to every object of industry; use or enjoyment; to every specie of possession. It imposes a burden which in case of failure to discharge the same may be followed by the seizure and confiscation of property after the observance of due process. POWER OF TAXATION COMPARED WITH OTHER POWERS OF THE STATE Q: What are the distinctions among the three inherent powers of the State?

TAXATION
Government or its political subdivision

POLICE POWER
Government or its political subdivision

EMINENT DOMAIN
Government or public service companies and public utilities To facilitate the taking of private property for public use On an individual as the owner of particular

Authority who exercises the power

Purpose

To rise revenue in order to support the government Upon the community or class of individuals

Promotion of general welfare through regulation


Persons affected

Upon the community or class of individuals

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property
Amount of monetary imposition

No ceiling except inherent limitations

Limited to the cost of regulation, issuance of license or surveillance


Benefits received

No imposition, the owner is paid the fair market value of his property The person receives the fair market value of the property taken from him/direct benefit results

5. Margin fee exaction designed to stabilize the currency; 6. Custom duties and fees duties charged upon commoditieson their being imported into or exported from a country; 7. Debt a tax is not a debt but is an obligation imposed by law. LICENSE FEE VS. TAX

Protection of a secured and organized society, benefits received from government/no direct benefit

Maintenance of healthy economic standard of society/no direct benefit

LICENSE FEE

TAX

Basis:
Police power Power of taxation.

Non-Impairment of contracts

Tax laws generally do not impair contracts, unless: government is party to contract granting exemption for a consideration

Purpose:
Contracts may be impaired

Contracts may be impaired

To regulate

To raise revenue.

Limitation:
Limited to costs of (1) issuing the license; and (2) necessary inspection or police surveillance Inherent and constitutional limitations.

Aspects of Taxation:
1. Levy or imposition of the tax; and 2. Enforcement or tax administration

Effect of nonpayment: Makes the business illegal. Does not make the business illegal.

Basic Principles of a sound tax system: A sound tax system must be: 1. sufficient to meet governmental expenditures (fiscal adequacy); 2. capable of being effectively enforced (administrative feasibility); and 3. based on the taxpayers ability to pay (theoretical justice). Impositions not strictly considered as taxes: 1. Toll amount charged for the cost and maintenance of property used; 2. Compromise penalty amount collected in lieu of criminal prosecution in cases of tax violations; 3. Special assessment levied only on land based wholly on the benefit accruing thereon as a result of improvements or public works undertaken by government within the vicinity; 4. License fee regulatory imposition in the exercise of the police power of the State;

Classification of Taxes: As to subject matter 1. Personal tax also known as capitalization or poll tax. 2. Property tax assessed on property of a certain class. 3. Excise tax imposed on the exercise of a privilege. 4. Custom duties duties charged upon commodities on being imported into or exported from a country; 5. Local taxes taxes levied by local government units pursuant to validly delegated power to tax; As to burden 1. Direct tax incidence and impact of taxation fall to one person and cannot be shifted to another. Page 5

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2. Indirect tax incidence and liability for the tax fall to one person but the burden thereof can be passed on to another. As to purpose 1. General taxes taxes levied for ordinary or general purpose of the government. 2. Special taxes levied for a special purpose. As to measure of application 1. Specific tax- tax imposed by the head or number or by some standard of weight or measurement. 2. Ad valorem tax tax imposed upon the value of the article. As to rate: 1. Progressive taxes rate increases as the tax base increases. 2. Regressive taxes rate increases as tax base decreases. SITUS OF TAXATION Situs of Taxation - an inherent mandate that taxation shall only be exercised on persons, properties and excises within the territory of the taxing power. 9. Transfer tax residence or citizenship of the taxpayer or location of the property; 10. Franchise tax State which granted the franchise; 11. Tax on corporations and other judicialentities law of incorporation. Intangible properties deemed with a situs in the Philippines: 1. franchise which must be exercised in the Philippines; 2. shares, obligations or bonds issued by a corporation organized and constituted in the Philippines in accordance with its laws; 3. shares, obligations or bonds issued by a foreign corporation 85% of its business is located in the Philippines; 4. shares, obligations or bonds issued by a foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; and 5. shares or rights in any partnership, business or industry established in the Philippines. (Sec. 104, R.A. 8424 or the CTRP)

LIMITATIONS ON THE POWER TO TAX Q. What are thefactors that determine the situs of taxation: A. 1. 2. 3. 4. 5. Nature of the tax; Subject matter of the tax; Citizenship of the taxpayer; Residence of the taxpayer; and Source of income

