LECTURE GUIDE NOTES 

Atty. Lyndon A. Maceren, MBA CPA REB

Guide Notes: Taxation I

General Principles of Taxation

Taxation: An Inherent Power of the State

The government has 3 inherent powers: Police Power, Eminent Domain and Taxation.
Police power is that inherent right of government to pass laws and regulations to promote good health,
public order, and safety in the society. It is when the interest of the few should be sacrificed for the
interest of the majority.
Eminent domain, on the other hand, is the inherent right of expropriation whereby the government can
forcibly acquire private property for public use upon payment of just compensation.
Lastly, the power of taxation which is the inherent right of the government to collect enforced
contribution, known as tax, through the lawmaking body in order to have funds to support the
government.
 Incidentally, the power to tax is not granted in the Constitution. Constitutional provisions
relating to the power of taxation do not operate as grants of the power of taxation to the
Government but instead merely constitute limitations upon a power which would otherwise be
practically without limit.
Role of the Three Departments in Taxation

The three bodies of the government, the legislative body, the executive body, and the judicial
body, have a role to play in taxation. The legislative body, the Senate and the House of
Representatives, plays a very important role in taxation because in the Constitution, all revenue bills
originate from the House. Once a law is enacted by the legislative body, the executive body of the
government now implements the law. For this purpose, there is the Department of Finance, under
which the Bureau of Internal Revenue and the Bureau of Customs belong. The Judiciary comes in the
moment there is a question on the interpretation of the law and it exercises its power of judicial review.

Power of Judicial Review in taxation – In the case of Commissioner v. Lingayen Gulf Electric
Power Co., Inc., G.R. L23771, August 4, 1988 the Court ruled that courts cannot inquire into the
wisdom of taxing act. The Court cannot review the wisdom or advisability or expediency of a
tax. The judicial tribunals of the State have no concern with the policy of legislation. The judicial
power cannot legitimately question or refuse to sanction the provisions of any law not
inconsistent with the fundamental law of the State. Nor can the motives which have influenced
the selection of objects for taxation or determine the rate, be inquired into.

The bottom line as far as judicial non-interference is concerned is this: As long as the
legislature, in imposing a tax, does not violate applicable constitutional limitations or restrictions,
the Courts have no concern with the wisdom or policy of the exaction, the political or other
collateral motives behind it, the amount to be raised, or the persons, property, or other privileges
to be taxed.

Incidentally, the Court’s power in taxation is limited only to the application and interpretation of
the law, therefore, the affixture of documentary stamp on freight receipts, in one of the cases
decided by the Supreme Court, may be seen as impracticable but should not be entertained
because according to the Court, the impracticability and absurd consequences of the law should
be addressed to the legislative and administrative authorities. Courts merely apply the law as they
find it (Bisaya Land Transportation Co. v. Collector, L1210, L10812, May 29, 1959)

Taxation, Defined.

It is:

the power by which the sovereign raises revenue to defray the necessary expenses of the government.
a mode of raising revenue for public purpose.
the power of the State to impose a charge or burden upon persons, property and rights for the use and
support of the government so that the latter may be able to discharge its proper functions. Stated
otherwise, taxation is the method of apportioning the cost of government among those who in some
measure are privileged to enjoy its benefits and must therefore bear its burden.
a symbiotic relationship whereby in exchange for the protection that the citizen get from the
government, taxes are paid (Commissioner v. Algue, L-28896, February 17, 1988)
 Nature of Taxation – Taxation is two-fold in nature:

It is an attribute of sovereignty: an inherent power of the state

The power of taxation is an essential and inherent attribute of sovereignty, belonging as a

matter of right to every independent government, without being expressly conferred by the
people (Pepsi-Cola Bottling Company of the Philippines vs. Mun. of Tanauan, Leyte, 69
SCRA 460; L-31156, Feb. 27, 1976)

2003 BAR Question: Why is the power to tax considered inherent in a sovereign State?
It is considered inherent in a sovereign State because it is a necessary attribute of
sovereignty. Without this power, no sovereign State can exist nor endure. The power to tax
proceeds upon the theory that the existence of a government is a necessity. The power to
tax is an essential and inherent attribute of sovereignty, belonging as a matter of right to
every independent State. No sovereign State can continue to exist without the means to pay
its expenses, and 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.

It is legislative process and its scope may be the:

discretion as to the purpose for which taxes shall be levied;

discretion as to the subject of taxation and the situs of taxation
discretion as to the amount or rate of tax; and
discretion as to the mode, method (classification) kind of tax.

The power of taxation is essentially a legislative function. The power to tax includes the
authority to:
determine the (a) nature or kind; (b) object (purposes); (c) extent (amount or rate); (d)
coverage (subjects and objects); (e) apportionment of the tax (general or limited
application); (f) situs (place of the imposition; and (g) method of collection;
grant tax exemptions or condonations; and
specify or provide for the administrative as well as judicial remedies that either the
government or the taxpayers may avail themselves in the proper implementation of the
tax measure (Petron vs. Pililla, 198 SCRA 82)

CONSEQUENTLY: It is generally not delegated to executive or judicial department

The power to tax is purely legislative and which the central legislative body cannot delegate
either to the executive or judicial department of the government without infringing upon the
theory of separation of powers. (Pepsi-Cola Bottling Company of the Philippines vs. Mun.
of Tanauan, Leyte, 69 SCRA 460; L-31156, Feb. 27, 1976)

EXCEPT:

To local governments in respect of matters of local concern to be exercised by the local legislative
bodies thereof (Section 5, Art. X,1987 Constitution)
When allowed by the Constitution. Thus, the Congress may, by law, authorize the President to fix
within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates,
import and export quotas, tonnage and warfage dues, and other duties or imposts within the
framework of the national development program of the Government (Section 28[2], Art. VI, 1987
Constitution)
When the delegation relates merely to administrative implementation that may call for some degree
of discretionary powers under a set of sufficient standards expressed by law (Cervantes vs. Auditor
General, 91 Phil. 359; L-4043, May 25, 1952)

2003 BAR Question: May Congress, under the 1987 Constitution, abolish the power to tax of local
governments? No, Congress cannot abolish what is expressly granted by the fundamental law. The
only authority conferred to Congress is to provide the guidelines and limitations on the local
government’s exercise of the power to tax (Section 6, Art. X, 1987 Constitution)

AND: It is subject to constitutional and inherent limitations

The power to tax is said to be the strongest of all the powers of government. It is unlimited, plenary,
comprehensive and supreme, in the absence of constitutional restrictions, the principal check on its
abuse resting in the responsibility of members of Congress to their constituents. However, the power
of taxation is subject to constitutional and inherent limitations.

Scope of the powers of the Legislature in Taxation

The legislative body has to power to choose:

the persons, property, or occupation to be taxed – within the jurisdiction of the taxing authority; taxing
authority can select the subjects of taxation (Gomez v. Palomar, G.R. L23645, October 29, 1968, 25
SCRA 827)
the amount or rate of the tax
the purposes for which taxes shall be levied provided they are public purposes
the kind of tax to be collected
the apportionment of the taxes, i.e., whether the tax shall be general or limited to a particular locality or
partly general and partly local;
the situs of taxation
the method of collection

These are all within the powers of the legislative branch of government and there could be no
judicial intervention in these areas unless there is abuse because these fall within the area of political
question

Theory or Underlying Basis of Taxation

Theory: Lifeblood Theory. Taxes are the lifeblood of the government and their prompt and certain
availability is an important need because without revenue being raised from taxation, no government
will survive, resulting in detriment to society. Without taxes the government would be paralyzed for
lack of motive power to activate and operate it. (Commissioner v. Algue, Inc. et. al 158 SCRA 8, 16-17;
1988)

1991 BAR Question: Discuss the meaning and the implications of the following statement: “Taxes are
the lifeblood of government and their prompt and certain availability is an imperious need.” The phrase
 “taxes are the lifeblood of government, etc.” expresses the underlying basis of taxation which is
governmental necessity, for indeed, without taxation, a government can neither exist nor endure.
Taxation is the indispensable and inevitable price for civilized society; without taxes, the government
would be paralyzed. This phrase has been used to justify the validity of the laws providing for
summary remedies in the collection of taxes. As a consequence of the above rule, an injunction against
the assessment and collection of taxes is generally withheld by the laws imposing such taxes. Even
when it is not so under procedural laws, such an injunction may not be obtained as held in the case of
Valley Trading Co. vs. CFI and Uy, 171 SCRA 501; No. 49529, Mar. 31, 1989, where the Supreme
Court ruled that the damages that may be caused to the taxpayer by being made to pay the taxes
cannot be said to be as irreparable as it would be against the government’s inability to collect taxes.

Basis: “Benefit-Protection” theory – Under this theory, taxes are what we pay for a civilized
society; the benefits received or in proportion to the amount of the benefits and protection he receives
from the State. Without taxes the government would be paralyzed for lack of motive power to activate
and operate it. Hence, despite the natural reluctance to surrender part of their hard-earned income to
the government, every person who is able must contribute his share in the running of the government.
The government, for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values. This symbiotic
relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power. (Commissioner v. Algue, G.R. L-28896, February 17,
1988).

In one decided case, the Supreme Court upheld the validity of the anti-TB Stamp Law (R.A. 1635)
which requires the affixture of a semi-postal stamp on mail matter between August 19 and September
30 of each year. The Court held that although no special benefit accrues to mail users by such stamp,
it is not necessary to constitute public purpose that special benefits accrue to a taxpayer; it is enough
that he enjoys the benefits of living in an organized society. (Gomez v. Palomar, G.R. L23645, October
29, 1968, 25 SCRA 827).

According to the Court in another case, a person cannot object or resist the payment of taxes solely
because no personal benefit to him can be pointed out as arising from the tax (Lorenzo v. Posadas, G.R.
L-43082, June 18, 1937, 64 Phil 353)

STATED OTHERWISE:

“Necessity theory” – taxes proceed upon the theory that the existence of government is a
necessity; that it cannot continue 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.
“Ability to pay” theory – ability to pay the contribution or tax in proportion to the revenue
or income one is enjoying under the protection of the state.

“The power to tax involved the power to destroy.” Vis-à-vis “The power to tax is not the power to
destroy while the court sits.” –

The principle that the power to tax involves the power to destroy is pertinent only when there
is no power to tax a particular subject and has no relation to a case where such right to tax exists.
Instead of being regarded as a blanket authorization of the unrestrained use of the taxing power for any
and all purposes, this maxim is reasonably construed as an epigrammatic statement of the political and
economic axiom that since the financial needs of a state may outrun any human calculation, so the
 power to meet those needs by taxation must not be limited even though that taxes become
burdensome or confiscatory. The phrase describes not the purpose for which the taxing power may
be used but the degree of vigor with which the taxing power may be employed in order to raise
revenue. (McCulloch vs. Maryland, US 4 Wheat. 316)

The power of taxation is sometimes also called the power to destroy. Therefore, it should be
exercised with caution to minimize the injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the “hen that lays the golden eggs.” In
order to maintain the general public’s trust and confidence in the government, this power must be used
justly and not treacherously (Roxas y Cia vs. CTA, 23 SCRA 276; L-25043, Apr. 26, 1968)

Foreign Justices’ views- Churchill and Tait v. Concepcion, G.R. L-11572, September 22, 1916, 34
Phil. 969 - The power to tax involves the power to destroy, according to Chief Justice Marshall,
because it interferes with the personal and property rights of the people and takes from them a
portion of their property for the support of the government. However it must be exercised with
caution to minimize injury to taxpayer’s proprietary rights. However Justice Holmes made
contrariwise statement by saying: “the power to tax is not the power to destroy while this court sits.”

To reconcile the two (2) views, it must be borne in mind that the imposition of a valid tax could
not be judicially restrained merely because it would prejudice taxpayer’s property. Moreover, an illegal
tax could be judicially declared invalid and should not work to prejudice a taxpayer’s property. Chief
Justice Marshall’s view refers to a valid tax while Justice Holmes’ view refers to an invalid tax.

2000, 1996 BAR Question: “The power to tax is not the power to destroy while this Court (Supreme
Court) sits.” Describe the power to tax and its limitations.

Phases / Aspects of Taxation

Levying or Imposition – which is legitimate act; to levy, being an aspect of taxation mean “an
imposition or for collection of an assessment, tax, tribute or fine; Levy as a remedial measure is the
power of the BIR to attached real properties for taxpayers who does not want to pay tax

Collection – which is essentially administrative in nature and includes criminal prosecution,

forfeiture, etc.

Taxes, defined:

are enforced contributions usually monetary in form, levied by the lawmaking body on persons, and
property subject to its jurisdiction for the precise purpose of supporting governmental needs.

