June 22 Recitation

What is Taxation?
- Power by which the sovereign raises revenue to defray the expenses.
- Purpose: revenue; regulatory; promotion of general welfare; reduction of social inequality;
encourage economic growth by granting incentives & exemptions; protectionism.

Excise tax
- a tax on the production, sale or consumption of a commodity in a country.

How taxes are imposed:

1. to raise revenue
2. to regulate

Case: Gomez vs Palomar

Ruling: RA 1653 is not violative of the equal protection clause that only tuberculosis is singled
out for the fund to the exclusion of other diseases. It is never the requirement of equal protection
that all evils of the same genus be eradicated or none at all. The 5-centavo levied is in the
nature of an excise tax, laid upon the exercise of the privilege of using mails.

The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner
means benefit to a taxpayer as a return for what he pays, then it is sufficient answer to say that
the only benefit to which the taxpayer is constitutionally entitled is that derived from his
enjoyment of the privileges of living in an organized society, established and safeguarded by the
devotion of taxes to public purposes.

Essential Characteristics of Tax [PLLEP]

1. Enforced contributions not a voluntary payment
2. Payable in money a pecuniary burden; must be in legal tender
3. Proportionate in character ordinarily based on ability to pay
4. Levied by the legislative authority only Congress; through enactment of tax statutes
5. Levied for public purposes

Theories of Taxation
1. Lifeblood Doctrine - the existence of the government is a necessity; it cannot exist nor
endure without means to pay its expenses; and for those means, the government has a right
to compel all its citizens and property within its limits to contribute in the form of taxes.
2. Necessity Theory
3. Benefits-Protection/ Reciprocity Theory - Taxes are what we pay for civilized society. Without
taxes, the government would be paralyzed for lack of the motive power to activate and
operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned
income to the taxing authorities, every person who is able to must contribute his share in the
running of the government. (CIR v. Algue, Inc.)

Nature of the Power of Taxation [LILINS]

1. Inherent in sovereignty (being an inherent power of the State)
2. Legislative in character
3. Imposed by Congress
4. Levied by: Congress or Local Legislative Body
5. Subject to Constitutional and legislative limitations the power is not absolute
6. Not political in nature

Scope of Taxation [CUPS-F]

1. Comprehensive
2. Unlimited
3. Plenary
4. Supreme
5. Far-reaching

When are taxes violative of the equal protection clause?

- EPC means that no person shall be deprived of the same protection of laws enjoyed
by others or other classes in the same place in like circumstances.
- Exception: There is reasonable classification.
- Reasonable classification requisites [SNAG] pg 52
Aspects of Taxation
1. Levying (a legislative act)
2. Assessment & collection of the tax (administrative in character)

Subjects of Taxation [PPTR-BP]

1. Persons, either natural or juridical
2. Property, whether real or personal, tangible or intangible
3. Businesses
4. Transactions
5. Rights, or
6. Privileges

Purpose of granting tax incentives:

- because the government can always regroup taxes in other ways.

Basic Principles of a sound Tax system [FAT]

1. Fiscal Adequacy the sources of revenue should be sufficient to meet the demands of
public expenditure
2. Theoretical Justice the tax burden should be distributed in proportion to the taxpayers
ability to pay or the Ability-to-Pay Principle
3. Administrative Feasibility tax laws should be capable of convenient, just and effective
administration or enforcement at a reasonable cost

Classification of Taxes: [BSP-GAP]

1. As to who bears the burden:
A. Direct the tax is imposed on the person who also bears the burden thereof
Ex. Income tax, community tax, estate tax
B. Indirect imposed on the taxpayer who shifts the burden of the tax to another
Ex. VAT, specific tax, percentage tax, customs duties
C. Note: VAT is an indirect tax. (Q: How is it a tax burden shifted to the consumer? A: The
incidence of the taxation falls to one person, but the burden of paying it falls to another.)
2. As to subject matter of object:
D. Personal, poll, capitation tax
fixed amount
individuals residing within specified territory
without regard to their property, occupation or business
Ex. Community Tax (Cedula)