A. Inherent Limitations The following are the inherent limitations on the power to tax (SPINE): 1. 2. 3. 4. 5. Public Purpose of taxes; Non-delegability of the taxing power; Territoriality or situs of taxation; Tax exemption of government; International comity

Application of Situs of Taxation: 1. Tax on persons residence of the taxpayer; 2. Community tax residence or domicile of the person taxed; 3. Business tax where business is conducted; 4. Privilege or occupation tax where occupation is pursued; 5. Sales tax where transaction takes place; 6. Real property tax where property is located; 7. Personal property tax tangible; where it is physically located; intangible: subject to Sec. 104 of CTRP and principle of mobilia sequuntur personam; 8. Income where income is earned or residence or citizenship of the taxpayer; UNEP COLLEGE OF LAW Test in Determining Public Purpose 1. whether the thing to be furthered by the appropriation of public revenue is something which is the duty of the state, as a government, to provide 2. whether the proceeds of the tax will directly promote the welfare of the community in equal measure. Non-delegability of the taxing power: The power of taxation is peculiarly and exclusively legislative. Consequently, the

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taxing power as a general rule may not be delegated. Non-delegable Legislative Power: 1. selection of property to be taxed; 2. determination of the purposes for which taxes shall be levied; 3. fixing of the rate of taxation; 4. rules of taxation in general Delegable Legislative Power: 1. Authority of the President to fix tariff rates, import and export quotas (Art. VI, Sec. 28[2], 1987 Constitution). 2. Power of local government units to tax subject to limitations as may be provided by Local Government Code (Art. X, Sec. 5, 1987 Constitution). Situs of taxation as a limitation on the power to tax: (See the subheading on Situs of Taxation, supra.) arbitrary, despotic, capricious, or whimsical manner. 2. Equal Protection of the Law (Sec. 1, Art. III of the Constitution) Requisites for a valid classification: a. Must not be arbitrary; b. Must be based upon substantial distinctions; c. Must be germane to the purposes of law; d. Must not be limited to existing conditions only; and e. Must apply equally to all members of a class. 3. Uniformity, Equitability, and Progressivity of Taxation (Art. VI, Sec. 28 (1) of the Constitution) Definitions: a. Uniformity: All taxable articles or kinds of property of the same class shall be taxed at the same rate. A tax is uniform when it operates with the same force and effect in every place where the subject of it is found. b. Equitability: Taxation is said to be equitable when its burden falls to those better able to pay. c. Progressivity: Rate increases as the tax base increases. 4. Non-impairment of Contracts (Art. III, Sec. 10 of the Constitution)

Exemption of the Government from Taxes As a matter of public policy, property of the State or any of its political subdivisions devoted to government uses and purposes are generally exempt from taxation.

B. Constitutional Limitations

1. Due Process of Law (Sec.1, Art. III of the Constitution) Requisites: a. The interests of the public generally as distinguished from those of a particular class require the intervention of the State; and b. The means employed must be reasonably necessary to the accomplishment of the purpose and not unduly oppressive. In a string of cases, the SC held that in order that due process of law will not be violated, the imposition of the tax must not be done in an UNEP COLLEGE OF LAW

5. Non-imprisonment for Non-payment of Poll Tax(Art. III, Sec. 20 of the Constitution) 6. Origin of Appropriation, Revenue, and Tariff Bills (Art. VI, Sec. 24 of theConstitution; Tolentino vs. Sec. of Finance). 7. Non-infringement of Religious Freedom and Worship (Art. III, Sec. 24 of the Constitution)

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American Bible Society vs. City of Manila and Tolentino vs. Sec. of Finance rulings reconciled: The imposition in the former is a license tax which is intended to regulate the exercise of freedom of religion while in the latter is a revenue tax. With respect to revenue tax, Congress can choose anyone who will be taxed. Its imposition is a political question. Sect, or System of religion. (Art. VI, Sec. 29(2) d. Treatment of Taxes Levied for a Special Purpose.(Art.VI, Sec. 29 (3)) e. Internal Revenue Allotments to Local Government Units. (Art.X, Sec.6)

DOUBLE TAXATION
Definition: Taxing the same subject twice when it should be taxed only once. Also known as duplicate taxation.

8. Delegation of Legislative Authority to the President to Fix Tariff Rates, Import and Export Quotas (Art. VIII, Sec. 28(2) of the Constitution) 9. Tax Exemption of Properties Actually, Directly, and Exclusively Used for Religious, Charitable and Educational Purposes (See Art. VI, Sec. 28(3) of the Constitution; Lladoc vs. Commissioner; Province of Abra vs. Hernando). This provision refers only to property taxes.

