TAXATION 1 MIDTERMS

TAXATION mode by which governments make exactions for revenue in

order to support their existence and carry out their legitimate objectives.
PART ONE: GENERAL PRINCIPLES
CONCEPT
1. Power to tax
2. act or process by which taxing power is exercised
NATURE
Inherent Attribute of Society
Legislative in Character
THEORIES
1. Lifeblood Theory / Necessity Theory
CIR vs PINEDA (solidarity applies to taxes because it is not an
ordinary contract)
Taxes are the lifeblood of the Government and their prompt
and certain availability are an imperious need
CIR vs Algue ( valid deduction for actual services rendered as
promotional fees)
Taxation is the indispensable and inevitable price for civilized
society
Vera vs Hernandez (Taxes against a decendents estate in the
form of exception from the application of the statute of nonclaims)
Upon taxation depends the Governments ability to serve the
people for whose benefit taxes are collected.

2.Benefits-Protection/ Reciprocity Theory (Doctrine of Symbiotic

Relationship)
PURPOSE
1. Revenue Raising
2. Regulation
3. Promote Public Welfare
4. Reduction of Social inequality
5. Encourage economic growth
PRINCIPLES OF A SOUND TAX SYSTEM (FAT)
1. Fiscal Adequacy sources of government revenue must be sufficient
to meet government expenditures and other public needs
2. Administrative Feasibility tax laws must be capable of being
effectively enforced with the least inconvenience to the taxpayer
3. Theoretical Justice based on taxpayers ability to pay
ASPECTS OF TAXATION
1. Levy
2. Assessment and collection
3. Payment
ESSENTIAL CHARACTERISTICS
1. It is imposed by the State which has jurisdiction over the person,
property or excises
2. It is levied by the lawmaking body
3. It is an enforced contribution
4. It is generally payable in money
5. It is proportionate in character
6. It is levied on persons, property and excises
7. It is levied for public purpose
8. It is paid at regular periods or intervals
9. It is personal to the taxpayer
Enforced contribution from person and property
Pecuniary burden in payment of money

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Assessed in reasonable rule of apportionment

Territorial
Levy for public purpose

CLASSIFICATION OF TAX
As to subject matter
a. personal e.g. community tax
b. property e.g. real property tax
c. excise or privilege e.g. donors tax, estate tax, VAT, income tax
As to burden or incidence
a. Direct
b. Indirect VAT, percentage tax
As to determination of amount
a. Specific tax on cigars, distilled spirits
b. Ad-valorem real property tax
As to purpose
a. General or Fiscal income tax
b. Special, regulatory or sumptuary customs duties
As to taxing authority
a. National
b. Local
As to graduation
a. Progressive
b. regressive
c. Mixed
d. Proportionate
TAX
Power of taxation
Revenue
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LICENSE FEE
Police power
Regulation

Amount is unlimited

Normally paid after

the start of business
Taxes cannot be
surrendered except
for lawful
consideration
Non payment does
not make the
business illegal but
may be ground for
criminal prosecution

Amount is limited to
to the cost of (1)
issuance of license
and (2) inspection
and surveillance
except for non-useful
occupation
Normally paid before
the commencement
of business
May be with or
without
consideration
Nonpayment makes
the business illegal

Victoria milling vs mun of victorias (sugar refineries)

Designation given does not decide whether the imposition is a licence
tax or a licence fee
3 kinds of licenses:
i. for regulation of useful occupation (police power)
ii. for restriction or regulation of non-useful occupation (police
power)
iii. for revenue (tax)
Morcoin vs city of manila
The amount of license fee shall not be confiscatory, prohibitive
or in unlawful restraint of trade, but should be approximately
commensurate with and sufficient to cover the necessary
expenses of issuing license and of such inspection
Golden ribbon vs city of butuan (sales tax on produced lumber)

The character or nature of tax is determined not by the title of the act
or ordinance, but by its operation, practical results and incidents.
Progressive vs qc
If the generating revenue is the primary purpose and regulation
is merely incidental, the imposition is tax
A charge of a fixed sum which bears no relation at all to the cost
of inspection and regulation may be held to be a tax
Pal vs edu
If the purpose is primarily revenue, or if revenue is, at least, one
of the real or substantial purposes, then the exaction is properly
called tax.
TAX
Enforced
proportional
contribution from
persons of property
A demand of
sovereignty
Levied for the
support of the
government
Amount is
determined by the
sovereign