E. Property tax
imposed on property, real or personal
in proportion to its value or other
reasonable method of apportionment
Ex. Real estate tax

F. Excise, privilege tax

imposed upon performance of an act, the enjoyment of a privilege or the engaging in an
occupation, profession or business
Ex. Income tax, VAT, estate tax, donors tax

3. As to Proportionality:
G. Specific tax imposed and based on a physical unit of measurement, as by head,
number, weight, length or volume. Ex. Tax on distilled spirits, fermented liquors, cigars
H. Ad Valorem - tax of a fixed proportion of the value of property with respect to which the
tax is assessed; requires intervention of assessor. Ex. Real estate tax, excise tax on
cars, non- essential goods

4. As to graduation:
1. Proportional - based on a fixed percentage of the amount of the property, income or
other basis to be taxed. Ex. Real estate tax, VAT, percentage tax
2. Progressive or graduated - tax rate increases as the tax base or bracket increases
Ex. Income tax, estate tax, donors tax
3. Regressive - tax rate decreases as the tax base increases.
4. Degressive - increase of rate is not proportionate to the increase of tax base

5. As to purpose
1. General, fiscal or revenue - imposed for the general purpose of supporting the
government. Ex. Income tax, percentage tax
2. Special or regulatory - imposed for a special purpose, to achieve some social or
economic objectives. Ex. Protective tariffs or customs duties on imported goods
intended to protect local industries

6. As to authority imposing the tax

1. National - imposed by the national government. Ex. National internal revenue taxes,
custom duties
2. Municipal or local - imposed by the municipal corporations or local governments Ex.
Real estate tax, occupation tax

Characteristics:
1. Real Estate Tax property. ad valorem determination, municipal authority, proportional rate
2. Income tax excise, direct burden, for general purposes, progressive graduation
3. VAT excise, indirect, for general purposes, proportional rate
4. Estate tax excise, direct burden, progressive graduation
5. Customs duties (different kind of excise tax), indirect, specific determination, for special
purposes, by national authority

Case: Angeles University vs City of Angeles

Ruling: Angeles University is not exempted from paying Building permit fees and Locational
Clearance Fees. Under RA 6055, petitioner was granted exemption only from income tax
derived from its educational activities and real property used exclusively for educational
purposes. Regardless of the repealing clause in the National Building Code, the CA held that
petitioner is still not exempt because a building permit cannot be considered as the other
charges mentioned in Sec. 8 of R.A. No. 6055 which refers to impositions in the nature
of tax, import duties, assessments and other collections for revenue purposes, following the
ejusdem generis rule.

Case: Diaz vs Secretary of Finance [Fees are not a tax on a tax]

(Brief: Commissioner Henares issued a memorandum circular requiring collection of )
Ruling: When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter's
use of the tollway facilities over which the operator enjoys private proprietary rights that its
contract and the law recognize. In this sense, the tollway operator is no different from the
service providers under Section 108 who allow others to use their properties or facilities for a
fee.

Distinction: Tax vs Toll [DABA]

1. Tax imposed under the taxing power of the government principally for the purpose of
raising revenues to fund public expenditures; may be imposed only by the government
2. Toll Fees collected by private tollway operators as reimbursement for the costs and
expenses incurred in the construction, maintenance and operation of the tollways, as well as to
assure them a reasonable margin of income; may be demanded by either the government or
private individuals

Case: Chevron vs BCDA

Ruling: Clark Development Corporation was within the limits of the police power of the State
when it imposed royalty fees. The subject royalty fee was imposed for regulatory purposes
and not for generation of income or profits. The Policy Guidelines was issued to ensure the
safety, security, and good condition of the petroleum fuel industry within the CSEZ.

Case: CIR vs Pineda

(Brief: BIR discovered that tax returns were not assessed for years 1945-1947. CTA: Pineda
only liable to the tax proportionate to his share. CIR appealed, he must be liable to the whole
tax due.)
Ruling: Pineda is liable of the whole amount of the unpaid income tax as an heir and holder
transferred of property belonging to the estate/taxpayer.