Is double taxation prohibited in the Philippines? No. There is no constitutional prohibition against double taxation in the Philippines. It is something not favored but permissible (Pepsi Cola Bottling Co. v. City of Butuan, 1968).

10. Majority Vote of all Members of Congress Required in Case of a Legislative Grant of Tax Exemptions (Art. VI, Sec. 28 (4) of the Constitution)

Kinds of Double Taxation (DT)

11. Non-impairment of the Supreme Courts Jurisdiction in Tax Cases [Art. VIII, Sec. 2(1) and Art. VIII, Sec.5(b) of the Constitution] 12. Tax Exemption of Revenues and Assets of, including Grants, Endowments, Donations, or Contributions to, Educational Institutions (Art. XIV, Secs. 4(3) and (4) of the Constitution) 13. Other Provisions of the Constitution Which are Related to Taxation a. Power of the President to veto item or items in an Appropriation, Revenue, or Tariff Bill (Art. VI, Sec. 27 (2)) b. Necessity of an a Appropriation before Money may be paid out of the Public Treasury (Art. VI, Sec. 29 (1)) c. Non-appropriation of Public Money or Property for the benefit of any Church, UNEP COLLEGE OF LAW

1. Direct duplicate taxation/obnoxious DT in the objectionable or prohibited sense. REASON: This constitutes a violation of substantive due process. The same property is taxed twice when it should be taxed only once. Requisites: a. the same property is taxed twice when it should only be taxed once; b. both taxes are imposed on the same property or subject matter for the same purpose; c. imposed by the same taxing authority; d. within the same jurisdiction e. during the same taxing period; and f. covering the same kind or character of tax.

2. Indirect double taxation: Not legally objectionable. The absence of one or more of the foregoing requisites of obnoxious DT makes the DT indirect.

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

Reliefs from Effects of Double Taxation

1. Tax deductions Example: Vanishing transfer taxes.

deductions

in

B. Capitalization

2. Tax credits An amount allowed as a reduction of the Phil. Income tax on account of income tax(es) paid or incurred to foreign countries. It is given to a taxpayer in order to provide a relief from too onerous a burden of taxation in case where the same income is subject to a foreign and Phil. Income tax. This may be claimed by (1) citizens of the Philippines and (2) domestic corporations. 3. Exemptions 4. Treaties with other states 5. Principle of reciprocity

Definition: Reduction in the price of the taxed object equal to the capitalized value of future taxes which the purchaser expects to be called upon to pay.

C. Transformation

Definition: The manufacturer or producer upon whom the tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavors to recoup himself by improving his process of production, thereby turning out his units at a lower cost.

FORMS OF ESCAPE FROM TAXATION D. Tax Avoidance The following are the forms of escape from taxation: 1. 2. 3. 4. 5. 6. Shifting Capitalization Transformation Avoidance Exemption evasion-unlawful

Definition: exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income, in order to avoid or reduce tax liability.

E. Tax Evasion Definition: Used by the taxpayer through illegal or fraudulent means to defeat or lessen the payment of the tax.

Key: ESCATE

A. Shifting

Definition: Process by which tax burden is transferred from statutory taxpayer to another without violating the law.

Indicia of Fraud in Tax Evasion: 1. failure to declare for taxation purposes true and actual income derived from business for two consecutive years; or 2. substantial underdeclaration of income tax returns of the taxpayer for four consecutive years coupled with intentional overstatement of deductions.

Impact of taxation point on which tax is originally imposed.

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Definition: A grant of immunity, express or implied, to particular persons or corporations from the obligation to pay taxes. 1. Exemptions from taxation are highly disfavored in law. 2. He who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. If ambiguous, there is no tax exemption. Taxation is the rule, tax exemption is the exception. 3. He who claims an exemption must justify that the legislature intended to exempt him by words too plain to be mistaken. 4. He who claims exemption should convincingly prove that he is exempted. 5. Tax exemption must be strictly construed. 6. Tax exemptions are not presumed. 7. Constitutional grants of tax exemptions are self-executing. 8. Tax exemptions are personal. 9. Deductions for income tax purposes partake of the nature of tax exemptions; hence, they are also to be strictly construed against the taxpayer.

Q: Discuss the nature of tax exemptions. A: 1. Personal in nature and covers only taxes for which the grantee is directly liable. Note: It cannot be transferred or assigned by the person to whom it is given without the consent of the State. 2. Strictly construed against the taxpayer. 3. Exemptions are not presumed. But when public property is involved, exemption is the rule, and taxation, the exception.