Elements/requisites/characteristic of valid tax

An enforced contribution, a forced charge, imposition or contribution. As such, it operates ad invitum

(it is in no way dependent upon the will or contractual assent, express or implied, of the person taxed.
It is not contractual, either express or implied, but positive acts of government
Proportionate in character (based on ability to pay)- (Sec. 28(a), Article VI, 1987 Constitution)
 Exacted and levied pursuant to law on persons, property or exercise of right or privilege within its
jurisdiction, in accordance with the principle of territoriality
Generally payable in money (but backpay certificates may be used in payment of the tax - Borja v.
Gella, G.R. L-18330, July 31, 1963, Buencamino v. Hernandez, G.R. L-14883, July 31, 1963, Tirona v.
City Treasurer of Manila, G.R. L-24607, January 29, 1968) The taxpayer is not allowed to settle his
tax liability by conveying property (real or personal) in view of the problem of assigning value to such
property
Levied by the lawmaking body of the State which has jurisdiction over the subject or object of taxation.
Taxes are obligations created by law (Vera v. Fernandez, G.R.L-31364, March 30, 1979) A tax creates
a civil liability on the part of the delinquent taxpayer, although the non-payment thereof creates a
criminal liability which could be the subject of criminal prosecution under existing laws. It is one’s
civil liability to pay national internal revenue taxes that gives rise to criminal liability, not the other way
around. Criminal cases cannot operate to discharge defendant-appellee from the duty of paying the
taxes which the law requires to be paid, since that duty is imposed by statute prior to and independently
of any attempts by the taxpayer to evade payment (Republic v. Patanao, G.R. L-22356, July 21, 1967)

Situs of Taxation – it is the place of taxation. It is the state or political unit which has
jurisdiction to impose a particular tax. The situs of:

real property - lex rei situs (where the property is situated)

personal property – where the owner is found because movable follows the person under
the principle of mobilia sequuntur personam.
taxable transactions – the place where respective transactions are perfected and
consummated.

Basis for situs of taxation – it is based on the principle of symbiotic relationship, that is, the
jurisdiction, state or political unit that gives protection has the right to demand support. The
taxable situs will depend upon various factors such as the nature of the tax, the subject matter
thereof (which may be person, property, act or activity), citizenship and residence of the
taxpayer.

Tax laws operate beyond the jurisdictional limits of a country. Among the instances is when
resident citizens are taxed on their incomes derived from abroad. However, there are also tax
laws that do not operate within the territorial jurisdiction of the state for reasons that (1) they
are exempted by treaty obligations; and (2) they are exempted by international comity.

Levied or collected for public purpose

It is personal to the taxpayer. A corporation’s tax delinquency cannot be enforced against its
stockholders. A corporation is vested by law with a personality that is separate and distinct from those
of the persons composing it as well as that of any other legal entity to which it may be related (Sunio
vs. National Labor Relations Commission, 127 SCRA 390; L-57767, Jan. 31, 1984)
2000 Bar Question: Among the taxes imposed by the Bureau of Internal Revenue are income tax,
estate and donor’s tax, value added tax, excise tax, other percentage taxes, and documentary stamp
taxes. Classify these taxes into direct and indirect taxes, and differentiate direct from indirect taxes.
Income tax, estate and donor’s tax are considered as direct taxes. On the other hand, value added tax,
excise tax, other percentage taxes, and documentary stamp tax are indirect taxes. Direct taxes are
demanded from the very person who, as intended, should pay the tax which he cannot shift to another;
while an indirect tax is demanded in the first instance from one person with the expectation that he can
shift the burden to someone else, not as a tax but as part of the purchase price.
Primary Purpose /Objectives of Taxation

Revenue purpose - to raise revenue for governmental needs in (a) promoting public welfare, (b)
funding various infrastructure projects vital to nation-building, and (c) meeting its domestic and
international obligations and commitments
Regulatory purpose – limiting consumption on items containing harmful substance making them more
expensive, i.e., cigarettes and liquor taxes: Taxation is no longer envisioned as a measure merely to
raise revenue to support the existence of government; taxes may be levied with a regulatory purposes to
provide means for the rehabilitation and stabilization of a threatened industry which is affected with
public interest as to be within the police power of the state. There can be no doubt that the oil industry
is greatly imbued with public interest and stabilization of oil prices is a prime concern which the state
via its police power may properly address (CALTEX Phils., Inc. v. COA 208 SCRA 726, G.R. 92585,
May 8, 1992)
Promotion of General Welfare – Taxation may be used as an implement of the police power in order
to promote the general welfare of the people. In the case of Lutz vs. Araneta, the Supreme Court
upheld the validity of the Sugar Adjustment Act which imposed a tax on milled sugar since the purpose
of the law was to strengthen the sugar industry which undeniably is an industry too vital to the
economy.

1991 BAR Question: the police power, the power to tax and the power of eminent domain are
inherent powers of government. May a tax be validly imposed in the exercise of the police power and
not of the power to tax? If your answer is in the affirmative, give an example. The police power may
not be exercised for the purpose of requiring license for which license fees may have to be paid. The
amount of the license fees for the regulation of useful occupations should only be sufficient to pay for
the cost for the license and the necessary expense of police surveillance and regulation. For non-
useful occupations, the license fee may be sufficiently high to discourage the particular activity sought
to be regulated. It is clear from the foregoing that police may not be exercised by itself alone for the
purpose of raising taxes. However, police power may be exercised jointly with the power of taxation
for the purpose of raising revenues. (Lutz vs. Araneta, 98 Phil. 148; L-7859, Dec. 22, 1956)
Compensatory purpose - Reduction of social inequality/ Equitable wealth distribution –
Progressive system of taxation prevents the undue concentration of wealth in the hands of a few
individual. Progressivity is keystoned on the principle that those who are able to pay shoulder the
bigger portion of the tax burden. Taxation reduces excessive inequality of wealth, that is, it is a tool to
promote more equitable distribution of wealth and social benefits
Encourage economic growth by granting incentives and exemptions – The power to tax and the
power to exempt are inherent in the State and in local governments. But the power to condone taxes
does not exist, save in the condonation of taxes (e.g., real property tax) which can be granted only for
certain justifiable reasons expressly stated in the law (Sec. 276, Local Government Code)
Protectionism – To protect local industries from foreign competition.

Characteristics of sound taxation (Canons of Taxation of Adam Smith)

Fiscal Adequacy – Sources of revenue are sufficient to meet the demand of public expenditures
and other public needs. This is essential in order to avoid budgetary deficits and so as to minimize
foreign and local borrowings. A court ruling describes fiscal adequacy as one of the characteristics of a
 sound tax system which requires that sources of revenue must be adequate to meet government
expenditures and their variations. (Chavez v. Ongpin GR 76778, June 6, 1990, 186 SCRA 331)
Theoretical Justice (Equality) – imposition of taxes is equated with the ability of the taxpayer to
pay. It suggests that taxation must be progressive conformably with the constitutional mandate that the
Congress shall evolve a progressive system of taxation (Art. VI, Section 28(1), Constitution)
Administrative Feasibility – tax law can reasonably be enforced not unduly “burdensome” upon nor
discouraging to business activity. Taxes should be capable of being effectively enforced. Hence it
must not lay down obstacles to business growth and economic development. The VAT could be cited
as an example of administrative simplicity. The Court to this effect ruled that the law “is principally
aimed to rationalize the system of taxes on goods and services; simplify tax administration and make
the system more equitable to enable the country to attain economic recovery” (Kapatiran ng mga
Naglilingkod sa Pamahalaan v. Tan, GR 81311, June 30, 1988)

DIFFERENTIATE Taxation from Eminent Domain and Police Power

Taxation Eminent Domain Police Power

Authority who May be exercised May be: May be exercised
Exercises the only by the Exercised by the only by the
Power government or its government or its government or its
political political political
subdivision subdivisions subdivision
Granted to public
service
companies or
public utilities
Purpose The property The property is The use of the
(generally in the “taken” for public property is
form of money) is use; it must be “regulated” for the
taken for the compensated purpose of
support of the promoting the
government general welfare; it
is not compensable
Persons Affected Operates upon a Operates on an Operates upon a
Community; or individual as the Community;
Class of Individuals owner of a Class of Individuals
particular property
Effect The money There is transfer of There is no transfer
contributed the right to of title
becomes part of the property At most, there is
public funds restraint on the
injurious use of
property
Benefits Received Assumed that the He receives the The person affected
individual receives market value of the receives indirect
the equivalent of property taken benefits as may
the tax in the form from him arise from the
 of protection and maintenance of a
benefits he receives healthy economic
from the standard of society
government
Amount of Imposition Generally there is No amount Amount imposed
no limit on the imposed but rather should not be more
amount of tax that the owner is paid than sufficient to
may be imposed the market value of cover the cost of
property taken the license and
necessary expenses.
Relationship to Subject to certain Inferior to the Relatively free
Constitution constitutional impairment from constitutional
limitations prohibition; limitations
Including the government cannot Is superior to the
prohibition against expropriate private impairment
impairment of the property, which provisions
obligation of under a contract it
contracts had previously
bound itself to
purchase from the
other contracting
party
*Non-impairment clause (Section 10, Art III, Philippine Constitution): “No law impairing the
obligation of contracts shall be passed” – Impairment is anything that diminishes the efficacy of the
contract; those that would change the terms and conditions of the original contract over one contracting
party’s objection.
** Ex post facto law: ((1)refers to a criminal matter, (2) it is retroactive in application; and (3) it
works to the prejudice of the accused)
It is every law:`
that makes criminal an action done before the passage of the law and which was innocent when done,
and punishes such action
that aggravates a crime, or makes it greater than it was when committed
that changes punishment, and inflicts a greater punishment than the law annexed to the crime when
committed
alters the legal rules of evidence, and receives less or different testimony than the law required at the
time of the commission of the offense, in order to convict the offender
which, assuming to regulate civil rights and remedies only, in effect imposes a penalty or the
deprivation of a right for something which when done when lawful;
which deprives persons accused of a crime of some lawful protection to which they have become
entitled, such as the protection of a former conviction or acquittal or of a proclamation of amnesty

Taxes distinguished from other impositions

1.  Tax vs. Debt
Tax Debt
Basis Based on Law Based on contract or
judgment
Effect of Non-payment Taxpayer may be imprisoned No imprisonment for failure
 for his failure to pay the tax to pay a debt
(except poll tax)
Mode of Payment Generally payable in money May be payable in money
property or services
Assignability Not assignable Can be assigned
Interest Does not draw interest unless Draws interest if stipulated or
delinquent delayed
Authority Imposed by public authority Can be imposed by private
individuals
Prescription Prescriptive periods for tax Civil Code governs the
are determined under the prescriptive period of debts.
NIRC

2.  Tax vs. Toll
Tax Toll
Definition Enforced proportional A sum of money for the use
contributions from persons of something, a consideration
and property which is paid for the use of a
property which is of a public
nature. e. g. road, bridge
Basis A demand of sovereignty A demand of proprietorship.
Amount No limit as to the amount of Amount of toll depends upon
tax the cost of construction and
maintenance of the public
improvement used
Authority May be imposed only by the May be imposed by the
government government or private
individuals or entities.

3.  Tax vs. License Fee
Tax License Fee
Purpose Imposed for revenue Imposed for regulatory
purposes purposes
Basis Imposed under the power of Imposed under the police
taxation power of the State
Amount No limit as to the amount of Amount of license fee that
tax can be collected is limited to
the cost of the license and the
expenses of police
surveillance and regulation.
Time of Payment Normally paid after the start Normally paid before the
of the business commencement of the
business
Effect of Non-Payment Failure to pay the tax does Failure to pay a license fee
not make the business illegal makes the business illegal
Surrender Taxes, being the lifeblood of License fee may be with or
the State, cannot be without consideration
 surrendered except for lawful
consideration.

4. Tax vs. Special Assessment

Tax Special Assessment

Definition Enforced proportional An enforced proportional
contribution from persons contribution from owners of
and property lands especially or peculiarly
benefited by public
improvements.
Basis Based on necessity Based wholly on benefits
Subject Levied on persons, property, Levied only on land
acts
Scope Has general application It is exceptional both as to the
time and place
Person Liable It is a personal liability of the Not a personal liability of the
tax person assessed; his liability
is limited only to the land
involved

5. Tax vs. Penalty

Tax Penalty
Definition Enforced proportional Sanction imposed as a
contributions from persons punishment for violation of a
and property law or acts deemed injurious;
violation of tax laws may
give rise to imposition of
penalty
Purpose Intended to raise revenue Designed to regulate conduct
Authority May be imposed only by the May be imposed by the
government government or private
individuals or entities.