Distinction (as to liability):

1. As an Heir individually answerable for the part of the tax proportionate to the share he
received from the inheritance
2.As a Holder of Property belonging to the estate up to the amount of the property in his
possession

Distinguish: Power of Taxation v. Police Power [PAPABER]

Inherent limitations of the power of taxation [SPING]

1. Situs or territoriality of taxation
2. Must be for Public Purpose
3. International Comity
4. Non-delegability of the taxing power
5. Exemptions of Government agencies

Case: Pascual vs Secretary of Public Works [defined Public Purpose]

Can Real Property Tax be imposed on embassies?

Case: Pepsi-Cola vs City of Butuan

Case: Abakada Guro Partylist vs Ermita

[non-delegation of taxing power]
Ruling: There is no delegation of power in the case at hand. It is simply a delegation of
ascertainment of facts upon which enforcement and administration of the increase rate under
the law is contingent. The Secretary of Finance is acting as the agent of the legislative branch,
to determine and declare the event upon which its expressed will is to take effect. In this case,
whatever agency that can be appreciated would be of severely limited capacity,
encompassing as it only could the administration, not enactment, of the tax measure.

The powers which Congress is prohibited from delegating are those which are strictly, or
inherently and exclusively, legislative. Purely legislative power, which can never be delegated,
has been described as the authority to make a complete law complete as to the time
when it shall take effect and as to whom it shall be applicable and to determine the
expediency of its enactment.

The general rule barring delegation of legislative powers is subject to the following recognized
limitations or exceptions:
1. Delegation of tariff powers to the President under Section 28 (2) of Article VI of the
Constitution;
2. Delegation of emergency powers to the President under Section 23 (2) of Article VI of the
Constitution;
3. Delegation to the people at large;
4. Delegation to local governments; and
5. Delegation to administrative bodies.

Case: Bagatsing vs Ramirez

Ruling:

Case: Atlas Consolidated Mining vs CIR [Cross-border doctrine]

Case: National Devt Corp. vs CIR Case: CREBA vs Romulo
Case: Reyes vs Almanzor
Case: manila horse racers vs de la fuentes [uniformity of tax; discrimination]
Case: American Bible Society

Case: MCIAA vs Marcos

Ruling: MCIAA is a government instrumentality (unlike Mactan-IA which is a GOCC) and is
exempt from realty taxes imposed by the government as provided under Section 14 of RA 6958.
NIRC of 1997, Sec. 30

June 29 No class; Quiz on June 22 recitation

July 6

Case: Mactan Cebu

Case: MIAA vs Pasay

Distinction between MCIAA and MIAA as to treatment of Government Instrumentalities

and GOCCs:
1. Pasay City cannot tax MIAA. MIAA is an instrumentality of the government, not created as
a corporation.
2. Cebu City can tax MCIAA. MCIAA was created as a GOCC by its charter.

Case: MIAA vs CA

Case: PAL vs Edu (recited by Nimai)

Facts: PAL has not paid taxes for many years claiming it was exempt from paying.
Edu Issue: Are motor vehicle registration fees tax or regulatory fees?
Ruling:

CONSTITUTIONAL LIMITATIONS
1. Due process of law;
No person shall be deprived of life, liberty, or property without due process of law.
2. equal protection of laws;
3. uniformity;
4. progressive system of taxation;
5. non-impairment of contracts;
6. non-imprisonment for non-payment of poll tax;
7. appropriation, revenue and tariff bills must origi- nate exclusively in the House of
Representatives;
8. presidential veto;
9. presidential power to fix tariff rates;
10. freedom of the press;
11. freedom of religion;
12. exemption from property tax of properties of religious, educational, charitable institutions; tax
exemptions granted to non-stock, non-profit educational institutions;
13. no public money or property used for a particular sect, priest, religious minister, etc.;
14. grant of tax exemptions;
15. grant of power of taxation to local government units;
16. money collected for a special purpose shall be considered a special fund;
17. exclusive appellate jurisdiction of the Supreme Court over judgments of lower courts
involving the legality of taxes, imports, assessment, fees, penalty.

1. DUE PROCESS CLAUSE

When is Due Process Clause of a corporation is violated?