What other grants are in the nature of tax exemptions? A: The following are also in the nature of tax exemptions: 1. Tax amnesties Tax condonations Tax refunds

Kinds of Tax Exemptions

As to basis: 1. Constitutional: Immunities from taxation which originate from the constitution 2. Statutory: Those which emanate from legislation As to form: 1. Express: Expressly granted by organic or statute law 2. Implied: When particular persons, properties, or excises are deemed exempt as they fall outside the scope of the 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.

2. 3.

Q: Are all refunds in the nature of tax exemptions? A: No. A tax refund may only be considered as a tax exemption when it is based either on a taxexemption statute or a tax-refund statute. Tax refunds or tax credits are not founded principally on legislative grace, but on the legal principle of quasi-contracts against a persons unjust enrichment at the expense of another. Note: The erroneous payment of tax as a basis for a claim of refund may be considered as a case of solutio indebiti, which the government is not exempt from its application and has the duty to refund without any unreasonable delay what it has erroneously collected.

Principles Governing Tax Exemptions

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Compensation or Set-Off Q: When does compensation or set-off take place? A: Compensation or set-off take place when two persons, in their own right, are creditors and debtors of each other (Article 1278, Civil Code). Q: What are the rules governing compensation or set-off as applied in taxation? A: General Rule: No set-off is admissible against the demands for taxes levied for general or local governmental purposes. Note: Taxes are not in the nature of contracts between the parties but grow out of duty to, and are positive acts of the government to the makingand enforcing of which, the personal consent of the individual taxpayer is notrequired. (Francia v. IAC, A.M. No. 3180, June 29, 1988) Exception: Where both of the claims of the government and the taxpayer against each other have already become due, demandable,and fully liquidated, compensation takes place by operation of law and both obligations are extinguished to their concurrent amounts. Inthe case of the taxpayers claim against the government, the government must have appropriated the amount thereto. (Domingovs. Garlitos, G.R. No. L-18849, June 29, 1963) Q: Can an assessment for a local tax be the subject of set-off or compensation against a final judgment for a sum of money obtained by a taxpayer against the local government that made the assessment? A: No. Taxes and debts are of different nature and character. Hence, no set-off or compensation between the two different classes of obligations is allowed. The taxes assessed or the obligation of the taxpayer arising from law, while the money judgment against the government is an obligation, arising from contract, whether express or UNEP COLLEGE OF LAW implied. Inasmuch as taxes are not debts, it follows that the two obligations are not susceptible to set-off or legal compensation. (2005 BarQuestion) Q: What is the Doctrine of Equitable Recoupment? A: It is a principle which allows a taxpayer, whose claim for refund has been barred due to prescription, to recover said tax by setting off the prescribed refund against a tax that may be due and collectible from him. Under this doctrine, the taxpayer is allowed to credit such refund to his existing tax liability. Note: The Supreme Court, rejected this doctrine in Collector v. UST (G.R. No. L-11274, Nov. 28, 1958), since it may work to tempt both parties to delay and neglect their respective pursuits of legal action within the period set by law. Compromise Q: What is meant by compromise? A: It is an agreement between two or more persons who, to avoid lawsuit, amicably settle their differences on such terms and conditions as they may agree on. It implies the mutual agreement by the parties in regard to the thing or subject matter which is to be compromised. It is a contract whereby the parties, by reciprocal concessions avoid litigation or put an end to one already commenced. Q: When is compromise allowed? A: Compromises are generally allowed and enforceable when the subject matter thereof is not prohibited from being compromised and the person entering such compromise is duly authorized to do so. Q: Who are the persons allowed to enter into compromise of tax obligations? A: The law allows the following persons to do compromise in behalf of the government:

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1. BIR Commissioner, as expressly authorized by the NIRC, and subject to the following conditions: a. When a reasonable doubt as to validityof the claim against the taxpayer exists; or b. The financial position of the taxpayerdemonstrates a clear inability to paythe assessed tax. (Sec.204 [A], NIRC) 2. Collector of Customs, with respect tocustoms duties limited to cases where the legitimate authority is specifically granted such as in the remission of duties (Sec. 709, TCC) 3. Customs Commissioner, subject to the approval of the Secretary of Finance, in cases involving the imposition of fines, surcharges, and forfeitures. (Sec.2316, TCC) Tax Amnesty A tax amnesty, being a general pardon or intentional overlooking by the state of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law, partakes of an absolute forgiveness or waiver by the government of its right to collect what otherwise would be due to it, and in this sense, prejudicial thereto, particularly to give tax evaders, who wish to relent or are willing to reform a chance to do so and become a part of the new society with a clean slate. (Republic v. IAC, 1991) Q: Distinguish exemption. tax amnesty from tax CONSTRUCTION AND INTERPRETATION OF TAX LAWS Q: What is the nature of tax laws? A: Tax laws are: 1. Not political 2. Civil in nature 3. Not penal in character or burden to which others are subjected
How applied

Applied retroactively There is revenue loss since there was actuallytaxes due but collection was waived by the government.