Classification of Taxes: according to:

purpose
subject matter
persons burdened
scope or authority imposing the tax
determination of amount to be paid
rates of tax

Taxes according to purpose:

Fiscal or revenue tax which is primarily for raising revenue for support of governmental programs and
services.
Regulatory tax which is imposed primarily for the regulation of useful or non-useful occupation or
enterprises and secondarily only for the raising of public funds.
 General tax which is intended for general purpose
Special tax – taxes intended for special purpose

Taxes according to subject matter:

Personal tax which is imposed in fixed sum upon resident (i.e., community tax)
Property tax which is imposed on properties (i.e., real estate tax); and
Excise tax which is imposed on the exercise of privileges.

Taxes According to persons burdened:

Direct tax which levied upon the very person bound to pay such as the individual income tax;
Indirect tax which is levied upon goods before they reach the consumers and are paid by those upon
whom they ultimately fall, not as taxes but as part of the purchase price (i.e., import dues, percentage
tax, contractor’s tax, etc.)

Taxes according to scope or authority imposing the tax

National tax which is levied upon the national government
Local tax which is imposed by the local government units.

Taxes according to determination of the amount to be paid.

Specific taxes which are those imposed specific sum by the head or number or by some standard of
weight or measurement (i.e., documentary stamp taxes, franchise, etc.)
Ad valorem taxes which are those duties based on the value of an article (or selling price), actual
valuation is to be effected by an authorized appraiser.

Systems of Taxation
Proportional system where the taxes increases or decreases in relation to the tax bracket.
Progressive or graduated system where the tax increases as the income of the taxpayers goes higher
Regressive system where the tax decreases as the income of the tax payer increases

Taxes as to rates of taxes to be paid

Proportional taxes which are higher or lower depending upon the bracket
Progressive or graduated taxes where taxes gradually increase or decrease as value increase
Regressive taxes which decreases as bracket increases.

DOUBLE TAXATION

Double Taxation (otherwise known as “direct duplicate taxation) means taxing the same person twice
by the same jurisdiction for the same thing in the same taxable year. There is no double taxation where
one tax is imposed by the State and the other is imposed by the municipality (Laoag Producers
Cooperative Marketing Asso., Inc. v. Laoag, 37 SCRA 594)

In order to constitute double taxation in the objectionable or prohibited sense, the same property
must be taxed twice when it should be taxed but once; both taxes must be imposed on the same
property or subject matter, for the same purpose, by the same State, Government or taxing authority,
within the same jurisdiction or taxing district, during the same taxing period and they must be the same
kind or character of tax. (Villanueva vs. City of Iloilo, 26 SCRA 578; L-26521, Dec. 28, 1968)

In the broad sense, double taxation means indirect duplicate taxation. It extends to all cases in
which there are two or more pecuniary impositions.

Double taxation is not specifically prohibited in the Philippine Constitution. – 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, L-22814, 1968) However, where there is direct
duplicate taxation then there may be violation of the constitutional precepts of equal protection and
uniformity in taxation

When an item is taxed in the Philippines and the same income is taxed in another country, there
is double taxation. But being indirectly a double taxation imposed by different taxing authority, it is
not prohibited. However, to avoid the impact of double taxation, some countries have considered it as
allowable deduction as a tax credit.

Kinds of Double Taxation

Direct duplicate taxation/obnoxious- DT in the objectionable or prohibited sense, same property is

taxed twice when it should be taxed only once.

Requisites:
The same property is taxed twice when it should only be taxed once;
Both taxes are imposed on the same property or subject matter for the same purpose;
Imposed by the same taxing authority;
within the same jurisdiction
during the same taxing period; and
covering the same kind or character of tax.

Indirect double taxation – not legally objectionable

Example: The taxpayer’s warehousing business although carried on in relation to the operation of
its sugar central is a distinct and separate taxable business.

A license tax may be levied upon a business or occupation although the land or property used in
connection therewith is subject to property tax.
Both a license fee and a tax may be imposed on the same business or occupation for selling the same
article and this is not violation of the rules against double taxation.
When every bottle or container intoxicating of intoxicating beverages is subject to local tax and at the
same time the business of selling such product is also subject to liquor license.
A tax imposed both on the occupation of fishing and on the fishpond itself.
A local ordinance imposes a tax on the storage of copra where it appears that the finished products
manufactured out of the copra are subject to VAT
 Methods of reducing/avoiding the occurrence of double taxation are as follows:

Tax deductions: vanishing deductions

Tax credits:
For VAT purposes, the tax on inputs or items that go into the manufacture of finished products (which
are eventually sold) may be credited against or deducted from the output tax or tax on the finished
product.
Tax credit scheme: on income taxation. In the case of a resident citizen or domestic corporation whose
income from foreign sources is also taxable under Philippine Law, the tax paid to the foreign country of
source may under certain limitations be claimed as a credit against the Philippine Tax on the same
income.
Tax Sparing Rule: Taxes paid here in the Philippines by a foreigner is recognized by his mother
country.
Provide for exemption : example: non-stock/non-profit
Tax treaties which exempt foreign national from local taxation and local nationals from foreign
taxation under the principle of reciprocity.

Cases:
Serafica v. City Treasurer of Ormoc: Regulation and taxation are two different things, the first being an
exercise of police powers, whereas the latter involves the exercise of the power of taxation. While R.A.
2264 provides that no city may impose taxes on forest products and although lumber is a forest product,
the tax in question is imposed not upon the lumber but upon its sale. There is no double taxation
involved, and even if there was, it is not prohibited by law.

CIR v. Hawaiian-Phil. Co.: A warehouseman is one who receives and stores goods of another for
compensation. The fact that Hawaiian-Philippine Co. (HPC) stores the planters’ sugar for free for the
first ninety days does not exempt it from liability. If this were the case, the law imposing the tax would
be rendered ineffectual. Neither is the fact that HPC’s warehousing business is carried on in addition to
or in relation to the operation of its sugar central sufficient to exempt it. Under Section 178 of the old
Tax Code, the tax on business is payable for every separate or distinct establishment or place where the
business subject to the tax is conducted, and one line of business or occupation does not become
exempt by being conducted with some other business or occupation for which such tax has been paid.
There can be no double taxation where the State merely imposes a tax on every separate and distinct
business in which a party is engaged in.

Compania General de Tabacos de Filipinas vs. City of Manila: That Tabacalera is being subjected to
double taxation is more apparent than real. What is collected under Ordinance No. 3358 is a license
fee, while the three other ordinances impose a tax on sales of the merchandise. Both a license fee and a
tax may be imposed on the same business or occupation, or for selling the same article. This is not
being in violation of the rule against double taxation.

San Miguel Brewery vs. City of Cebu: The tax on the sale or disposal of every bottle or container of
liquor or intoxicating beverages is a revenue measure, whereas the sum of P600 San Miguel pays
annual is for a second-class wholesale liquor license, which is a license to engage in the business of
wholesale liquor in Cebu City, and constitutes a regulatory measure, in the exercise of police power.

TAX EXEMPTIONS
 Tax Exemptions: a grant of immunity, express or implied, to particular persons or corporations from
the obligation to pay taxes. It is a freedom from a charge or burden to which others are subject
(Greenfield vs. Meer)

Kinds of Tax Exemptions

As to source

Constitutional- immunities from taxation which originate from the constitution

Statutory- those which emanate from legislation.

As to consent

Express- expressly granted by organic or statute law

Implied- when particular persons, properties, or excises are deemed exempt as they fall outside the
scope of the taxing provision itself.

As to extent

Total- connotes absolute immunity

Partial- one where a collection of a part of the tax is dispensed with

Principles governing tax exemptions

Exemptions from taxation are highly disfavored in law and he who claims an exemption must be able
to justify his claim by the clearest grant of organic or statute law. If the provision is ambiguous, there
can be no tax exemptions. Taxation is the rule, tax exemption is the exception.
He who claims an exemption from his share of the common burden in taxation must justify his claim
by showing that the legislature intended to exempt him by words too plain to be mistaken.
It is a well-settle rule that he who claims exemption should prove by convincing proofs that he is
exempted.
Tax exemption must be strictly construed and that the exemption will not be held to be conferred unless
the terms under which it is granted clearly and distinctly show that such was the intention of the parties.
Tax exemptions are not presumed.
Constitutional grants of tax exemptions are self-executing. Reason: a constitutional provision
declaring certain properties as tax-exempt does not need a legislative enactment to put it into effect.
Tax exemptions are personal.
Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions
are to be strictly construed, then it follows that deductions must also be strictly construed against the
taxpayer.

Cases:

Manila Electric Company vs. Vera: Tax exemptions are strictly construed against the taxpayer
because such provisions are highly disfavored and may almost be said to be odious to the law.

Commissioner v. Guerrero: The natural rule is that everyone in the state must contribute to the
support of government. Exemptions are in derogation of sovereignty; hence, they must be strictly
construed against the person claiming it.
 LECTURE GUIDE NOTES 
Atty. Lyndon A. Maceren, CPA

LIMITATIONS ON THE TAXING POWER

The power to tax is the strongest of all the powers of government (HSBC v. Commissioner).
The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very
nature no limits, so that security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency who are to pay it. Nevertheless, effective
limitations thereon may be imposed by the people through their Constitution (Roxas y Cia v. CTA).
Accordingly, no matter how broad and encompassing the power of taxation, it is still subject to inherent
and constitutional limitations.
Limitations on the Power of Taxation

Inherent Limitations: proceed from the very nature of the taxing power itself. It exist whether
declared or not declared in the constitution (SPINE)

Public Purpose of taxes;

Test in Determining Public Purpose

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
Whether the proceeds of the tax will directly promote the welfare of the
community in equal measure
It cannot be exercised in aid of enterprises strictly private, for the benefit of individuals, though in a
remote or collateral way, the public may be benefited thereby.
Though the line which distinguishes public use for which taxes may be assessed, from private use for
which they may not, is not always easy to discern, it is always the duty of the court to interpose when
properly called on for the protection of the rights of the citizen and aid to prevent his private property
from being lawfully appropriated to the use of others.
Cases:

Citizens Savings and Loan Association of Cleveland, Ohio v. Topeka City: A statute
which authorizes towns to issue bonds in aid of manufacturing enterprises of individuals
is void, because the taxes necessary to pay bonds would, if collated, be a transfer of the
property of individuals to aid the projects of gain and profit of others, and not for public
use

Lutz v. Araneta:
Commonwealth Act No. 567 was a valid exercise of police power of the State. Since the
promotion of the sugar industry is a matter of public concern, the legislature may
determine within reasonable bounds what is necessary for its protection and expedient
for its promotion. Thus, the increase in the existing tax on the manufacture of sugar and
the levying of tax on lands devoted to the production of sugar is considered as a public
purpose.
Bagatsing v.Ramirez: The entrusting of collection of fees does not destroy the public
purpose of the ordinance. So long as the purpose is public, it does not matter whether
 the agency through which the money is dispensed is public or private. The right to tax
depends upon the ultimate use, purpose, and object for which the fund is raised. It does
not depend on the nature and character of the person or corporation whose intermediate
agency is to be used in applying it. The people may be taxed for a public purpose
although it is under the direction of an individual or private corporation.
Pascual v. Sec. of Public Works and Communications: It is the essential character of
the direct object of expenditure and not the magnitude of interests to be affected,
nor the degree to which the general advantage of the community and ultimately the
public welfare may be benefited by their promotion, which must determine its
validity as justifying a tax. Incidental advantage to the public or the State, which
results from the promotion of private interests and the prosperity of private enterprises
or businesses, does not justify their aid by the use of public money. Where the land on
which feeder roads were to be constructed belongs to a private person, an appropriation
made by Congress for that purpose is null and void, and a donation to the government
made five months after the approval of the Act does not cure the basic defect of the law.

Non-delegability of the taxing power: the power of taxation is peculiarly and exclusively legislative.
Consequently, the taxing power as a general rule may not be delegated.

Exception:
Art. VI, Section 28(2), 1987 Constitution
Congress, may by law, authorize the President to fix within specified limits, and subject to such
limitations and restrictions as it may impose, tariff rates, import or export quotas, tonnage and wharfage
dues or other duties and impost within the framework of the government

Art. X. Section 5, 1987 Constitution

Each local government unit shall have the power to create its own
sources of revenue and to levy taxes, fees and charges, subject to such
guidelines and limitations as the Congress may provide consistent with
the basic policy of local autonomy. Such taxes, fees, charges shall accrue
exclusively to the local government.

Non-delegable legislative power

selection of property to be taxed

determination of the purposes for which taxes shall be levied
the fixing of the rate of taxation
rules of taxation in general

Territoriality or Situs of taxation: means place of taxation

Power of taxation is necessarily limited only to persons, property or business

within its jurisdiction, that is to say to subject within its jurisdiction, or over
which it can exercise dominion.

The maxim of “mobilia sequuntur personam”: means “movables follow the person”
 According to this maxim, the situs of personal property is the domicile of the
owner.