May be imposed only

by the State

TOLL
A consideration
which is paid for the
use of a property
which is of a public
nature
A demand of
proprietorship
For the use of
anothers property
Amount is
determined by the
cost of the property
or of the
improvement
By the government or
private individual

City of Ozamis vs Lumampas (parking fees or toll fees?) (1975)

Toll connotes the act of passing along the road and the collection of toll
fees may not be imposed unless approved by the President of the PH
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TAX
Enforced
proportional
contribution from
persons of property

Levied on land,
persons, property,
income, business etc
Personal liability of
taxpayer
Based on necessity
and partially on
benefits
General application

SPECIAL
ASSESSMENT / LEVY
Enforced
proportional
contribution from
owners of lands
especially or
peculiarly benefited
by public
improvements
Levied on land

Cannot be made a
personal liability of
the person assessed
Based solely on
benefits
Special application
only as to particular
time and place

TAX vs DEBT
Taxes are not contractual in nature, they are mandatory
TAX
Based on Law
Failure to pay may
result in
imprisonment
Not subject to
compensation or set
off
Imposed by public

DEBT
Contract
No imprisonment for
non-payment
May be subject to
compensation
By private individuals

authority
Philex vs CIR
Debts are due to the Government in its corporate capacity, while taxes
are due to the government in its sovereign capacity
SCOPE AND LIMITATIONS
Sison vs Ancheta
Arbitrariness - A mere allegation does not suffice
Where the assailed tax measure is beyond the JD of the state, or
is not for public purpose, or in case of a retroactive statute is so
harsh and unreasonable, it is subject to attack on due process
grounds.
Pepsi co vs Mun. of Tanauan (delegation to local government the power
to tax)
Comm vs Algue supra
i. INHERENT LIMITATIONS (PITSE)
1. Public Purpose
Test:
1. Duty Test
2. Promotion of General Welfare Test (Direct not incidental)
Pascual vs Sec of Public Works
It is the essential character of the direct object of the
expenditure which must determine its validity. Incidental
advantageto the public or the State, which results from the
promotion of private interests, does not justify their aid by the
use of public money.
Gomez vs Palomar (anti-TB stamp; mail users were already a class by
themselves)
The eradication of a dreaded disease is a public purpose
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just because all other needs are not addressed, does not mean it is not
for public purpose
Lutz vs Araneta (levied for the aid and support exclusively of the sugar
industry VALID)
Tio vs VRB
The public purpose of a tax may legally exist even if the motive which
impelled the legislature to impose the tax was to favor one industry over
another.
2. Inherently legislative (Non-delegation)
Abakada vs Ermita
There is no undue delegation of legislative power but only a
discretion as to the execution of the law
3. Territorial (Situs)
CIR vs Marubeni
All services for the design, fabrication, engineering and
manufacture of materials and equipment were made and
completed in Japan. These services were rendered outside
Philippines taxing jurisdiction and are therefore not subject to
contrators tax
4. Subject to international comity
5. Exemption of government agencies and instrumentalities (political
subdivisions)
II. CONSTITUTIONAL LIMITATIONS
1. Due Process and Equal Protection Clause (Art III, Sec 1)
*Sison vs Ancheta
*Victoria Milling case
2. Non-impairment Clause (Art III, Sec 10)
3. Non-imprisonment for Non-payment of Poll Tax (Art III, Sec 20)
4. Art VI, Sec 28
a. Uniform and Equitable