Applied prospectively None, because there wasno actual taxes due as theperson or transaction isprotected by taxexemption.

Presence of actual revenue loss

Q: Does the mere filing of tax amnesty return shield the taxpayer from immunity against prosecution? A: No. The taxpayer must have voluntarily disclosed his previously untaxed income and must have paid the corresponding tax on such previously untaxed income. (People v. JudgeCastaeda, 165 SCRA 327[1988])

Q: How are tax laws construed? A: 1. Generally, no person or property is subject to tax unless within the terms or plain import of a taxing statute. 2. Tax laws are generally prospective in nature. 3. Where the language is clear and categorical, the words employed are to be given their ordinary meaning. 4. When there is doubt, tax laws are strictly construed against Page 12

TAX AMNESTY Immunity from all criminal, civil and administrative obligations arising from nonpayment of taxes
Grantee

TAX EXEMPTION Immunity from civilliability only

Scope of immunity

General pardon given toall erring taxpayers UNEP COLLEGE OF LAW

A freedom from a charge

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the Government and liberally in favor of the taxpayer. Note: Taxes, being burdens, are not to be presumed beyond what the statute expressly and clearly provides. 5. Provisions of the taxing act are not to be extended by implication. 6. Tax laws are special laws and prevail over general laws. Q: State the rule on construction of exemptions. A: General Rule: Strict construction of tax exemptions against grantee. Exception: 1. If the statute granting exemption expressly provides for liberal interpretation; 2. In case of exemptions of public property; 3. Those granted to traditionalexemptees; 4. Exemptions in favor of thegovernment; 5. Exemption by clear legislative intent. 6. In case of special taxes (relating tospecial cases affecting special persons). Note: The intent of the legislature to grant tax exemption must be in clear and unmistakable terms. Exemptions are never presumed. The burden of establishing right to an exemption is upon the claimant. Q: Are the tax exemptions strictly construed against government political subdivision or instrumentality? A: No. It is a recognized principle that the rule on strict interpretation does not apply in the case of exemptions in favor of a government political subdivision or instrumentality. The reason for the strict UNEP COLLEGE OF LAW Page 13 tax interpretation does not apply in the case of exemptions running to the benefit of the government itself or its agencies. In such a case, the practical effect of an exemption is merely to reduce the amount that has to be handled by government in the course of its operations. For these reasons, provisions granting exemptions to government agencies may be construed liberally, in favor of non-taxability of such agencies. (Maceda vs. Macaraig, 197 SCRA 771) Q: How are tax rules and regulations construed? A: The construction placed by the office charged with implementing and enforcing the provisions of a Code should be given controlling weight unless such interpretation is clearly erroneous. Q: How are penal provisions of tax laws construed? A: Penal provisions are given strict construction so as not to extend the plain terms thereof that might create offenses by mere implication not so intended by the legislative body. (RP v. Martin, G.R. No. L-38019, May 16, 1980) Q: What is meant by the strict construction rule? A: When it is said that exemptions must be strictly construed in favor of the taxing power, this does not mean that if there is a possibility of a doubt it is to be at once resolved against the exemption. It simply means that if, after the application of all the rules of interpretation for the purpose of ascertaining the intention of the legislature, a well-founded doubt exists, then the ambiguity occurs which may be settled by the rule of strict construction. Note: Moreover, rulings are not the same as laws or rules and regulations. They only issue upon query by a taxpayer.

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1. Assessment and collection of all national internal revenue taxes, fees, and charges 2. Give effect to and administer the supervisory and police power conferred to it by the Tax Code or other laws 3. Enforcement of all forfeitures, penalties and fines in connection therewith 4. Execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts

TAX ENFORCEMENT AND ADMINISTRATION

Sources of Tax Laws (Key: SPEC2TRA BLT) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Statutes Presidential Decrees Executive Orders Constitution Court Decisions Tax Codes Revenue Regulations Administrative issuances BIR Rulings Local Tax Ordinances Tax treaties and conventions with foreign countries

Assessment Defined: It is a finding by the taxing agency that the taxpayer has not paid his correct taxes. It is also a written notice to a taxpayer to the effect that the amount stated therein is due as a tax, and containing a demand for the payment thereof.