When to apply? In the case of Wells Fargo Bank vs. Collector, the SC ruled that
the shares of stock left behind by a non-resident alien decedent in an anonymous
partnership (forerunner of corporations) in the Philippines are subject to
Philippine inheritance tax notwithstanding the mobilia rule. The mobilia rule
should yield to reason. The shares of stock are also taxable in the situs of their
actual location, i.e., the Philippines. However, in those cases when the situs for
certain intangibles are into categorically spelled out in a statute, there is room for
applying the mobilia rule.

Intangible properties deemed with a situs in the Philippines:

Franchise which must be exercised in the Philippines

Shares, obligations or bonds issued by a corporation or sociedad anonima organized and constituted
in the Philippines in accordance with its laws;
Shares, obligations or bonds issued by a foreign corporation 85% of its business is located in the
Philippines;
Share, obligations or bonds issued by a foreign corporation if such shares, obligations or bonds have
acquired a business situs in the Philippines;
Shares or rights in any partnership, business or industry established in the Philippines (Section 104,
R.A. 8424 or the CTRP)

Tax exemption of government: 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.

Can the government tax itself? Yes, in one case, the SC held that there is no constitutional limitation
on the power of Congress to tax the AFP if it wishes to do so (Bisaya Land Transportation, Co. vs.
Collector)

International comity

Constitutional Limitations:

Due Process of Law: Section 1, Article II of the Constitution – “No person shall be deprived of life,
liberty or property without due process of law.”

Requires that:

The tax must be for public purpose

imposed within territorial jurisdiction; and
No arbitrariness or oppression in assessment and in collection.

However, it does not require:

Determination through judicial inquiry of property subject to tax; of the amount of tax to be imposed;
 Notice and hearing as to amount of the tax and the matter of apportionment for reason of lifeblood
(necessity) theory.
Instances where due process clause may be invoked:

When there is a clear contravention of inherent or constitutional limitations in the exercise of tax power
Where tax measure becomes so unconscionable and unjust as to amount to confiscation of property,
courts will not hesitate to strike it down, for despite all its plenitude, the power to tax cannot override
constitutional prescriptions. (Tan v. Del Rosario, 237 SCRA 324, 1994)
Cases:

Kapatiran vs. Tan – The CS ruled that due process was not violated by the VAT law
(E.O. No. 273) because there is no grave abuse of discretion incident to its
promulgation. The petitioners failed to show that E.O. 273 was issued capriciously and
whimsically or in an arbitrary or despotic manner by passion or personal hostility since
it appears that a comprehensive study of the VAT was made before EO 273 was
issued.

Sison vs. Ancheta – the modified schedular income tax is not a denial of due process
because there is not proof of arbitrariness in the imposition of the tax rates.

Villegas vs. Hsiu Chiong Chai Po – there is a denial of due process on account of the
passage of an ordinance of the City of Manila which imposes a permit fee of P50.00 on
aliens as a condition to employment or engaging in any business or occupation. The SC
pointed out that aliens once admitted in the Philippines cannot be deprived of life
without due process of law and this guarantee includes the means of livelihood.

Equal Protection of the Law: Section 1, Article III of the Constitution. – “xxx nor shall any person
be denied the equal protection of the law.”

The state has the power to make reasonable and natural classification for purposes of taxation.
However, the classification must be based upon real and substantial differences between the
persons, property or privileges and those not taxed must bear some reasonable relation to the object
of purpose of legislation or to some permissible governmental policy or legitimate end of governmental
action.

Equality of taxation means that all persons who are similarly situated should be treated alike both in
the privilege conferred and burdens imposed. Constitutional equality in taxation means the application
of the concept of equal protection of the laws which prohibits discrimination other than those instances
where there is valid classification. Thus, persons who are similarly situated, or who belong to the same
class, should be given by law the same protection and privileges as well as it imposed the same burdens
and obligations. (tiu et. al. v. CA, GR No. 127410, January 20, 1999)

Requires that taxes treat persons who are similarly situated in the same manner

Uniformity, Equitability, and Progressivity of Taxation: Art. VI, Section 28 (1) of the Constitution –
“The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system
of taxation.”
Uniformity: means that all taxable articles or kinds of property of the same class shall be taxed at the
same rate. (Tan Kim v. CTA, L-18080, April 22, 1963) Different articles or other subjects like transactions,
business, rights, etc. may be taxed at different rates provided that the rate (not necessarily the amount)
is uniform in the same class everywhere.
A tax is uniform when it operates with the same force and effect in every place where the subject of it is
found.
Requires that there should be no direct duplicate taxation

Requisites: for valid classification

It is based upon substantial distinctions which made real differences
It is germane or relevant to the purpose of the legislation or ordinance
It applies, not only to present conditions but also to future conditions substantially identical to those of
the present.
It applies equally to all those who belong to the same class

Equitability: taxation is said to be equitable when its burden falls on those better able to pay. It
implies that the amount of tax must be kept in the light of the taxpayer’s ability to pay. So taxation
may be uniform but inequitable where the amount of tax imposed is excessive or unreasonable. (Reyes v.
Almanzor, 196 SCRA 322, 1991)

Progressivity: taxation is progressive when its rate goes up depending on the resources of the person
affected.

Non-impairment of Contracts: Art. III, Section 10 of the Constitution 0- “No law impairing the
obligations of contracts shall be passed.”

A law which changes the terms of the contract by making new conditions, or changing those in the
contract, or dispenses with those expressed impairs its obligation.
The non-impairment rule does not apply to public utility franchises since a franchise is subject to
amendment, alteration or repeal by the Congress when the public interest so requires.
The obligation of a contract is impaired when its terms or conditions are changed by law or by a party
without consent of the other thereby weakening the position or rights of the latter. (Edwards v. Kearney, 96
US 607) Thus, there is impairment by law when a tax exemption based on a contract is revoked by a later
taxing statute. (Cassanova v. Hord, 8 Phil. 126)
Example: Congress granted a franchise to XYZ shipping lines for the operation of a passenger/cargo
service between Cebu and Surigao subject to the condition that ABC carries government mails free of
charge. It then pays the franchise in lieu of other taxes. Since the grant was for a valid consideration, it
may be considered as a contract and any withdrawal of such franchise or exemption would impair the
obligations of contracts. However, if there was no consideration, it would be gratuitous grant and not a
contractual agreement and therefore the exemption could be without impairing the obligations of
contracts.
HOWEVER: Non-impairment clause must yield to police power of the state (Oposo v. Factoran, et al., 224
SCRA 792, 1994) because public welfare is paramount over impairment to justify state interference though
police power. (Juarez v. CA, et. al., 214 SCRA 475, 1992)
EX POST FACTO LAW: The prohibition against ex post facto laws applies only to criminal and not lo
laws which concern civil matter. Tax laws are special laws and civil in nature. (Republic v. Oasan, L-1941,
Nov. 25, 1955) Collection of interest on taxes is not penal and ex post facto prohibition does not apply.
(Central Azucarera de Don Pedro v. CA, 20SCRA 344, 1967)
The Rule on no-imprisonment for non-payment of poll tax: Article III, Sec. 20 of the Constitution
provides that “No person shall be imprisoned for debt or non-payment of poll tax.”
Taxpayer’s failure to pay the community tax will not cause imprisonment; however, he may be
criminally charged for committing falsification of community tax or for non-payment of other taxes if
the law so provides.

Origin of Appropriation, Revenue, and Tariff Bills: Art. VI, Section 24, of the Constitution – “All
appropriations, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
applications shall originate exclusively in the House of Representatives, but the Senate may propose or
concur with amendments.”

Non-infringement of religious freedom and worship: Art. III, Section 24 of the Constitution. – “No
law shall be made respecting an establishment of religion or prohibiting the free exercise thereof. The
free exercise and enjoyment of religious profession and worship without discrimination or preference
shall forever be allowed. No religious test shall be required for the exercise of civil or political rights.

In the case of American Bible Society vs. City of Manila, the SC ruled that a municipal license tax on
the sale of bibles and religious articles by a non-stock, non-profit missionary organization of a little
profit constitutes a curtailment of religious freedom and worship which is guaranteed by the
constitution.

Delegation of Legislative authority to fix tariff rates, import and export quotas: Art. VII, Section
28 (2) of the Constitution. – “The Congress may by law authorize the President to fix within specified
limits and subject to such limitations and restrictions as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues and other duties or imposts within the framework of the national
development program of the government.

It has been held that the President may increase tariff rates as authorized by law even for revenue
purposes only.

Tax exemption of properties actually and exclusively used for religious, charitable and
educational purposes: Art. VI, Section 28 (3) of the Constitution. – “ Charitable institutions, churches
and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries and all lands,
buildings and improvements actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation.”

Rev. LLado vs. Commissioner: the SC ruled that the constitutional exemption applies only to property
tax. Gifts are subject to donor’s tax
Under the CTRP, gifts made in favor of religious, charitable or educational organizations would
nevertheless qualify for donor’s gift tax exemption.
Is proof of actual use for the tax-exempt purpose necessary?: In the case of Prov. Of Abra vs.
Hernando & Roman Catholic Archbishop of Bangued, Abra, the SC ruled that actual use is necessary.
To be exempt, the lands, buildings, and improvements must not only be exclusively but also actually
and directly used for religious and charitable purposes. This is the difference between the present
(1973) constitution and the 1935 charter which requires only that the property be exclusively used for
the purposes indicated.
“Use” overrides “Ownership” in that if property although actually owned by a religious, charitable, or
educational institution is actually used for a non-exempt purpose, the exemption from tax of said
property vanishes. HOWEVER, total or absolute use is not required, incidental use is enough.
 Voting Requirement in connection with the legislative grant of tax exemptions: Art. VI, Section
28 (4) of the Constitution provides, “No law granting any tax exemption shall be passed without the
concurrence of a majority of all members of Congress.”

Non-impairment of the Supreme Court’s Jurisdiction in Tax Cases: The pertinent provisions of the
Constitution are: Art. VIII, Section 2(1) – The Congress shall have the power to define, prescribed, and
apportion the jurisdiction of the various court but may not deprive the SC of its jurisdiction over cases
enumerated in Sec. 5 hereof.

Art. VIII, Section 5: “The Supreme Court shall have the following powers: xxx …: “Review, revise,
reverse, modify or affirm on appeal on certiorari as the law or the Rules of Court may provide, final
judgments and orders of lower courts in: xxx (b) All cases involving the legality of any tax, impost,
assessment or toll, or any penalty imposed in relation thereto. xxx.”

Tax exemption of revenues and assets, including grants, endowments, donations, or contributions
to educational institutions: Art. XIV, Secs. 4 (3) and (4) of the Constitution provides: Section 4 (3):
“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 matter
provided by law.

“Proprietary educational institution, 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 reinvestments.”

Section 4(4): “Subject to the conditions prescribed by law; all grants, endowments,
donations or contributions was actually, directly, and exclusively used for educational
purposes shall be exempt from tax.”

Suppose income from tuition is invested from an unrelated purpose like placements in the money
market, is the invested income taxable? The invested income is not taxable but the earnings realized
thereon like interest on the placement is the one that is taxable.

Other provisions of the constitution which are related to taxation

Power of the President to veto item or items in an Appropriation, Revenue or Tariff Bill (Art. VI. Sec.
27 (2))
Necessity of an Appropriation made before Money may be paid out of the Treasury (Art. VI, Sec.
29(1))
The provision against the appropriation of Public Money or Property for the benefit of any Church,
Sect, or System of religion. (Art. VI, Sec. 29 (2))
The Constitutional Provision on Taxes Levied for a Special Purpose (Art. VI, Sec. 29(3))
Allotments to Local Governments (Art. X, Sec. 6)
 LECTURE GUIDE NOTES – PART 2
Atty. Lyndon A. Maceren, CPA
TAX LAWS AND ADMINISTRATION

Nature of Tax Laws

Tax laws are civil in nature and are not political. Hence even during the period of enemy occupation
(such as for instance during the Japanese Occupation of the Philippines in World War II which lasted
from 1942 to 1945) tax laws are continually enforced as they are deemed the laws of the occupied
territory and not those of the occupying power. (Hilado v. Collector, 100 Phil. 288)

Tax laws are not penal. Hence, the rule on the retroactive effect of penal laws under Art. 22 of the
Revised Penal Code which reads, as follows: “Penal laws shall have a retroactive effect insofar as they
favor the person guilty of a felony, who is not a habitual criminal as defined in rule 5 of Article 62 of
this Code, although at the time of the publication of such laws a final sentence has been pronounced
and the convict is serving the same,” find no application in tax cases. As stated in Lorenzo v. Posadas,
64 Phil. 353, revenue laws which impose taxes collected by means which are ordinarily resorted to for
the collection of taxes are not classed as penal laws and therefore cannot be given retroactive effects.