- When a taxing statute is so arbitrary that it finds no support in the Constitution.

Case: Villegas vs. Hiu Chiong Tsai Pao Ho, 86 SCRA 270
- before a foreigner can work in Cagayan de Oro, it must pay P10,000 tax.
- Violates Due Process of law & equal protection of law.
- The foreigner cannot be deprived of life without due process of law, once admitted.
- The shelter of protection is given to all persons, both aliens & citizen.

Case: Tolentino vs Secretary of Finance

[no violation of procedural due process]
Facts: A bill submitted by the House of Representatives to the Senate to which the latter
amended entirely. Petitioner raised that the law should come from the House of
Representatives.
Ruling: What is required of the House of Representatives is merely the initiative.

Case: Gomez vs Palomar

Ruling: The eradication of a dreaded disease is a public purpose, but if by public purpose the
petitioner means benefit to a taxpayer as a return for what he pays, then it is sufficient answer to
say that the only benefit to which the taxpayer is constitutionally entitled is that derived from his
enjoyment of the privileges of living in an organized society, established and safeguarded by the
devotion of taxes to public purposes. Any other view would preclude the levying of taxes except
as they are used to compensate for the burden on those who pay them and would involve the
abandonment of the most fundamental principle of government that it exists primarily to
provide for the common good.

Case: Manila Race Horse Trainers Association v. De La Fuente

Ruling: The Court upheld the validity of an ordinance taxing boarding stables of race horses
because "(R)ace horses are devoted to gambling, if legalized, their owners derive fat income
and the public hardly any profit from horse racing, and this business demands relatively heavy
police supervision."

2. Exemption from property tax of properties of religious, educational, charitable

institutions; tax exemptions granted to non-stock, non-profit educational
institutions

Sec. 4 (3), Article XIV, Constitution:

All revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and duties.
Upon the dissolution or cessation of the corporate existence of such institutions, their assets
shall be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively owned, may likewise be

entitled to such exemptions subject to the limitations provided by law including restrictions on
dividends and provisions for reinvestment.

Case: De La Salle vs CIR

Ruling: La Salle is exempt from taxes. Sec. 4 (3), Art. XIV of the Constitution provides that all
revenues for educational purposes shall be exempt, regardless where it comes from.

3. NON-IMPAIRMENT OF CONTRACTS

Case: CEPALCO vs CIR

Ruling: the non-impairment of contracts clause does not apply to public utility franchises or
rights since they are subject to amendment, alteration or repeal by the Congress when the
public interest so requires.

4. NON-INFRINGEMENT OF RELIGIOUS FREEDOM AND WORSHIP

-the free exercise and enjoyment of religious profession and worship, without discrimination or
preference, shall forever be allowed.
-Exemption pertains only to the properties

Case: American bible society vs City of Manila

Ruling:
Question: If the bibles were sold for profit, would the Supreme Court rule otherwise?
Answer: Yes, because the sale would no longer be primarily for religious purpose but for
proprietary purpose.

Situation: There is a commercial building beside Cathedral. The Archdiocese rents a floor for
provided catering services. Is the income thereat subject to tax? Answer: Yes. Only properties
actually, directly, and exclusively used for religious purposes are exempt from tax.

Case: Pepsi vs Butuan City

[Procedural due process: Classification of power to tax must be reasonable; non-delegation of
the power to tax]
Facts: Petitioners assail the constitutionality of Municipal Ordinance No. 110, as amended by
Mun. Ord. No. 122, on the ground that Sec. 2 of R.A. 2264, upon the authority of which it is
delegated, is an unconstitutional delegation of legislative powers.
HELD: The general principle against the delegation of legislative powers as a consequence of
the principle of separation of powers is subject to one well-established exception: legislative
powers may be delegated to local. Included in this grant of legislative power is the grant of local
taxing power.
5. CONCURRENCE OF CONGRESS MAJORITY MUST BE OBTAINED IN GRANTING TAX
EXEMPTION
therefore, 126 votes of the Congress must be obtained
What is needed from the House of Representatives is merely the initiative.
Ratio of constitutional provision:
(p. 48 of De Leon) to prevent indiscriminate grant of tax exemptions.
Taxes are the lifeblood of the government. Taxes must be collected, but tax exemption is the
concept of foregoing the requirement. Thus there is stringency of application.
Thats why majority vote must be required.