Burden of proceedings: -

proof

in

pre-assessment

Requisites of Tax Regulations 1. 2. 3. 4. Reasonable Within the authority conferred Not contrary to law Must be published

Retroactivity of BIR Rulings: General Rule: Prospective. Exceptions: 1. Where no vested right will be impaired; 2. Where the law allows retroactive application; and 3. If there is bad faith on the part of the taxpayer.

There is a presumption of correctness on the part of the CIR, thus the burden of proof is on the taxpayer. Otherwise, the finding of the CIR will be conclusive and the CIR will assess the taxpayer. Such finding is conclusive even if CIR is wrong if the taxpayer does not controvert.

Principles Governing Tax Assessments: (PADDD) 1. Assessments are prima facie presumed correct and made in good faith 2. Assessments should be based on actual facts 3. Assessment is discretionary on the part of the Commissioner 4. The authority vested in the Commissioner to assess taxes may be delegated. 5. Assessments must be directed to the right party.

Agencies Involved in Tax Administration: 1. BIR 2. Bureau of Customs 3. Provincial, city, and municipal assessors and treasurers

Powers and Duties of the BIR (Sec. 2, CTRP): (AGEE)

Means Employed in the Assessment of Taxes (Sec. 6, CTRP): (BETI-PPEA)

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1. Examination of tax returns 2. Use of the best evidence obtainable 3. Inventory taking, surveillance and use of presumptive gross sales and receipts 4. Termination of taxable period 5. Prescription of real property values 6. Examination of bank deposits to determine the correct amount of the gross estate 7. Accreditation and registration of tax agents 8. Prescription of additional procedural or documentary requirements. ineffective unless such proceedings are began immediately.

Instances when the Commissioner may inquire into Bank Deposits: 1. When determining the gross estate of a decedent; 2. Where a taxpayer offers to compromise his tax liability on the ground of financial inability in which case he must submit a waiver.

Examination of Income Tax Returns: General Rule: confidential. Exceptions: Inspection of the return may be authorized: 1. 2. 3. upon written order of the President of the Philippines; under Finance Regulations no. 33 of the Secretary of Finance; when the production of the tax return is material evidence in a criminal case wherein the Government is interested in the result; by the taxpayer himself; Income tax returns are

Inspection and Examination of Books and Records, When Made General Rule:Shall be made once in a taxable year. Exceptions: 1. in cases of fraud, irregularity, or mistakes 2. when taxpayer requests a reinvestigation 3. to verify compliance with withholding tax laws and regulations 4. to verify capital gains tax liabilities 5. upon order of the Commissioner

4.

25% Surcharge on the Amount of the Tax Due is imposed in the Following Cases: 1. failure to file any return required under Tax Code or regulations on the date prescribed 2. filing a return with the wrong internal revenue officer 3. failure to pay the tax within the time prescribed for its payment 4. failure to pay the full amount of tax shown on any return required to be filed under the Tax Code or regulations or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment

Cases when Commissioner may Assess Taxes on the Basis of the Best Evidence Obtainable: 1. a person fails to file a return or other document at the time prescribed by law 2. he willfully or otherwise files a false or fraudulent return or other document

Grounds for Termination of Taxable Period: (CRIP) 1. 2. 3. 4. the taxpayer is retiring from business subject to tax he intends to leave the Philippines or remove his property therefrom he hides or conceals his property he performs any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year or renders the same totally or partly

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VAT, thus, forms a substantial portion of consumer expenditures. Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by the seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax burden. In adding or including the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted only to theintermediate buyer andultimately to the final purchaser is the burden of the tax. Stated differently, a seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or consumer of such goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax.(Contex v. CIR, GR No. 151135, July 2, 2004) Q: What is the effect of VAT being an indirect tax on exemptions? A: If a special law merely exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VATregistered suppliers, the purchase transaction is not exempt. It is because VAT is a tax on consumption, the amount of which may be shifted or passed on by the seller to the purchaser of the goods, properties or services. (CIR v. SeagateTechnology, G.R. No. 153866, Feb. 11, 2005) Q: How are transactions classified under the VAT system? A: 1. VAT taxable transactions a. Subject to 12% VAT rate b. Zero-rated transactions UNEP COLLEGE OF LAW Page 16