Tax laws not being penal, the rule in the Constitution against the passage of ex post facto laws
cannot be invoked. The constitutional prohibition against the passage of ex post facto legislation
according to the Supreme Court applies only to criminal or penal matters and not to laws which
concern civil matters or proceedings generally or which affect or regulate civil or private rights
(Republic v. Oasan Vda. De Fernandez, L-9131, 1956)

Sources of Tax Laws

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

Requisites of Validity Tax Regulations

Reasonable
Within the authority conferred
not contrary to law
must be published
 Publication Requirement

Not all sources of tax laws as enumerated previously require publication in the Official Gazette
as provided in Art. 2 of the Civil Code which states that “laws shall take effect after fifteen days
following the completion of their publication in the Official Gazette unless it is otherwise provided.”

Tañada v. Tuvera, L-63915, Dec. 29, 1986: the following need publication as a condition for
their effectivity: Statutes, including those of local application and private laws, presidential decrees
and executive orders promulgated by the President, and administrative rules and regulations if their
purpose is to enforce or implement existing law pursuant to a valid delegation.

Interpretative regulations and those which are merely internal in nature (those which regulate
only the personnel of the administrative agency and not the public) need not be published.

The memorandum circular is merely for purposes of internal administration of the BIR and not
a regulation within the contemplation of the Tax Code and the Revised Administrative Code. As such,
said circular needs no publication in the Official Gazette as erroneously argued by petitioners. Section
79(b) of the Revised Administrative Code provides that chiefs of bureaus may be authorized to
promulgate circulars or information for the officers and employees in the interior administration of the
business of each bureau or office, and in such case said circular shall not be required to be published.

When an administrative agency renders an opinion by means of a memorandum circular, it

merely interprets a pre-existing law and no publication is necessary for its validity. Construction by an
executive branch of government of a particular law, although not binding upon the courts, must be
given weight as the construction comes from the branch of government called upon the implement of
the law. In this case, the memorandum circular has the force and effect of law. In fact, the petitioners
admitted that copies of said memorandum were distributed to and received by them. (La Suerte Cigar
& Cigarette Factory vs. Commissioner, L-26130, January 1986)

Interpretation/construction of Tax Laws

Statutes levying taxes are construed against the government

It is a well-settled rule in taxation that a statute will not be construed as imposing a tax unless it
does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express
words for that purpose. Accordingly, the provisions of a taxing act are not to be extended by
implication. (Marinduque Iron Mines Agents, Inc. v. Mun. of Hinabangan, L-18924, June 30, 1964)

It is a general rule in the interpretation of statutes levying taxes or duties, that in case of doubt,
such statutes are to be construed most strongly against the government and in favor of the subjects
or citizens, because burdens are not to be imposed, nor presumed to be imposed beyond what the
statutes expressly and clearly import. The purpose of imposing documentary stamp taxes is to raise
revenue and the corresponding amount has already been paid and has become part of the revenue of
government. There is no justification of the government which has already realized the revenue to
require the payment of the same tax for the same documents. (Collector v. Fireman’s Fund
Insurance Co., 148 SCRA 315)

Construction by statute by predecessors is not binding on the successors

 The power to pass upon the validity of General Circular No. V-123 is vested exclusively in our
courts in view of the principle of separation of powers. The Secretary of Finance acted without
valid authority in revoking General Circular No. V-123 in approving, in lieu thereof, General
Circular No. V-139. It cannot be denied, however, that the Secretary of Finance is vested with
authority to revoke, repeal or abrogate the acts or previous rulings of his predecessor in office
because the construction of a statute by those administering it is not binding on their successors, if
thereafter the latter becomes satisfied that a different construction should be given. (Hilado vs.
Collector, 100 Phil. 288)

Retroactive Application

As a rule, taxing statutes must be applied prospectively, except by express provision of the law.
The mere fact that a tax law is retroactive, however, does not make it invalid or against due process
because retroactivity must be so harsh and oppressive in its application in order to invalidate the
law.

The commissioner’s contention that Burroughs Ltd. Is no longer entitled to refund of overpaid
branch profit remittance tax because Revenue Memorandum Circular (RMC) No. 8-82 dated March
17, 1982 had revoked and/or repealed BIR Ruling of January 21, 1980 is without merit. What is
applicable here is still the BIR Ruling of January 21, 1980 because respondent paid the tax in
question on March 14, 1979. RMC 8-82 dated March 17, 1982 cannot be given retroactive effect in
the light of Section 327 (now Section 246) of the Tax Code.(Commissioner vs. Burroughs, 142
SCRA 324)

Exceptions to Non-Retroactivity of Rulings

Revocation, modification or reversal of any rules and regulations promulgated by the Secretary
of Finance or CIR shall not have retroactive effect if it will be prejudicial to the taxpayer, except:

where the taxpayer deliberately misstates or omits material facts from his return or in any document
required of him by the BIR
where the facts subsequently gathered by the BIR are materially different from the facts on which the
ruling is based
where the taxpayer acted in bad faith.

Special Laws prevail over general laws

The demand on the taxpayer to pay is an assessment for deficiency franchise tax. As such, the
right to assess and collect the same is governed by Section 331 of the Tax Code, rather than Article
1145(2) in relation to Articles 1154 and 1155 of the Civil Code which provide for prescription after
6 years. The Tax Code is a special law which must prevail over the Civil Code, a general law
(Guagua Electric Light Plant Co. vs. Commissioner, 19 SCRA 790)

Tax Laws are Special Laws

Tax laws are special laws. The Tax Code is an example of a tax law and according to one
decided case, the Tax Code is a special law and prevails over a general law (Republic v. Santiago
Gancayco, L18307, June 30, 1964)
Tax laws treat of a special subject, i.e., taxes.
 TAX ADMINISTRATION AND ENFORCEMENT

ORGANIZATION AND FUNCTION OF THE BUREAU OF INTERNAL REVENUE

(See Section Sections 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, and 21 of the
NIRC)

BIR Organizational Structure

The BIR is headed by a CIR and 4 Deputy Commissioners (Section 3, NIRC), each of whom
heads the Operations Group, Legal and Inspection Group, Resource and Management Group, and
Information Systems Group. Two more Deputy Commissioners were appointed in 2003 as head of the
Prosecution group and the Special Concerns Group. The Commissioner and 6 Deputy Commissoners,
together with 13 Assistant Commissioners for the different services, comprise the senior level of
administrative authority. Supporting them are 19 Regional Directors (Section 10, NIRC), 115 Rvenue
District Officers (Section 9, NIRC), and thousands of revenue officers conducting the audit of
taxpayers’ books of accounts and accounting records.

Agents in the Collection of Taxes

BIR officials are charged with assessment and collection of all national internal revenue taxes, fees and
charges, including penalties and fines for violations of certain provisions of the 1997 NIRC (Tax Code)
and special laws administered by the BIR.

The following officials are constituted as agents of the CIR (Section 12, NIRC)

The Commission of Customs and his subordinates, with respect to the collection of VAT and Excise
Tax on Imported goods;
The Head of appropriate government office and his subordinates, with respect to the collection of
energy tax; and
The authorized agent banks, with respect to the receipt of payments of internal revenue taxes
authorized to be made through banks. Any bank officer or employee involved in this task shall be
subject to the same sanctions and penalties under Section 269 (violations committed by government
enforcement officers) and 270 (unlawful divulgence of trade secrets) of the 1997 Tax Code.

Powers and Duties of BIR

Section 2 of NIRC enumerates the powers and duties of the BIR as follows:

To assess and collect national internal taxes, fees, and charges;

To enforce all forfeitures, penalties and fines connected therewith;
To execute judgment in all cases decided in its favor by the CTA and the ordinary courts; and
To effect and administer the supervisory and police powers conferred upon it by the Tax Code or other
special laws

Powers of the CIR in order to effectively enforce tax laws and collect the needed revenues

Power to interpret tax laws and to decide tax cases

 Section 4 of NIRC provides that the power to interpret the provisions of the Tax Code and
other tax laws shall be under the exclusive and original jurisdiction of the CIR, subject to review by
the Secretary of Finance. The provision was inserted in R.A. 8424, which became effective on
January 1, 1998, in order to avoid situations where different government agencies like the BIR,
Department of Finance (DOF), Department of Justice (DOJ), Board of Investments (BOI), and even the
Office of the Executive Secretary issue conflicting opinions on the proper interpretation of certain
provisions of the Tax Code and other tax laws.

The power to decide disputed assessments, refunds of taxes, fees or other charges,
penalties, and other matters arising under the Tax Code is vested with the Commissioner, subject to
the exclusive appellate jurisdiction of the Court of Tax Appeals (CTA) (R.A. 1125, as amended).
 Power to examine books and other accounting records and obtain information.

In ascertaining the correctness of any return, or in making a return when none has been made,
or in determining the liability of any person, or in collecting any such liability, or in evaluating tax
compliance, the Commissioner is authorized:

To examine any book, paper, record, or other data which may be relevant or material to such
inquiry;

To obtain on a regular basis from any person other than the person whose internal revenue tax
liability is subject to audit or investigation, or from any office or officer of the national and
local governments, government agencies and instrumentalities, including the Bangko
Sentral ng Pilipinas and GOCC, any information;

To summon the person liable to tax or required to file a return, or any officer or employee of such
person, to appear before the CIR or his duly authorized representative at a time and place
specified in the summons and to produce such books, papers, records, or other data, and to
give testimony;

To take such testimony of the person concerned, under oath, as may be relevant or material to
such inquiry; and

To cause revenue officers and employees to canvass from time to time of any revenue district or
region and inquire after and concerning all persons therein who may be liable to pay any
internal revenue tax, and all persons owning or having the care, management or possession
of any object with respect to which a tax is imposed.

BAR:

ABC Corporation, is a big manufacturer of consumer goods and has several suppliers of raw
materials. The BIR suspects that some of the suppliers are not properly reporting their income
on the sales to ABC Corporation. The CIR therefore:
Issued an access letter to ABA Corporation to furnish the BIR information on sales and
payments to its suppliers.
Issued an access letter to Bank X to furnish the BIR on deposits of some supplier of
ABC Corporation on the alleged ground that the suppliers are committing tax evasion.

ABC Corporation, Bank X and the suppliers have not been issued by the BIR letter of authority
to examine. ABC Corporation, and Bank X believe that the BIR is on a “fishing expedition”
and come to you for counsel. What is your advice?

I will advise ABC Corporation and Bank X that the BIR is justified only in getting information
from the former but not from the latter. The BIR is authorized to obtain information from other
persons that those whose internal revenue tax liability is subject to audit or investigation.
However, this power shall not be construed as granting the CIR the authority to inquire into
bank deposits (Section 5, NIRC)

Power to inquire into bank deposits of taxpayers

 The general rule under Section 5 of the NIRC, the law does not grant the CIR the authority to
inquire into bank deposits other than as provided for in Section 6(F) of the Tax Code.

Section 6(F) provides that notwithstanding any contrary provisions of RA 1405 (Bank Secrecy
Law) and other general or special laws, the CIR is authorized to inquire into the bank deposits of
A decedent to determine his gross estate; and
Any taxpayer who has filed an application for compromise of his tax liability under Section 204(A)(2)
of this Code by reason of financial incapacity to pay his tax liability.

The application to compromise shall not be considered, unless and until the taxpayer waives in
writing his privilege under RA 1405, and such waiver shall constitute the authority of CIR to inquire
into the bank deposits of the taxpayer.

If a bank has knowledge of the death of a person, who maintained a bank deposit account alone
or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the CIR
has certified that the transfer taxes imposed thereon have been paid. However, the administrator of the
estate or any one of the heirs of the decedent may, upon authorization by the Commissioner, withdraw
an amount not exceeding P20,000 without the said certification. For this purpose, all withdrawal slips
shall contain a statement to the effect that all of the joint depositors are still living at the time of
withdrawal by any one of the joint depositors and such statement shall be under oath by the said
depositors (Section 97, NIRC)

BAR:

Can the Commissioner of Internal Revenue inquire into the bank deposits of a taxpayers? If so does
this power of the CIR conflict with RA 1405, Secrecy of Bank Deposits Law?

The CIR is authorized to inquire into the bank deposits of:

A decedent to determine his gross estate; and

Any taxpayer who has filed an application for compromise of his tax liability under Section 204(A)(2)
of this Code by reason of financial incapacity to pay his tax liability.

The limited power of the CIR does not conflict with RA No. 1405 because the provisions of
the Tax Code granting this power is an exception to the Secrecy of Bank Deposits Law as
embodied in a later legislation.

Furthermore, in case a taxpayer applies for an application to compromise the payment of

his tax liabilities on his claim that his financial position demonstrates a clear inability to
pay the tax assess, his application shall be not be considered unless and until he waives in
writing his privilege under RA 1405, and such waiver shall constitute the authority of the
CIR to inquire into the bank deposit of the taxpayer.