Case: Angeles City Case: Lung Center Case: Abra valley

Lung Center of the Philippines vs Quezon City

Ruling: Tax Exempt - only the portions of land occupied and used by Church, convent, & school.
Taxable - portion occupied by commercial establishments & idle lands. Usage and not
ownership is the determining factor.

Case: CIR vs St Lukes

Facts: St Lukes is created for a non-stock, non-profit, charitable institution (but presently, only a
small portion is intended for charitable purposes, nonetheless still considered a charitable
institution). St Likes was exempt from paying tax, but it paid under protest. They went to court
for a refund of their payment of tax.
Issue:
Ruling: St Luke has derived income from paying patients. It is proved in Court that such
revenues of 1.7Billion is not inclined to their charitable purpose. Instead it was declared for profit
purpose. It is thus subject to income tax at the rate of 10%. Only 10% (from the normal
corporate income tax rate is 30%; 105 applies to proprietary educational, religious and hospital
institutions as preferential rate; ratio of imposing preferential rate: __) because they do not
lose the character of being a charitable institution.

DOUBLE TAXATION
Kinds of DT:
1. Direct Double Taxation; in its strict sense Elements: [SuPuT-JuPeK]
2. Indirect Double Taxation; in its liberal sense
If one of the elements is absent, it is indirect DT

How Double Taxation is mitigated:

1. Reciprocal Exemption either by law or by treaty
2. Tax Credit for foreign taxes paid
3. Deduction for foreign taxes paid
4. Reduction of the Philippine Tax Rate
FORMS OF ESCAPE FROM TAXATION
1. Tax Evasion -a scheme outside of those lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil or criminal liabilities.
- Three factors: [SEC] the end to be achieved; accompanying state of mind which is evil; a
course of action or failure of action which is unlawful.
2. Tax Avoidance - tax saving device within the means sanctioned by law.
3. Tax Exemption
- Grounds for exemption: receive full equivalent
- Construed in strictissimi juris against taxpayer
- He who claims must point to some provision of law creating the right.

Concept of Self-Assessment: you file your returns, and you assess your own liabilities. If your
taxes are not properly paid, BIR may make an investigation.

TAX ENFORCEMENT AND ADMINISTRATION

Sources of Tax Law: [SPECCTRA-BLT]
1. Statutes
2. Presidential Decrees
3. see reviewer, or p. 94

Revenue Regulation: p. 97
They have the same effects as xxx
Who promulgates revenue regulation (?)
BIR
There are provisions of the NIRC which are not self-executory and thus need regulation of the
Commissioner
When a case is considered financial incapacity? When there is xx
Construction of Tax Laws p. 90
Application of Tax Laws p. 91

Case: CIR vs Toda Jr

Ruling: There is Tax Evasion when there is a evil motive or evil intention.

Review of the June 29 Quiz: [02:00:00]

Subjective:
30. Can a law imposing tax on revenues earned by churches & other religious institutions?
31. May the courts enjoin the collection of taxes? Lifeblood doctrine. If the government will be
enjoined, the collection of the necessary funds will be ... Generally, In the long
line of cases... Exception: RA 9212 (?) the expanding of xxx.

Objective
32. Phases of Taxation
33. Purpose of Taxation: Revenue, Regulation; Regulatory purposes of taxation 34. Theory and
Basis of Taxation
35. Inherent powers of the State
36. Inherent limitations: [SPING]
Discussion:
Before RA 8424, OFWs are subject to tax because they are still within Philippine jurisdiction
although they are not within Philippine territory.

Constitutional Prohibitions:
1. Substantive relates to the substance of the law
2. Procedural relates to the method imposed

Uniform and Equitable

Uniformity - all taxable articles or kinds of property of the same class shall be taxed at the same
rate.