EXPANDED VALUE ADDED TAX


VALUE-ADDED TAX Q: What is value-added tax (VAT)? A: It is an indirect tax and the amount of tax may, by law, be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. (Sec. 105, NIRC) It is a tax on the estimated market value added to a product or material at each stage of its manufacture or distribution, ultimately passed on to the consumer. Q: What is the nature of VAT? A: It is an indirect tax. VAT is a tax on consumption levied on the sale, barter, exchange, or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines. The seller is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. However, in the case of importation, the importer is the one liable for the VAT. (Sec 4.105-2 RR 16-2005) Q: Explain VAT as an indirect tax. A: The amount of tax paid on the goods, properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee. Unlike a direct tax, such as the income tax, which primarily taxes an individuals ability to pay based on his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions involving the same. The

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2. Exempt transactions Q: Define taxable transactions under the VAT law. A: Taxable transactions are those transactions which are subject to VAT either at the rate of 12% (effective January 1, 2006, VAT rate was increase from 10-12%) or 0%, and the seller shall be entitled to tax credit for the VAT paid on purchases and leases of goods, properties or services(Commissioner v. Cebu Toyo Corporation, G.R. No. 149073, February 16, 2005) Q: Mr. A, a VAT-exempt retailer sells to Mr. O, a non-VAT exempt purchaser. Is Mr. O liable to pay VAT on the transaction? A: Yes. The purchaser is subject to VAT because it is merely added as part of the purchase price and not as a tax because the burden is merely shifted. The seller is still exempt because it could pass on the burden of paying the tax to the purchaser. Q: Lilys Fashion Inc. is a garment manufacturer located and registered as a Subic Bay Freeport Enterprise under R.A. 7227 and a non-VATtaxpayer. And as such, it is exempt from payment of all local and national internal revenue taxes. Duringits operations, it purchased various supplies and materials necessary in the conduct of its manufacturing business. The supplier of these goods shifted to Lilys Fashion, Inc. the 10% VAT on the purchased items amounting to P500,000. LilysFashion Inc. filed with the BIR a claim for refund for the input tax shifted to it by the suppliers. If you were the CIR will you allow the refund? A: No. The exemption of Lilys Fashion Inc. is only for taxes which it is directly liable, hence, it cannot claim exemption for tax shifted to it, which is not at all considered a tax to the buyer but part of the purchase price. Lilys Fashion Inc. is not a taxpayer in so far as the passed-on tax is concerned and therefore, it cannot claim for a refund of a tax merely, shifted to it. Only taxpayers are allowed to file a claim for refund. (2006 Bar Question) UNEP COLLEGE OF LAW Q: What is Tax Cascading? A: An item is taxed more than once as it makes its way from production to final retail sale.

Q: Explain how VAT is not a cascading tax? A: VAT is merely added as part of the purchase price and not as a tax because the burden is merely shifted. Thus, there can be no tax on the tax itself. Q: What are the advantages in imposing VAT? A: 1. 2. 3. 4.

Economic growth Simplified tax administration Promote honesty Higher governmental revenues of the

Q: Is the VAT law violative administrative feasibility principle?

A: No. The VAT law is principally aimed to rationalize the system of taxes on goods and services. Thus, simplifying tax administration and making the system more equitable to enable the country to attain economic recovery. (Kapatiran ng Mga Naglilingkod sa Pamahalaan v. Tan, G.R.No.81311, June 30, 1988) Q: Is VAT regressive? A: Yes. By its very nature, it is regressive inasmuch as the VAT paid by the consumer or business for every goods bought or services enjoyed is the same regardless of income. In other words, the VAT paid eats the same portion of an income, whether big or small. The VAT taxes you on how much you spend rather than how much you make. It is usually regressive because lower income people generally spend a higher percentage of their income and save less than higher income people. Q: How is the regressive effect of VAT minimized?