X dies in year 2000 leaving a bank deposit of P2,000,000 under joint account with his associates in a
law firm. Learning of X’s death from the newspapers, the CIR wrote to every bank in the country
asking them to disclose to him the amount of deposits that might be outstanding in his name or jointly
with others at the date of his death. May the bank holding the deposit refuse to comply on the ground
of the Secrecy of Bank Deposit Law? Explain.
 No. The CIR has the authority to inquire into bank deposit accounts of a decedent to
determine his gross estate notwithstanding the provisions of the Bank Secrecy Law. Hence,
the banks holding deposits in question may not refuse to disclose the amount of deposits on
the ground of secrecy of bank deposits (Section 6(F), NIRC). That fact that the deposit is a
joint account will not preclude the CIR from inquiring thereon because the law mandates
that if a bank has knowledge of the death of a person, who maintained a bank deposit
account alone or jointly with another, it shall not allow any withdrawal from the said
deposit account, unless the CIR has certified that the taxes imposed thereon have been paid
(Section 92, NIRC). Hence, to be able to give the required certification, the inclusion of the
deposit is imperative.

A taxpayer is suspected not to have declared his correct gross income in his return filed for 2003. The
examiner requested the Commissioner to authorize him to inquire into the bank deposits of the taxpayer
so that he could proceed with the net worth method of investigation to establish fraud. May the
examiner be allowed to look into the taxpayer’s bank deposits? In what cases may the Commissioner
or his duly authorized representative be allowed to inquire or look into the bank deposits of a taxpayer?

No, as this would be violative of RA 1405, the Bank Deposits Secrecy Law.
The CIR or his duly authorized representative may be allowed to inquire or look into the
bank deposits of a taxpayer in the following cases:
For the purpose of determining the gross estate of a decedent;
Where the tax has filed an application for compromised of his tax liability by reason of financial
incapacity to pay such tax liability (Section 6F, NIRC)
Where the taxpayer has signed a waiver authorizing the CIR or his duly authorized representative to
inquire into the bank deposits.

Power to assess and collect the correct amount of tax

After the return is filed, the CIR or his duly authorized representative may authorize the
examination of any taxpayer and the assessment of the correct amount of tax. The tax or deficiency tax
so assessed shall be paid upon notice and demand from the CIR or his duly authorized representative
(Section 6(A), NIRC)

Means Employed in the Assessment of Taxes

Examination of tax returns
Use of the best evidence obtainable
Inventory taking, surveillance and use of presumptive gross sales and receipts.
Termination of taxable period.
Prescription of real property values.
Examination of bank deposits to determine the correct amount of the gross estate.
Accreditation and registration of tax agents.
Prescription of additional procedural or documentary requirements
 LECTURE GUIDE NOTES – Taxation 2
Atty. Lyndon A. Maceren, CPA
TAX ON INCOME

Income, in its broad sense, means all wealth which flows into the taxpayer other than as a mere return
of capital. It may be received actually or constructively.

It is also defined as 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. (Conwi, et al. v. CTA, 213 SCRA 83, G.R. No. 48532, August 31, 199)

For purposes of solving income taxation problems which require the determination of items
considered as income, income is defined (conceptual definition) as any material gain, not excluded by
law, realized out of closed and completed transaction where there is an exchange of economic value for
economic value. This definition should not be used for answering objective type questions asking for
definition of income.

Income means all wealth which flows into the taxpayer other than a mere return of capital. It includes
the forms of profits/income specifically described as derived from the sale or other disposition of
capital assets. (key word : profit)

For income to be taxable, the requisites are:

There must be gain or profit. There must be in fact income, whether in cash, or its equivalent
because income does not only refer to money a taxpayer received but includes anything of value,
whether tangible or intangible.
The gain must be realized or received. Even if there is material gain not excluded by law if the
material gain is not yet realized by the taxpayer there is no income to speak of. Hence, the realization
principle. Thus:
Mere increase in the value of property is not income but merely an unrealized increase in capital.
Mere increase in the net worth of a taxpayer which was not the result of the receipt by it of
unreported or unexplained taxable income, but was merely the outcome of the correction of errors in its
entries in its books relating to its indebtedness to certain creditors which had been erroneously
overstated or listed as outstanding when they had in fact been duly paid does not give rise to taxable
income.

Realization Principle. (Doctrine of Actual Receipt) Under this principle, revenue is generally
recognized when both of the following conditions are met:
the earning process is complete or actually complete
an exchange has taken place.

This principle requires that revenues must be earned before it is recorded (Manila Mandarin Hotel
Inc. v. CIR, CTA Case No. 5046 promo March 24, 199)

Doctrine of Constructive Receipt of Income. Income is considered constructively received where

the taxpayer has an unjustified right to receive the same but by his own choice the income is not
reduced to possession. Examples:
Then undistributed share in the profits of a partner in a general professional partnership of a partner.
Uncollected matured interest coupons which are due and payable is income for the year during which
the coupons matured.
Credited interest collected on savings bank deposits
Dividends applied by the corporation against the indebtedness of a stockholder
Rental payments refused by the lessor, when the lessee tendered payment and the latter made a v
judicial deposit of the rental due

The gain must not be excluded by law or treaty from taxation. This implied that not all income is
required to be included in computing the taxable income. Example: certain passive incomes of
individuals like interest on bank deposits are not reported for income tax being subject to a final tax on
passive income.

Capital v. Income
Capital is a fund while income is a flow
Capital is a fund of property existing at an instant of time while income is a flow of services rendered
by that capital by the payment of money from it or any other benefit rendered by a fund of capital in
relation to such fund through a period of time.
Capital is the wealth itself while income is the service of wealth
Capital is the tree while income is the fruit.

Capital is a fund or property existing at one distinct point of time. It differs from income.

Receipts has reference to all wealth that flow into the taxpayer which includes return of capital. It is
evident that receipt is broader in scope than income.

Revenue as applied to taxation, refers to all the funds or income derived by the government whether
from tax or any other source

Classes of sources of income

Income from sources within the Philippines
Income from sources without the Philippines
Income from sources partly within/without the Philippines.

Classification of income from sources within

Gross income like the following:
Interest
Dividends from domestic/foreign corporations,
Services
Rentals and
Royalties (from copyrights, patent, right to use scientific equipment, technical device, use of film,
tapes, etc.)
Sale of real property
Sale of personal property

Taxable income is the remainder after deducting from gross income, the expenses, losses and other
allowable deductions.

Taxability of income
The law in levying the tax adopts the most comprehensive tax situs of nationality and residence of
the taxpayer (that renders resident citizens subject to income tax liability on their income from all
sources) and of the generally accepted and internationally recognized income taxable base (that
can subject nonresident aliens and foreign corporations to income tax on their income from Philippine
sources) (Tan v. del Rosario, Jr. 237 SCRA 342, 334)

As regards individuals, the taxability of income depends upon:

citizenship
resident of the recipient
the place where such income is derived

Income subject to tax under the NIRC (Section 23, NIRC)

Income received from all sources by every individual resident of the Philippines.
Income derived by non-resident citizen of the Philippine, an oversea contract worker or seamen only
from sources within the Philippines
Income received from all sources within the Philippines by every alien individual, whether resident or
not.

Income tax means a tax imposed on taxable income in one taxable year. It is based on the gross
income/taxable income payable yearly by individual persons or corporations. Income tax is a tax on
the yearly profit arising from property, profession, trades and offices.

For income to be taxable, the requisites are:

There must be gain or profit
The gain must be realized or received, actually or constructively; and
The gain must not be excluded by law or treaty from taxation

Types of Income Taxes

Presumptive income tax where a scale of income taxes is imposed in relation to a group of persons’
actual expenditures and the presumed income
Composite Income tax where a tax consisting of a series of separate quasi-personal taxes, assessed on
the particular source of income with a superimposed personal tax on the income as a whole.
Unitary income tax where incomes are arranged according to source. The separate items are added
together and the rate applied to the resulting total income.

Systems of income taxation

Global system is employed where the tax system views indifferently the tax base and generally treats
in common all categories of taxable income of the individual. It is a system which taxes all categories
of income except certain passive income and capital gains. It prescribes a unitary but progressive rate
for the taxable aggregate income and flat rates for certain passive incomes derived by individuals. (Tan
v. Del Rosario, 237 SCRA 324, 331)

Under this system, there is a unitary or single tax rate. There is no need for classification as all
taxpayers are subject to a single rate and this system is usually applied to corporations.
 Schedular system is where the income tax treatment varies and is made to depend on the kind or
category of taxable income of the taxpayer. It is a system which itemizes the different incomes and
provides for varied percentages of taxes, to be supplied thereto.

Under the scheduler system, there are different tax rates and different categories of taxable income.
This system is usually used in income taxation of individuals

Basic Features of the present income tax system

Progressive
Global system for taxable corporations and schedular system for individuals
Uses gross compensation system

Income taxes under the NIRC

Tax on individuals
Tax on corporations
Income on estates (i.e., decedent’s estates under testate or intestate proceeding) and trust may be taken
into consideration as the third kind or classification

Taxpayer means any person subject to tax imposed by the NIRC. Income taxpayers are persons who
derive taxable income. (Tan v. Del Rosario, 237 SCRA 324, 331)

Classification of taxpayers

Individual taxpayers.
Corporate taxpayers (includes Partnerships or co-partnerships)
Estates under juridical settlement; and
Trusts (irrevocable both as to corpus and income) – see Tan v. Del Rosario, ibid.
General Professional Partnerships

For tax purposes, individuals are classified into: (Section 23, NIRC)
Citizens – taxable on ALL income derived from sources within and without the Philippines
Resident citizens – taxable on ALL income derived from sources WITHIN AND WITHOUT the
Philippines;
Nonresident citizens- taxable on ALL income derived from sources WITHIN the Philippines
Overseas contact worker (working and deriving income from abroad)– taxable only on income from
sources WITHIN the Philippines
Aliens – taxable only on income derived from sources WITHIN the Philippines.
Resident aliens;
Nonresident aliens engaged in trade or business; and
Nonresident aliens not engaged in trade or business.

For tax purposes, corporations are classified into: (Section 23, NIRC)
Domestic Corporation – taxable on all income derived from sources WITHIN and WITHOUT the
Philippines

Foreign Corporation – taxable only on income derived from sources WITHIN the Philippines
Engaged in trade or business; and
Not engaged in trade or business.
 Kinds of individual taxpayers as to their personal exemptions: Section 35, NIRC
Single, unmarried or
legally separated taxpayer P50,000
Head of a family P50,000
Married individuals P50,000

It is important to know the different groups of taxpayers on the kinds of individual taxpayers in
order to determine and to know the applicable tax rates, exemptions and allowable deductions.

Kinds of Filipino Citizens for taxation purposes

Resident citizens who are Filipinos residing in the Philippines
Nonresident citizens are those who establishes to the satisfaction of the CIR the fact of his physical
presence abroad with a definite intention to reside thereto. He shall submit proof to the CIR to show
his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the
Philippines as the case may be. (Section 20, NIRC)
Immigrant is one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa
as such has been issued.
Permanent employee is one who leaves the Philippines on account of a contract of employment on a
more or less permanent basis.
Contract worker is one who leaves the Philippines on account of a contract of employment which is
renewed from time to time within or during the taxable year under such circumstances as to require him
to be physically present abroad most of the time during the taxable year. A contract worker must have
been outside the Philippines for not less than 183 days during such taxable year.

Kinds of Aliens for taxation purposes

Resident aliens are non-Filipinos but residing permanently in the Philippines. They are placed in
the same category as citizens of the Philippines
Nonresident aliens are non-Filipinos and either do not reside here in the Philippines or temporary
residents here.

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.

Gross Income means the sum total of all the gains, profits and income, not exempt from tax by law,
derived by a taxpayer during the taxable year, whether from legal, illegal, moral or immoral sources.

Statutory definition of gross income

Gross income mean all the income from whatever source derived including (but not limited to) the
following:
Compensation for services in whatever form paid, including but not limited to fees, salaries, wages,
commissions and similar items.
Gross income derived from the conduct of trade or business or the exercise of a profession.
Gains derived from dealings in property.
Interest
Rents
Royalties
Dividends
Annuities
Prize and winnings
 Pensions, and Partner’s distributive share of the gross income of the general professional partnership.

Gross Income Taxation means the tax base is the total gross income of an individual during the
taxable year without any deduction allowed.

Classes or kinds of taxable gross income

Pure gross income tax is one where the tax base is the total gross income of an individual during the
taxable year.
Adjusted of modified gross income
Certain passive income
Gross income subject to final tax, and
Taxable gross compensation income.

Advantages of gross income taxation

The procedure for the computation of the tax is simpler than in the case of taxation based on net
income
Less discretion will be allowed to the tax examiners thereby minimizing graft
Examination and/or investigation of tax return can be made faster
if coupled with an effective withholding tax system would provide more returns to the government.