City of Baguio vs De Leon

A tax is considered uniform when it operates with the
same force and effect in every place where the subject
may be found
Eastern Technical vs Alfonso
All taxable articles or kinds of property of the same
class shall be taxed at the same rate
b. Progressive system of Taxation
c. Delegated Authority of President to Impose Tariff rates, Import
and Export Quotas, Tonnage and Wharfage duties
d. Tax exemption of Religious, Charitable and Educational
Entities (ADE)
Herrera vs QC
The exemption extends to facilities which are incidental
to and reasonably necessary for the accomplishment of
the main purpose
Abra Valley Collge vs Aquino
Voting Requirement for Tax Exemption by concurrence of all
members of Congress
5. Prohibition on Use of Tax Levied for special purpose or special
Assessments [Art VI, sec 29 (3)]
Lutz vs Araneta (sugar industry)
6. Supreme Courts Power to Review Judgments or Orders of Lower
Court [Art VIII, Sec 5(B)]
7. Grant of Taxing Authority to LGUs (Art X, Sec 5)
The local Tax Code only allows provinces and cities to impose a
tax on the transfer of ownership of real property. Municipalities
are prohibited from imposing said tax that provinces are
specifically authorized to levy.
8. Tax Exemption to Non-stock, Non-profit Educational Institution [Art
XIV, Sec 4(3)]
MFABIAN

ADMU vs CIR
DLSU vs CIR
9. (Partial) Veto of the President (Art VI, Sec 27)ART

INTERPRETATION AND CONSTRUCTION OF TAX STATUTES

1. Tax laws are prospective in nature
2. Legislative intention must be considered
3. Where there is doubt In case of doubt, tax statutes imposing
payment of tax, laws are construed strictly against the government
4. Where language is plain rule of strict construction does not apply
5. Public purpose is always presumed
6. Provisions of the taxing ac are not to be extended by implication
7. Tax laws are special laws and prevail over general laws.
* When the SC decides a case, it does not pass a new law, but merely
interprets a pre-existing one
HORNBOOK DOCTRINE a statute will not be construed as imposing tax
unless it does so clearly, expressly and unambiguously.
LEGISLATIVE INTENT/ TAX STATUTES Liberally in favor of the taxpayer
and strictly against the taxing authority
VALIDITY OF TAX LAW and on the issue of TAX POWER presumed
Valid *The power exists is the rule, the limitation of such power is the
exception
Government is never estopped from collecting taxes because of mistakes
and errors on the part of its agent (exception: in the interest of justice
and fair play)
TAX EXEMPTION not presumed; strictly against the grantee (strictissimi
juris)
Taxation is the rule and the exemption is the exception

Floro Cement vs Gorospe cement not mineral

Luzon Stevedoring vs CTA- tugboat not exempt
CIR vs GuillermoEXCEPTIONS: (when exemptions are construed liberally in favor of
grantee)
1. Law provides for such liberal construction
2. Under special circumstances to special classes of persons
3. In favor of the Government, its polsub or instru
4. traditional exemptees (religious, charitable, educ)
REVOCATION OF TAX EXEMPTIONS
The exemption may be withdrawn at the pleasure of the taxing authority.
Exception:
a. if the tax exemption constitutes a binding contract and for valuable
consideration, the government cannot unilaterally revoke the tax
exemption
b. If the tax exemption is granted by the consti, its revocation may be
effected through consti amendment only
Tax statutes strictly against the gov vs tax exemption strictly against
the taxpayer
IT MUST BE DETERMINED FIRST IF THE PERSON IS COVERED BY THE TAX
LAW, APPLYING THE RULE OF STRICT INTERPRETATION OF LAWS
IMPOSING TAXES AND OTHER BURDENS ON THE POPULACE, BEFORE
ASKING THE SAME PERSON TO PROVE HIS EXEMPTION THEREFOR.
TAX EXEMPTIONS (immunity or privilege) vs
TAX REFUNDS CIR vs San Roque - failure to comply with 120day waiting
period for the application of tax refund
TAX AMNESTY governments absolute forgiveness or waiver
TAX EXCLUSIONS

CIR vs Fireman Insurance

MFABIAN

Documentary stamp tax

There is no justification for the govt which has already realized
the revenue which is the object of the tax, to require payment of
the same tax again for the same docs (unjust enrichment)