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A: In the case of VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of certain transactions while granting exemptions to other transactions. The transactions which are subject to VAT are those which involve goods and services which are used or availed of mainly by higher income groups. (Ibid.) Characteristics of VAT Q: What are the characteristics of VAT? A: 1. It is an indirect tax where tax shifting is always presumed 2. It is consumption-based 3. It is imposed on the value added in each stage of distribution 4. It is a credit-invoice method value-addedtax 5. It is not a cascading tax. (1996 BarQuestion) Impact of Tax Q: Who bears the impact of tax (VAT)? A: It is on the seller upon whom the tax has been imposed. Incidence of Tax Q: Who bears the incidence of tax (VAT)? A: It is on the final consumer, the place at which the tax comes to rest. The tax is shifted to the buyer of the goods, properties, or services. Tax Credit Method Q: Explain the Tax Credit Method (also called invoice method) of collecting VAT? A: The input tax shifted by the seller to the buyer is credited against the buyers output taxes when he in turn sells the taxable goods, properties or services. Q: What is the Destination Principle or theCross Border Doctrine as used in VAT? 1. Any person whether natural of juridical who, in the course of trade or business, sells, barters, exchanges, or leases goods or properties, or renders services; 2. Any person who imports goods whether for business or non-business purpose; and provided, gross receipts is more than P550,000.00, otherwise, more than P100T but less than P550T 3% percentage tax less than P100T no business tax liability A: Under this doctrine, goods and services are taxedonly in the country where they are consumed. No VAT shall be imposed to form part of the cost of goods destined outside the territorial border of the taxing authority. Thus, exports are zero-rated, while imports are taxed. Actual shipment of the goods from the Philippines to a foreign country is a precondition of an export sale following thedestination principle being adhered to by our VAT system. Q: Is there any exception to the destination principle? A: Yes. The law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that are performed in the Philippines, "paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP." Hence, actual or constructive export of goods and services from the Philippines to a foreign country must be zero-rated for VAT; while, those destined for use or consumption within the Philippines shall be imposed the twelve percent (12%) VAT. Persons liable to Pay the VAT: ( S B E L S I )

Transactions Subject to VAT: (S I T S )

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1. Every sale, barter, or exchange, leases goods or properties made in the course of trade or business; 2. Transactions deemed sale for VAT purposes; 3. Importation of goods; and 4. Every sale of service made in the course of trade or business other than services rendered by persons subject to other percentage taxes. inventory or the actual VAT paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.

Export Sales sale and shipment or exportation of goods from the Philippines to a foreign country irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported, or foreigncurrency denominated sales.

Elements of VAT :

1. Sale must be made in the Philippines; 2. Sale must be of taxable goods, properties or services; and 3. Sale must be made by a taxable person in the course or furtherance of his business.

Foreign Currency Denominated Sales sales to non-residents of goods assembled or manufactured in the Philippines for delivery to residents in the Philippines and paid for in convertible foreign currency remitted through the banking system in the Philippines.

ZERO-RATED VS. EXEMPT TRANSACTIONS ZERO-RATED EXEMPT TRANSACTIONS

Rate Structure under the VAT System: 1. 0% rate for export sales and persons whose sales are effectively zero-rated and zero-rated sales of services; and 2. 10% for all other articles and transactions covered by the VAT. Input Tax tax on purchase price of goods which is passed on or shifted to a buyer / purchaser /lessee by the supplier / seller / lessor. It is the VAT paid by a VAT-registered person in the course of his trade or business. Output Tax-- VAT due on the sale of taxable goods or services by any person registered or required to register for VAT purposes. Transitional Input Tax Credit person who becomes liable to VAT or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory of goods, material and supplies equivalent to 8% of value of such UNEP COLLEGE OF LAW

Extent:
All value added tax is Only removes the value added tax at removed the exempt stage

Claim for refund:


Taxpayer can claim the refund of input taxes passed on to him by the supplier, etc. or credit such input taxes against his liabilities for output taxes on his other non-zero rated transactions Taxpayer is not entitled to credit or refund of the input tax passed on to him by the supplier, etc.

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Scope:
Generally, taxable sales, and taken into account in determining turn-over or sales for sales for VAT-registration purposes. Not taxable sales and therefore not taken into account in determining turn-over or VAT-registration purposes Transactions deemed sales for VAT purposes (Sec. 106B) 1. Transfer, use or consumption not in the course of trade or business of goods originally intended for sale or for use in the course of business; 2. Distribution or transfer to shareholders or investors as share in the profits of the VAT -registered persons; 3. Consignment of goods if actual sale is not made within 60 days following the date of consignment; 4. Distribution or transfer to creditors in payment of debt; 5. Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation.

Registration
requirement: Zero-rated person may still register for VAT. Exempt person may not register for VAT.

Registration Requirements: 1. Mandatory every person who in the course of trade or business, sells, barters, exchanges,leases goods or services for others, if the aggregate amount of actual or expected gross sales and / or gross receipts exceeds P550T for any 12-month period.

2. Optional -- any of the following persons may, at their option, apply for VAT registration: a. Seller of goods or services whose taxable sale or gross receipts do not exceed P550T for any 12-month period; b. Seller of agricultural or marine food products in their original state; c. Seller of fertilizer, seeds, seedlings and fingerlings, fish livestock and poultry feeds,including ingredients whether locally produced or imported, used in the manufactureof finished foods; d. Seller of non-food agricultural, marine and forest products in their original state; e. Seller of cotton and cotton seeds in the original state, and copra. ( 550 FANC ) N.B.: Items b to e, refer to export sales only

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