CASES TO READ:

CIR vs Lingayen Gulf Electric 164 SCRA 67

MisOR vs CEPALCO 181 SCRA 38, GR L-45355

ISSUE: WON a corporation whose franchise expressly provides that the payment of the
franchise tax of 3% of the gross earnings shall be in lieu of all taxes and assessments of
whatever authority upon privileges, earnings, income, franchise, and poles, wires, transformers,
and insulators of the grantee is exempt from paying a provincial franchise tax.
HELD:

Iladoc vs CIR
14 SCRA 292, GR No. L-19201
Facts: Sometime in 1957, M.B. Estate Inc., of Bacolod City, donated 10,000.00 pesos in cash to
Fr. Crispin Ruiz, the parish priest of Victorias, Negros Occidental, and predecessor of Fr.
Lladoc, for the construction of a new Catholic church in the locality. The donated amount was
spent for such purpose.
On March 3, 1958, the donor M.B. Estate filed the donor's gift tax return. Under date of April 29,
1960. Commissioner of Internal Revenue issued an assessment for the donee's gift tax against
the Catholic Parish of Victorias of which petitioner was the parish priest.
Issue: Whether or not the imposition of gift tax despite the fact the Fr. Lladoc was not the Parish
priest at the time of donation, Catholic Parish priest of Victorias did not have juridical personality
as the constitutional exemption for religious purpose is valid.
Held: Yes, imposition of the gift tax was valid, under Section 22(3) Article VI of the
Constitution contemplates exemption only from payment of taxes assessed on such
properties as Property taxes contra distinguished from Excise taxes The imposition of the gift
tax on the property used for religious purpose is not a violation of the Constitution. A gift tax is
not a property by way of gift inter vivos.
The head of the Diocese and not the parish priest is the real party in interest in the imposition of
the donee's tax on the property donated to the church for religious purpose.

CIR vs Johnson and Sons [International Double Taxation]

International Juridical Double Taxation

the imposition of comparable taxes in two or more states on the same taxpayer in respect of the
same subject matter and for identical periods.
Rationale for doing away with double taxation
to encourage the free flow of goods and services and the movement of capital, technology and
persons between countries, conditions deemed vital in creating robust and dynamic economies
to encourage foreign investors to invest in the Philippines - a crucial economic goal for
developing countries

Most-favored nation clause

Definition:
Purpose: to grant to the contracting party treatment not less favorable than that which has
been or may be granted to the most favored among other countries.
Essence: to allow the taxpayer in one state to avail of more liberal provisions granted in
another tax treaty to which the country of residence of such taxpayer is also a party
provided that the subject matter of taxation, in this case royalty income, is the same as that in
the tax treaty under which the taxpayer is liable.

When double taxation takes place

when a person is resident of a contracting state and derives income from, or owns capital in, the
other contracting state and both states impose tax on that income or capital.

Methods established by tax treaty to eliminate Double Taxation

43. First method: it sets out the respective rights to tax of the state of source or situs and of the
state of residence with regard to certain classes of income or capital.
44. Second method: applies whenever the state of source is given a full or limited right to tax
together with the state of residence. In this case, the treaties make it incumbent
upon the state of residence to allow relief in order to avoid double taxation.

TWO METHODS OF RELIEF:

(s) Exemption method the income or capital which is taxable in the state of source or situs is
exempted in the state of residence, although in some instances it may be taken into account in
determining the rate of tax applicable to the taxpayers remaining income or capital.
(t) Credit method although the income or capital which is taxed in the state of source is still
taxable in the state of residence, the tax paid in the former is credited against the tax levied in
the latter.
Difference: in the exemption method, the focus is on the income or capital itself, whereas the
credit method focuses upon the tax.

Cases comparing Sec. 4 (3), Article XIV from Section 28 xxx [distinguish Educational institutions
and Religious institutions; exemptions for religious institutions pertains only to properties, for
educational institutions it pertains to both properties and revenues.]
De La Salle was able to show that they were for educational purposes

Rule of Prescription:

Distinguish Taxing power of:

47. National
48. Local government units limited to real property taxes
 LGUs are also corporations, so that they may engage in business. Generally, LGUs are
exempt from taxation by its inherent limitation. But when engaged in proprietary functions,
they are treated as corporations and as such are taxed.