CLASSIFICATION OF TAX EXEMPTION

1. Express
2. Implied (ex. Government)
3. Contractual (government in proprietary functions)
vs Tax exemption under Franchise (government in govt
functions)
Cagayan electric vs CIR
Congress could impair petitioners legislative
franchise by making it liable for income tax.
Franchise is subject to amendment, alteration, or
repeal by the Congress when the public interest
so requires.
Misamis Oriental vs Cepalco

SPECIFIC DOCTRINES IN TAXATION

A. PROSPECTIVITY
Exception :
1. When the laws otherwise provides (Hydro resources vs CA)
2. Retroactivity may also be allowed if it will not deny due process

Hilado vs Collector
Tax laws are neither political nor penal in nature, and they are deemed
laws of the occupied territory rather than of the occupying enemy
Central azucarera vs CTA
Expost Facto Rule, except for the penalty imposed (not the interest),
would be inapplicable

Republic vs Fernandez same ruling

Lorenzo vs Posadas
CIR vs Marubeni
an amendatory act operates prospectively. It may not be given a
rectroactive effect unless it is so provided expressly or by necessary
implication and no vested right or obligations of contracts are thereby
impaired

NO DOUBLE TAXATION
1. There can be no DT where the State merely imposes a tax on every
separate and distinct business in which a party is engaged in.
2. Both a license fee and a tax may be imposed on the same business or
occupation, or for selling the same article
3. Subjecting the interest on bank deposits to 5% gross receipt tax
Double Taxation standing alone and not being forbidden by our
fundamental law is not a valid defense against the legality of a tax
measure

The reversal of a ruling shall not be given a retroactive application, if said

reversal will be prejudicial to the taxpayer.
B. IMPRESCRIPTIBILITY OF TAXES
Exception:
1. When the laws otherwise provides (CIR vs Ayala)
C. DOUBLE TAXATION
i. same thing or activity is taxed twice when it should be taxed only once
ii. same tax period
iii. same purpose
iv. same kind of character of tax
Direct Duplicate Taxation (obnoxious) when the levies are made by
the same taxing authority
Indirect Duplicate Taxation (permissible) the absence of one or more
of the elements
P&G vs Jagna
CIR vs Lednicky
Measures adopted by sovereign to avoid resulting inequities:
a. Treaty provisions against DT
b. Reciprocity provisions
c. Tax credit provisions
MFABIAN

D. POWER TO TAX INVOLVES THE POWER TO DESTROY

i. the power to tax must be exercised with caution to minimize injury to
the proprietary rights of a taxpayer
ii. if the tax is lawful and not violative of any of the inherent and consti
limitations, the fact alone that it may destroy an activity or object of
taxation will not entirely permit the courts to afford any relief
iii. a subject or object that may not be destroyed by the taxing authority
may not likewise be taxed.
Sison vs Ancheta
A tax may not be imposed on the exercise of a fundamental right since
to otherwise permit it would amount to destroying that fundamental
right.
E. ESCAPE FROM TAXATION
TAX AVOIDANCE tax saving device within the means sanctioned by law
e.g. estate planning
Delpher vs IAC two pieces of real estate were transferred to
the family corporation
TAX EVASION is a scheme used outside of those lawful means, and
when availed of, usually subjects the taxpayer to further or additional
civil or criminal liabilities.
3 Factors:

a. the end to be achieved i.e. payment of less or non-payment

b. an accompanying state of mind which is being described as
being evil, in bad faith
c. a course of action which is unlawful
F. DOCTRINE OF EQUITABLE RECOUPMENT
A claim for refund barred by prescription may be allowed to offset
unsettled tax liabilities, pertinent only to taxes arising from the same
transaction.
CIR vs UST SC rejected the doctrine ; it may work to tempt the
collecting agency and the taxpayer to delay and neglect their
respective claims within the period prescribed by law

I. TAXPAYERS SUIT
It is only when an act complained of, which may include a legislative
enactment, directly involves the illegal disbursement of public funds
derived from taxation that the taxpayers suit may be allowed.
Maceda vs Macaraig

J. COMPROMISES
i. when the subject matter thereof is not expressly prohibited from being
compromised
ii. the public official entering into is authorized by law