Disadvantages of gross income taxation

a taxpayer may derive gross income but suffers a net loss
the rule of taxation may not be more equitable; and
if gross income were the basis, it may serve as a disincentive to further employment

System of gross compensation income taxation is valid. While taxpayers are classified into different
categories their classifications rest on substantial distinction and that makes the real differences.
Taxpayers who are recipients of compensation income are apart as a class because they are not entitled
to make deductions as they practically have no overhead expenses. On the other hand, in the case of
professionals in the practice of their calling and businessmen, there is no uniformity in the costs or
expenses necessary to produce their income. It would not be just to disregard the disparities by giving
all of them zero deductions and indiscriminately impose on all alike the same tax rates on the basis of
gross income. (Sison Jr. V. Ancheta et. al. 230 SCRA 654, 665)

Passive income subject to final tax (Sec. 24B)

dividends
ex. Corporation A Corp B Tax Deferment rule Subj to tax
-if domestic -domestic applies NO
- if domestic -Res. Foreign applies NO
-if domestic -Non-res. FC tax 35%/15% Tax sparing
-if any combination subject to spcl rate
interest on currency deposits
deposit substitutes,
trust funds
royalties (20%) except literary work of arts
prizes and winnings (except lotto and sweepstakes); (20% or 10% for less than 10t)
 Various names of income that may be considered as compensation income. Names by which
remuneration for services are called are immaterial; however, these names are considered
compensation income:
salaries
wages
emoluments and honoraria
bonuses
allowances
commissions (e.g. transportation, representation entertainment and the like
fees, including director’s fees, if the director is at the same time an employee of the
employer/corporation
taxable bonus and fringe benefits except those which are subject to the fringe benefits tax;
taxable pensions and retirement pay, and
other income of a similar nature

Compensation income is now treated for tax purposes as consisting of two kinds:
The basic compensation income which is subject to allowable deduction then to the schedule rate;
Certain fringe benefits that are subject to a final withholding tax. Fringe benefits exempted from the
payment of fringe benefit tax shall still form part of the employee’s basic compensation income.

Kinds of tax rates

Flat rate
Graduated rate and sub-classified into:
Progress tax rate; and
Regressive tax rate

Flat tax rate means the tax liability increase at the same rate at the increase in the tax base.

Graduated tax rate is a tax rate where the rate changes with the tax base.

Taxpayers covered by taxable compensation income

citizens of the Philippines
Resident/non-resident aliens;
Overseas contract workers

Formula for computing taxable compensation income

Gross compensation income Pxxx
Less:
Personal Exemptions Pxxx
Additional Exemptions xxx xxx
Taxable Income Pxxx
Multiplied by taxable rate
(see schedule) x%

Tax due Pxxx

Less: Withholding tax xxx
Tax Payable/ Pxxx
(Refundable) (xxx)
 What is Taxable Income?

Taxable income means the pertinent items of gross income specified in the Tax Code less the
deductions and/or personal and additional exemptions, if any, authorized for such types of income, by
the Tax Code or other special laws.

What is Gross Income?

Gross income means all income derived from whatever source.

What comprises gross income? Section 32 (A), NIRC

Gross income includes, but is not limited to the following:

· Compensation for services, in whatever form paid, including but not limited to fees, salaries,
wages, commissions and similar item
· Gross income derived from the conduct of trade or business or the exercise of
profession
· Gains derived from dealings in property
· Interest
· Rents
· Royalties
· Dividends
· Annuities
· Prizes and winnings
· Pensions
· Partner's distributive share from the net income of the general professional partnerships

What are some of the exclusions from gross income? Section 32 (B), NIRC

· Life insurance
· Amount received by insured as return of premium
· Gifts, bequests and devises
· Compensation for injuries or sickness
· Income exempt under treaty
· Retirement benefits, pensions, gratuities, etc.
· Miscellaneous items
- income derived by foreign government
- income derived by the government or its political subdivision
- prizes and awards in sport competition
- prizes and awards which met the conditions set in the Tax Code
- 13th month pay and other benefits
- GSIS, SSS, Medicare and other contributions
- gain from the sale of bonds, debentures or other certificate of indebtedness
- gain from redemption of shares in mutual fund

What are the allowable deductions from gross income? Section 34, NIRC

Except for taxpayers earning compensation income arising from personal services rendered
under an employer-employee relationships where the only deduction up to a maximum limit of P 2,400
per year per family is the premium payment on health and/or hospitalization insurance, a taxpayer
may opt to avail any of the following allowable deductions from gross income:
· Optional Standard Deduction - an amount not exceeding 10% of the gross income; or
· Itemized Deductions which include the following:
- Expenses
- Interest
- Taxes
- Losses
- Bad Debts
- Depreciation
- Depletion of Oil and Gas Wells and Mines
- Charitable Contributions and Other Contributions
- Research and Development
- Pension Trusts
In addition, individuals who are either earning compensation income, engaged in business or deriving
income from the practice of profession are entitled to personal and additional exemptions as follows:

Personal Exemptions: (as amended by RA9504 - June 17, 2008)

For single individual or married individual judicially decreed as legally separated with no qualified
dependents…………………………………………..P 50,000.00
For head of family…………………………………...P 50,000.00
For each married individual *……………………... .P 50,000.00

Note: In case of married individuals where only one of the spouses is deriving gross income, only such
spouse will be allowed to claim the personal exemption.

Additional Exemptions

· For each qualified dependent, an P 25,000 additional exemption can be claimed but only up to 4
qualified dependents (as amended by RA9504)
· The additional exemption can be claimed by the following:
- The husband who is deemed the head of the family unless he explicitly waives his right in
favor of his wife
- The spouse who has custody of the child or children in case of legally separated spouses.
Provided, that the total amount of additional exemptions that may be claimed by both shall not
exceed the maximum additional exemptions allowed by the Tax Code.
- The individuals considered as Head of the Family supporting a qualified dependent

The maximum amount of P 2,400 premium payments on health and/or hospitalization insurance can be
claimed if:

· Family gross income yearly should not be more than P 250,000

· For married individuals, the spouse claiming the additional exemptions for the qualified dependents
shall be entitled to this deduction

Section 34: Deductions from Gross Income: (EXINTALOBA-DEPDEPCHAPEN)

 Expenses
Interest
Taxes
EXCEPT1ONS
Income tax under the Code
Income taxes imposed by authority of any foreign country; EXCEPT in the case of a taxpayer who
does not signify in his return his desire to have to any extent the benefits of tax credits for taxes of
foreign countries
If taxpayer signifies in his return his desire to avail of tax credits, the tax under the
NIRC shall be credited with:

Citizen and Domestic Corporation – the amount of income taxes paid or incurred during the taxable
year to any foreign country; and
Partnerships and Estates – individual who is a member of a GPP or a beneficiary of an estate or trust,
his proportionate share of such taxes of the GPP or the estate or trust paid or incurred during the taxable
year to a foreign country, IF his distributive share of the income of such partnership or trust is reported
for taxation under the Code.
(Note 1: An alien and a foreign corporation- not allowed the credits against the tax for
the taxes of foreign countries allowed under this section;
Note 2: Tax credits for foreign taxes are allowed only for income derived from sources
outside the Philippines)
Estate and donor’s taxes; and
Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.

LIMITATIONS
The amount of credit shall not exceed the same proportion of the tax against which such
credit is taken, which the taxpayer’s taxable income from sources within such country
under the Code bears to his entire taxable income for the same taxable year; AND
The total amount of the credit shall not exceed the same proportion of the tax against
which such credit is taken, which the taxpayer’s taxable income from sources without
the Philippines taxable under the Code bears to his entire taxable income for the same
taxable year.

PROOF:
total amount of income derived from sources without the Philippines
amount of income derived from each country, the tax paid or incurred to which is claimed as a credit
all other information necessary for the verification and computation of such credits.

FORMULA:

Per country limitation (34.C.4.a) for taxes paid to one foreign country:

Taxable Income
From foreign country
 --------------------------- x Phil. Income tax = Tax credit limit
Taxable income
From all sources

Over-all limitation (34.C.4.b)

Taxable Income
From Outside sources
--------------------------- x Phil. Income tax = Tax credit limit
Taxable income
From all sources

Note: The allowable tax credit is the lower amount between the tax credit computed in
1 and 2

20% discount to senior citizens treated as tax credit, not as deductible cost. (RA 7432)

Losses

Actually sustained during the taxable year

Not compensated for by insurance or other forms of indemnity
If incurred in trade, profession or business
Of property connected with trade, business or profession, if the loss arises from fires, storms,
shipwreck, or other casualties, or from robbery, theft or embezzlement.

EXCEPT: if claimed as a deduction for estate tax purposes

Need for proof of loss

NET OPERATING LOSS CARRY-OVER

For any taxable year immediately preceding the current taxable year, which had not been previously
offset as deduction from gross income
For the next three (3) consecutive taxable years immediately following the year of such loss
Any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall
not be allowed as deduction
Allowed only if there has been no substantial change in the ownership of the business
not less than 75% in nominal value of outstanding issued shares, if the business is in the name of a
corporation, is held by or on behalf of the same persons
not less than 75% of the paid up capital of the corporation, if the business is in the name of a
corporation, is held by or on behalf of the same persons

Bad Debts – debts due to the taxpayer actually ascertained to be worthless and charged off within the
taxable year except those not connected with profession, trade or business and those sustained in a
transaction entered into between parties in 36(b) (see page 363)

Depreciation- a reasonable allowance for the exhaustion, wear and tear (including reasonable
allowance for obsolescence) of property used in the trade or business.

METHODS:
Straight-line method
Declining Balance method, using a rate not exceeding twice the rate which would have been used had
the annual allowance been computed under the method in F.1
Any other method prescribed by the Secretary of Finance

Depletion of Oil and Gas Wells and Mines

Charitable and Other Contributions
Research and Development
Pension Trusts

Special Treatment of Fringe Benefit: Section 33, NIRC

This clarifies the meaning of fringe benefit, when it is taxable and when it is not taxable. It gives
statutory recognition to the fact that fringe benefits are subject to income tax.

Fringe Benefit, defined.

 The following is a summary of deductions for individual taxpayers allowed under the National
Internal Revenue Code:

Optional standard deduction [Section 34 (L)]

A fixed percentage deduction which is allowed to certain taxpayers without regard to any actual
expenditures. It is an amount not exceeding 10% of the gross income of the qualified taxpayer.
Allowed only to resident citizens and resident aliens on their gross income derived from employer-
employee relationship
Must signify choice of this deduction, otherwise, he shall be understood to have chosen the itemized
deductions.
Itemized deductions [Section 34 (A-K) and (M)] - {EXINTALOBA-DEPDEPCHAPEN}
Expenses (ordinary/necessary/business)
Interest
Taxes
Losses
Bad debts
Depreciation
Depletion
Charitable and other contributions
Research and development; and
Contributions to pensions trust
Premium payments on health and/or hospitalization insurance subject to certain conditions.

Personal and additional exemptions [Section 35] for citizens and resident aliens

Basic personal exemption (each) (as amended by RA9504)

Single, or married individual judicially declared as
legally separated with no qualified dependents P50,000.00
Head of a Family 50,000.00
Married Individual 50,000.00
In the case of married individuals where only one of the spouses is deriving gross income, only such
spouse shall be allowed personal exemption [Section 35 (A)]
Additional exemption of P25,000 for each qualified dependents --- maximum of four dependents (not
more than 21 years of age)
Premium on health and/or hospitalization insurance (Sec. 34 (M)

Extraordinary deductions
Those allowed to insurance companies (Section 37)
Deductions allowed to estates and Trusts availing of itemized deductions of income currently
distributed to beneficiaries (Section 61)
Losses from was sales of stocks or securities (Section 38)
Certain capital losses but only from capital gains (Section 39)

“Head of a Family”

An unmarried or legally separated man or woman

With one or both parents living with and dependent upon him or her for their chief support; and
 With one or more brothers or sisters,
With one or more legitimate or illegitimate, recognized natural or legally adopted children
Where such brothers or sisters of children are
not more than 21 years of age,
unmarried, and
not gainfully employed or
regardless of age, are incapable of support because of mental or physical defect [Last paragraph,
Section 35 (A)]

with a “senior citizen” living with him

may be their relatives or not
the senior citizen must declare his benefactor who will be granted the exclusive right to claim him as
dependent
a certification shall be issued by the Office of the Senior Citizens Affair (OSCA) stating that the person
claiming as Head of Family is the benefactor himself or herself of the senior citizen.

In computing net income, no deductions shall be allowed in respect of:

Personal, living, or family expenses

Any amount paid out for new building or for permanent improvements, or betterments made to increase
the value of any property or estate;
Any amount spent in restoring property or in making good the exhaustion thereof for which an
allowance is or has been made; or
Premiums paid on any life insurance policy covering the life of any officer or employee, or of any
person financially interested in any trade or business carried on by the taxpayer, individual or
corporate, when the taxpayer is directly or indirectly a beneficiary under such policy [Section 36 (A)]

LECTURE GUIDE NOTES – PART 3
Atty. Lyndon A. Maceren, CPA

CAPITAL GAINS TAXATION

Capital gains are the gains realized from the sale, exchange or other disposition of the properties of a
taxpayer classified as capital assets.