Scope of Tax Laws: July 20

General rule: It bears stressing that tax exemptions in the Tax Code refer only to DIRECT
TAXES. They are not made to pay income tax, etc but they are still made to pay excise tax.
Exceptions: If exemption is granted because of international comity, they are also exempted
from paying INDIRECT TAXES. E.g., WFP, Red Cross, UN, etc.
Situation: Persons of the UN, when buying cars here in the Philippines
Religious institutions: They are not made to pay direct taxes, but have to pay indirect taxes.

(Done with General principles)

INCOME TAX
Individual Income taxation
Schedular Tax System
Different tax rates found in Section 24 of Tax Code
Net Income Taxation used in Philippines
Gross Income Taxation For non-resident aliens not engaged in business in the Philippines
When are they not engaged in business? ANSWER: Where they did not stay in the Philippines
for not more than 180 (cumulative) days. IN SHORT, only Filipino citizens residing in the
Philippines are subject to XXXXX
Income Tax Situs

Corporate Income Taxation

Only one rate = 30%
See St Lakes case; SC imposed 10% corporate income tax
Net Taxable income

Criteria in imposing Income Tax: (mamalateo p. 89)

1. Citizenship
2. Residence
3. Source

Common nature: Pay-as-you-file

When you file, you also pay
also called Voluntary/ Self-Assured system

Creditable withholding tax system

Substituted filing employees whose tax due is equal to the tax withheld, and they only have
one employer, then they do not have to file an ITR.
For employees who are required to file those who have more than one employer

Final Withholding Tax System (mamalateo, p. 81)

Applies to passive income, e.g, interest income is subject to 20% rate
What if the bank failed to pay interest? The BIR cannot run after the bank. The liability falls
under the withholding agents.

Distinguish:
Creditable withholding tax system: whatever is withheld, subject to credit
FWT: there is full settlement

Lecture
Income all wealth that goes into the taxpayer, other than mere return of xxx
Income from whatever source, illegal or legal, is taxable
Economists view: A man value of the net accretion of the xx
Say: this is the purchasing power of a person from January 1 to the end of the year
whatever is the increase of the economic power is the income.

Income vs Gross Receipt

Gross receipt: everything that the taxpayer receives, including return of capital
Income: Gross receipts less allowable deductions

Income vs Revenue
Income: Earned by individuals
Revenue: Whatever is being received by the State; either in the form of income, foreign aid, or
loans
A. Loans are considered revenues; Foreign and domestic loans

Sources of Income:
1. Properties
2. Rent
3. Fruits
4. Labor
5. Sales, exchange of capital assets

Under the Tax Code, income derived from whatever source forms part of the taxpayers income.
Includes:
1. Tax refunds
2. Bad debts

Case: CONWI vs CTA, GR 48532

[Defined Income] an amount of money coming to a person or corporation within a specified
time, whether as payment for services; interest or profit from investment. Unless otherwise
specified, it means cash or its equivalent. Income can also be thought of as a flow of the fruits of
one's labor.

Case: Javier vs CA, GR 78953

Issue: Is there fraud?
Held: No. The fraud contemplated by law is actual and not constructive. It must be
intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to
induce another to give up some legal right. In the case at bar, there was no actual and
intentional fraud through willful and deliberate misleading of the government agency concerned,
the Bureau of Internal Revenue, headed by the herein petitioner. The government was not
induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful
agents from proper assessment of tax liabilities because Javier did not conceal anything. Error
or mistake of law is not fraud.
Affirming CTA, the 50% surcharge imposed as fraud penalty by the petitioner against the private
respondent in the deficiency assessment should be deleted.

Issue: Is it taxable, then?

Held: Yes. Mrs Javier treated the money she received as if it was hers; there was a treatment of
claim of right. The determination of whether income is taxable, Claim of Right Doctrine is one
of the principles applied.

Other tests:
58. Severance Test When the amount can be distinguished from the capital.
59. Control test

Case: Commissioner vs BOAC, GR No. L-65773

RULE: The source of an income is the property, activity or service that produced the income.
For the source of income to be considered as coming from the Philippines, it is sufficient that
the income is derived from activity within the Philippines.