G. SET OFF TAXES

Republic vs Mambulao Lumber (1962)
Taxes are not subject to set off or legal compensation.
Domingo vs Garlitos reversed
where taxes and the taxpayers claim are fully liquidated, due and
demandable, legal compensation can take place

SOURCES OF TAX LAWS

1. Constitution
2. Legislation or statutes
3. Contemporaneous construction by executive or administrative officers
4. Administrative rules and regulations, rulings and opinions of tax
officials
5. Judicial decisions

Francia vs IAC (1988) revert to Mabulao Lumber case

TREATIES
Philex Mining vs CIR (1998) there can be no offsetting of taxes against
the claims that the taxpayer may have against the government
There can be legal compensation for tax purposes as long as all requisites
under Art 1279 of the CC are present (RECALDE)
H. MANDATORY AND DIRECTORY PROVISIONS OF TAX STATUTES
The omission to follow mandatory provisions renders invalid the act or
proceeding to which it relates while the omission to follow the directory
provisions does not involve such consequence.
Hijos de Pedro vs Rafferty
MFABIAN

Revenue Memorandum 72-2010

TAX TREATY RELIEF to streamline the processing of TTRA and to
prescribe the documentary requirements for the application for relief
from double taxation pursuant to existing PH tax
Revenue Memorandum 27-2016 new procedures in claiming tax treaty
benefits on dividend, interest and royalty income of non-residents,
amending RMO 72-2010
Deutsche Bank vs CIR

Principle of pacta sunt servanda requires the performance in good faith

of treaty obligations. Thus, to require that taxpayers must first comply
with an administrative requirement is not in consonance with the
performance in good faith
PART TWO: INCOME TAXATION
I. Organization and Structure of BIR (Sec 2-21, Tax Code)
Powers and Duties of BIR:
1. Assess and Collect NIR taxes, fees and charges
2. Enforce all forfeitures, penalties and fees connected with the
assessment and collection of taxes
3. Execute judgment in all cases decided in its favor by the CTA and the
ordinary courts
4. Effect and administer the supervisory and police powers conferred
upon it by the tax code.
BIR rules and regulation
1. consistent and in harmony with law
2. reasonable
3. useful and necessary
4. published in the official gazette

5. Revenue Memorandum Circulars (RMC) for compliance or guidelines

of revenue personnel
6. Revenue Memorandum Orders (RMO)- directives outlining procedures
7. Revenue Audit Memorandum Orders (RAMO) uniform audit
procedures
8. Revenue Delegation of Authority Orders (RDAO) functions delegated
by the commissioner to revenue officers
9. Revenue Administrative Orders (RAO) deal strictly with
administrative set-up of the Bureau

II. FEATURES OF INCOME TAXATION

a. Direct Tax
b. Progressive Tax
c. Adoption of citizenship principle, the residence principle, and the
source principle. Any of the three is enough to justify the imposition of
income tax
d.The present income tax law is now more scheduler than global in the
case of individual income taxpayer but it has maintained much of its
global treatment on corporations
e. The Philippine income tax law is a law of American origin.
III. GENERAL DEFINITIONS FOR INCOME TAX PURPOSES

Classification of BIR rulings and issuances

1. Revenue Memorandum Rulings (RMR) rulings, opinions and
interpretation by the Commissioner with respect to the provisions of the
Tax Code
Ruling of first impression
Ruling with established precedent
2. Revenue Bulletins (RB) periodic issuances
3. Revenue Travel Assignment Order (RTAO) assign revenue personnel
to specific functions in specific units
4. Revenue Special Orders (RDO) for the accomplishment of special
assignment
MFABIAN

Revenue regulations No. 10-2012

Joint venture or consortium formed for the purpose of undertaking
construction projects (xxx)
Joint ventures not taxable as corporations:
1. It should be for the undertaking of a construction project; and
2. Involve joining or pooling of resources by licensed local contracts; that
is, licensed as general contractor by the Philippine Contractors
Accreditation Board of DTI
3. These local contractors are engaged in construction business; and
4. The JV itself must likewise be duly licensed by the PCAB of DTI

BIR Ruling No. 108-10

Aurora-Avida Case
The allocation of the saleable units between the parties does not
constitute a taxable event except marketing fees derived by Aurora