Nature of Income Tax

Considered an excise tax
Based either on Gross Income or Net Income
Imposed on yearly profit. For Corporations, it is called Fiscal Year.

Purposes of Income Taxation

60. Primarily: to raise revenue
61. to off-set regressive taxes, i.e., indirect taxes
62. To mitigate the evils arising from xxx; to collect more taxes from those who earns more

Case: Commissioner vs Lednicky, GR No. L-18169

Ruling:
Partnership aspect: Aside from not conforming to the fundamental doctrine of income taxation
that the right of a government to tax income emanates from its partnership in the production of
income, by providing the protection, resources, incentives, and proper climate for such
production, the interpretation given by the respondents to the revenue law provision in question
operates, in its application, to place a resident alien with only domestic sources of income in an
equal, if not in a better, position than one who has both domestic and foreign sources of income,
a situation which is manifestly unfair and short of logic.

Options for Tax paid in Other Jurisdictions

W. Tax Deduction
X. Tax Credit

Requisites for income to be taxable:

64. There must be gain or profit
65. The gain must be realized
66. The gain not be excluded by law
Case: CIR vs Isabela Cultural Corporation, GR 17223
Ruling:
In the case at bar, ICC used Accrual Method. But in claiming their deductions, they used Cash
Basis. Expenses were already incurred because services were already rendered.

In determining income, there are 2 accounting methods:

Y. Accrual Basis even if the income has not yet been paid, as long as it is earned then it is
recognized
Z. Cash Basis income only recognized when payment is received

Case: Fernandez vs CIR

[Losses]

Case: Limpan vs Investment Corp, GR No. L-21570

Constructive Receipt is subject to tax.
Purpose:
Listen to recording: Tax July 20 part 2 at 3:00:00 Re Gross Income
back at 11:28:00

Case: In re: Zialcita, October 18, 1990

Terminal Leave Pay is not subject to income tax.
*Listen to recording for several followup questions re distinction of employees, compensation

Title I. Organization and Function of BIR, Secs. 1-23, RA 8424

What if the person summoned will not heed?
ANSWER: Cite that person for contempt. File a case for failure to obey summons; a criminal
case punishable by imprisonment of 1-2 years and fine.

Tax Mapping xxx

BIR through the Commissioner, may make assessments. Or he may delegate it to a duly
authorized representative, necessarily the Regional Directors.
Surveillance

Section 7
Note: Rules and regulations must be signed by Secretary of Finance upon recommendation of
BIR Commissioner.

Skip Section 8

Section 9.
Hierarchy
67. National Office
68. Regional Offices
69. District Offices

*SEE RA 8424 Tax Reform Act document

CASES TO READ:
1. Agrinurture case
The amount of purchases was lesser than that discovered by BIR. What is an income?
NEXT MEETING:

Individual Income Taxation

Different types of Income Taxes

1. Personal Income Tax on Individuals
2. Regular Corporate Income Tax
3. Minimum corporate income tax
4. CGT on (1) sales of shares of stocks of domestic corporation by any person or corporation,
who is not dealer in securities and (2) CGT on real property classified as a capital asset
located in the Philippines by any person who is not a real estate dealer, developer, or lessor
5. Tax on passive investment income (interest, dividend and royalty fees)
6. FBT
7. Branch Profit Remittance Tax on Phil branches of foreign corp operating in the Phil
customary territory
8. Tax on Improperly Accumulated Earnings of Corp
9. FWT on certain income from source within the Phil payable to resident

Income Tax Systems:

1. Global
2. Schedular
3. Semi-Schedular or Semi-Global

PAGCOR vs BIR

Whether or not the 20% final tax on a banks passive income, withheld from the bank at source,
still forms part of the banks gross income for the purpose of computing its gross receipts tax
liability.
1. If the answer is in the affirmative, is there double taxation?
The 20% tax withheld is included in computing for the gross income of banks.

Final Withholding Tax

-withholding tax
Gross Receipts Tax
-percentage tax (e.g. GRT in banks)