BIR Ruling [DA-(JV-017)-077-10]

FLI-MBTC Case
MBTC, as landowner, shall contribute the parcels of land and FLI, as
developer, shall provide the necessary expertise and resources for the
project.
Taxable joint venture? NO. Not subject to corporate income tax
*No profits will be shared by the parties because once the
development and construction of the project is completed, each
party shall take separate ownership
Real properties subject to income tax?NO. the JDAs executed is neither a
contract of sale over real property nor an instrument which convey title
to real property
MBTCs contribution not subject to income tax, it does not constitute
sale of property
ELEMENTS OF A TAXABLE JOINT VENTURE
1. Each party must make a contribution
2. Profits must be shared among the parties
3. Joint proprietary and right of mutual control
4. Usually, there is a single business transaction
5. An unmistakable intention to form partnership or joint venture

ALIEN INDIVIDUAL
FOREIGN CORPORATION
(resident or not)
NON RESIDENT CITIZEN
1. A citizen who establishes to the satisfaction of the Commissioner the
fact of his physical presence abroad and his definite intention to reside
therein
2. A citizen who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis
3. A citizen who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most
of the time during the taxable year (183 days)
4. A citizen who has been previously considered a NRC who arrives in the
PH at any time during the taxable year to reside permanently in the PH
shall likewise be treated as NRC for the taxable year in which he arrives
in the PH with respect to his income derived from sources abroad until
the date of his arrival in th PH
Kinds of Income Taxpayers (Sec 22)
Evangelista vs Collector
Partnership
i. an agreement to contribute money, property or industry to a
common fund
ii.intent to divide the profits among the parties
CIR vs BTC same ruling

IV. General Principles of Income Taxation in the Philippines

Income sources from within and without the Philippines (Sec 42)

RESIDENT CITIZEN
DOMESTIC CORPORATION
NON RESIDENT CITIZEN

Gross Income from sources within

i. interest
ii. Dividends
iii. Rentals

MFABIAN

Taxable from sources within and

without the Philippines
Taxable from sources without the
Philippines

iv. Royalties
v. Sale of real property
vi. Sale of personal property
*sources within the country which sold
Except: gain from sale of shares of stock in a domestic corporation shall
be treated as derived entirely from sources within the Philippines
regardless where said shares sold
BOAC vs CIR
The source of an income is the property, activity or service that
produced the income
V. COMPUTATION OF TAXABLE INCOME

a. TAXABLE INCOME
i. the money or property received is income, gain or profit (and not
return of capital)
ii. the IGP is received (actually or constructively), accrued, or realized
during the taxable year;
3. The IGP is not exempt from income tax under the Constitution, tax
treaty or statute
Madrigal vs Rafferty
the Income tax law does not look on the spouses as individual partners
in an ordinary partnership
b. Computation of Gross Income

The redemption of stock dividends previously issued is used as a veil for

the constructive distribution of cash dividends
WON redemption of stocks from the stockholders as well as
exchange of common with preferred shares can be considered
equivalent to the distribution of taxable dividend
GENERAL RULE:
Proportionate Test Stock Dividends (SD) once issued form part
of the capital and thus subject to income tax
SD representing the transfer of surplus to capital account shall
not be subject to tax
SDs represent capital and do not constitute income toi its
recipient. Mere issuance thereof is not yet subject to income tax.
As capital, SD postpone the realization of profits
The determining factor for the imposition of IT is whether any
gain or profit was derived form a transaction

EXCEPTION:
If a corporation cancels or redeems stock issued as a dividend at
such time and in such manner as to make the distribution and
cancellation or redemption essentially equivalent to the
distribution of a taxable dividend
Elements:
i. there is redemption and cancellation
ii. transaction involves SD
iii. the time and manner of the transaction makes it essentially
equivalent to a distribution of taxable dividends
presence or absence of real business purpose

c. Gross Income Items subject to Tax (Sec 32 A)

Henderson vs Collector (allowances)
In relation to Dividends
CIR vs CA and Andres Soriano Corp
MFABIAN

Not being a taxpayer, a withholding agent is not protected by the

amnesty

MFABIAN