Capital assets means property held by the taxpayer (whether or not connected with his trade or
business, but does not include:

Stock in trade of the taxpayer; or

Other property of a kind which would properly be included in the inventory of the taxpayer if on hand
at the close of the taxable year; or
Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business; or
Property used in the trade or business, of a character which is subject to the allowance for depreciation;
or
Real property used in the trade or business of the taxpayer. [Section 39 (A.l)]
 There are two (2) kinds capital gains under the NIRC
Capital gains subject to final tax
Capital gains included in the gross income for income tax purposes.

TRANSFER TAXES

Transfer tax is the tax imposed upon the transfer of property ownership. It is a privilege tax which is
imposed on the act of passing ownership of property and not a tax on the property itself.

Kinds of Transfer Taxes under the NIRC:

Estate Tax; and

Donor’s Tax

Donor’s Tax is an excise tax imposed on the transfer of property by way of gift inter vivos (Lladoc v.
CIR, 121 Phil. 1077). It is not a tax on the property donated but on the privilege to transfer the
property.

Donor’s tax is a tax on the privilege to transfer property during one’s lifetime while estate tax is a tax
on the privilege to transfer property upon one’s death.

Elements of donations subject to donor’s tax

There must be an act of liberality on the part of the donor;

The donation must be inter vivos in its effect
The disposal must be gratuitous
In favor of the donee who must accept it (Art. 725, Civil Code)

When the donee or beneficiary is a stranger, the tax payable by the donor shall the donor’s tax in
accordance with the schedule in the Tax Code or 30% of the net gifts whichever is higher (1st
paragraph, Section 99 (B), NIRC as amended by R.A. No. 8424)

For the purpose of the donor’s tax, a stranger is a person who is NOT a:

Brother, sister (whether by whole or half-blood), spouse, ancestor, and lineal descendant, or
A relative by consanguinity in the collateral line within the fourth degree of relationship (2nd paragraph,
Section 99 (B), NIRC as amended by R.A. No. 8424)

PROBLEMS

A is a single individual, had a brother X and a sister Y, both minors, who were completely dependent
upon him for support. A’s father is living. In his income tax return for the year 1998, A claimed a
personal exemption of P25,000 as “head of the family” pursuant to Section 35 of the NIRC. The CIR
refused to consider A as “head of the family” and allowed him only the personal exemption as a single
individual based on the ground that A’s father is still living and continues to exercise parental authority
 over X and Y. A appealed from the ruling of the CIR. If you were a member of the Court of Tax
Appeals, how would you decide this case? State your reasons.

B is a married person legally separated from his wife, is the chief support of his illegitimate son who is
18 years old, and not gainfully employed, and of a sister who is 24 years old and unmarried but
incapable of self-support because of mental defect. How much personal exemption is Mr. X entitled
to? State your reasons.

C, a bachelor, works in a private firm and lives in a rented house. His father, a retired government
employee with no income except his monthly pension of P1,500, and his mother, with no income at all
live with him. C pays the rent, spends for their food. He does not give any money to his parents,
although his mother does the cooking and attends to the housekeeping. Can he claim the exemption as
“head of family?” State your reasons.

D, who is singe, maintains Z, a common-law wife. Z is legally married to W. D and Z have four (4)
children and they are living and dependent upon D for their chief support, and the children are minors,
unmarried and not gainfully employed.

For income tax purposes, will you consider D as head of family?

Is the personal exemption of P25,000.00 claimed by D as “head of family” and deducted from his 1998
gross compensation income valid and allowable?
Is D entitled to deduct from his 2004 gross compensation income the additional exemption of
P8,000.00 for each of his illegitimate children?

E, single, resident in and citizen of the Philippines is a law practitioner. He supports wholly his
grandfather, mother, an unmarried brother 23 years old but mentally defective, and an orphaned
nephew 10 years old. Not one of these dependents is gainfully employed.

Discuss briefly the personal and additional exemptions available to him.

In January, 2004, E and F were legally separated by court order. E was awarded the custody of their
minor son, R, and F, the custody of their minor daughter, S. To preserve the ties between parents and
child living separately, the court ordered to E to shoulder 60% of the financial support of S, and F, to
shoulder 60% of the financial support for R. E and F complied religiously with the order of the court.

In their respective tax returns for their 2004 income, how much personal and additional exemptions
would E and F be separately entitled to, assuming that each of them earned more than P60,000 in
2004?.

In 2004, G, married, with four minor children who are all single, living with and wholly dependent
upon him for support, earned the following:

Salary and living allowance from Alta P120,000.00

Corp.
Interest from bank savings deposit (net 1,700.00
of withholding tax)
Dividends from SMB, Inc. (Net of 2,400.00
Withholding tax)
 Distributive share in a general 15,000.00
partnership (net of withholding tax)
Raffle winnings (net of withholding tax) 5,000.00
Royalties (net of withholding tax) 5,000.00
Gains from the sale of SMB, Inc. Shares
thru the Makati Stock Exchange (net of 2,000.00
withholding tax)
Retirement Gratuity from a Foreign 50,000.00
Corporation
Separation pay from AJC Corp. as of
December 31, 2003 (his position was 150,000.00
abolished in a company reorganization)

Compute G’s taxable income, explaining the details thereon.

Assume that a married individual has the following unmarried children whose ages are indicated below,
who are living with him and wholly dependent upon him for support:
Child Ages as of December 31, 2004
L 25
M 23
N 17
O 12
P 10
Q 7
R 6
S 2

For purposes of the income tax return to be filed in 2004, how much additional exemptions would
the above taxpayer be entitled to and for whom? Explain

Taxpayer Carlo is single. He maintains an apartment in Cebu City which is the principal place of
abode for himself and his orphaned niece, aged ten, who is chiefly dependent upon him for support.
Carlo also principally supports his widowed mother who maintains her own household in Danao City.

Will Carlo qualify as head of a family? Explain. State the circumstances under which Carlo may
qualify as head of a family, if he does not qualify as such under the above set of facts.

Arden, a widower, 54 years of age, maintains a home in Cebu City for his three children. His wife died
in January, 2004. During the taxable year 2004, his eldest child Emelia, who is 20 years of age, was
away most of the time at the University of the Philippines, Diliman, Quezon City. The other two
children, Nick and Mark, ages 14 and 12, respectively, were away in Singapore on vacation with their
uncle and aunt for eight months during 2004. Arden is the sole supporter of his children who do not
have income of their own.

Without stating the amounts involved, what are the total exemptions for the taxable year 2004
which can be availed of by Arden? Explain your answer.
Jon, a Filipino citizen, married Pha Wang, a Singaporean National in 1994 in Singapore. In 2000, the
two separated and Jon returned to the Philippines. The two lost contact with each other. In 2004, Jon
filed his income tax return and claimed a personal exemption of P32,000 under Section 35 (A) of the
Tax Code. Decide.

Joseph and Rosalie got married in January 2004. A week before their marriage, Rosalie received by
way of donation, a condominium unit worth P750,000.00 from her parents. After marriage, some
renovations were made at a cost of P150,000.00. The spouses were both employed after their marriage
in 2004 by the same company. On December 2004, their child was born. Also in 2004, they sold the
condominium unit and bought a new unit.

Under the foregoing facts, what were the events in the life of the spouses that had income tax
incidences?

What are the requisites:

Before deductions are allowed?

For bonus to employees to be deductible by employer as business expense?
For interest to be deductible?
For the deductibility of a loss?
For the deductibility of bad debts
For the deductibility of depreciation?
For ordinary contributions/donations to be deductible?
To be complied with by the employer in order to validly deduct the payment of pension trusts?
Of a reasonable retirement plan?

What are the three (3) essential conditions which must be satisfied in order that an expense may be
validly considered deductible for income tax purposes?

What are the administrative conditions for the allowance of tax credits?

Are contributions to a candidate in an election subject to donor’s tax? On the part of the contributor is
it allowable as a deduction from the gross income?

Enumerate the non-deductible items from gross income

In the conduct of his business in 2004, Joy found it necessary to give gifts to the government officials
with whom he had official dealings. She deducted the costs of this gifts as representation expenses in
her income tax return. Are the deductions valid? Reasons.

Jason is the proprietor of Trelor, which is a security and detective agency. Jason was able to get the
contract to provide the security services of a government agency. He signed the Security Agreement
with the director of the government agency calling for the deployment of 100 security guards on a 24
hour basis. The contract was revocable at the will of the director. To please the director, Jason gives at
the end of the month P100.00 per guard hired. May Jason deduct from his income the money he paid
to the director? Reasons.

A doctor has the following items of expenditure for the taxable year:
 House rent
Office rent
Medical supplies
Telephone in the office
Assistant nurse in the office
Yearly dues of the Philippine Medical Association
Subscriptions to medical journal
New typewriter for the office
Gasoline and minor repair expense for his car which he uses more for his profession than for personal
use;
Tuition fees for the studies of his children
Donation to the Philippine National Red Cross
Traveling expenses incurred by him and his wife during a trip to the United states where he attended a
medical convention as a Philippine representative. His wife accompanied him and took advantage of
the occasion to visit her relatives.

State which of the above items are fully or partially deductible and explain your answers.

Atty. Romeo Callow, a law practitioner in one of the prestigious law firms in Cebu City, incurred the
following expenses in 1998. Decide with reasons whether or not the following expenses can be
claimed as deductions from his income.

Club dues and expenses amounting to P20,000 at the Casino Español, an exclusive business club,
where he normally entertains his clients.
A 2003 Mitsubishi Adventure dubbed as “Car of the Century” recently purchased for P2,000,000.00
which he uses exclusively in his work as a lawyer. He has another, car Mercedes Benz for his personal
and family use.
Expenses for attending the Mandatory Continuing Legal Education (MCLE) Seminar in Hongkong,
amounting to P30,000.00 for plane fare and hotel expenses.

Ricardo borrowed money from a private bank at 18% interest per annum. Ricardo used that money to
purchase government bonds earning 14% interest per annum, which interest is exempt from taxation.
Is the 18% interest paid by Ricardo deductible?

Mr. Reynes, a gravel and sand dealer, bought the following items in 2004, for his business:

1 Mitsubishi dump truck (directly imported)

Landed Cost P1,500,000.00
VAT 150,000.00
Total P1,650,000.00

1 locally assembled Nissan pick-up

Landed Cost P 350,000.00
VAT 35,000.00
Total P 385,000.00
 In determining his taxable net income for 2004, Mr. Reynes deducted from his gross income the
amount of P185,000 representing the taxes indicated above. Was the deduction proper under the
National Internal Revenue Code? Explain.

Jane is engaged in the export of copra. Leo, a supplier, offered to supply all the copra requirements of
Jane. Jane agreed provided Leo executes a performance bond in favor of Jane. Accordingly, Gil as a
principal and XYZ Insurance and Surety Company executed a performance bond in favor of Jane. For
the protection of the insurance company, Leo in turn, executed a chattel mortgage over his machineries
to indemnify XYZ against loss or damage arising from the execution of the performance bond. Leo
failed to deliver the copra.

In an action instituted by Jane in 2003, the court rendered judgment in 2004 against XYZ Insurance
and Surety Co. in the amount of P100,000.00. is the amount paid by the insurance company
deductible as a loss? Explain your answer.

Dr. Alliah Ann Gonzalez estimated that by the end of 1998, she shall have earned from the practice of
her profession a net income of P3,000,000.00. However, her fashion designing business has been
losing during the past 10 months, and she estimated that by the end of 1998, said business shall have
suffered a loss of P100,000. She requested your advise on whether she can reduce his taxable net
income by deducting from or offsetting against the income earned from the practice of his profession
the losses suffered by her fashion designing business. What advice can you give Dr. Gonzalez? State
the basis of your advice.

Allen is a traveling salesman in Jolo, Sulu. In the course of his travel, a band of MNLF seized his car
by force and used it to kidnap a foreign missionary. The next day, Allen learned that the military and
the MNLF band had a chance encounter. Using heavy weapons, the military fired at the MNLF band
that tried to escape with the use of Allen’s car. All the members of the band died and Allen’s car was a
total wreck. Can Allen deduct the value of his car from his income as casualty loss? Reason out your
answer.

Section 38 of the National Internal Revenue Code deals with and provides for what is known as “wash
sale.” Explain and discuss the objective and philosophy behind the said provision.

What is meant by “depreciation” as used in the National Internal Revenue Code? Why is there a need
for a depreciation allowance?

Joel’s favorite charity organization is the Philippine National Red Cross. To raise money, PNRC
sponsored a concert featuring the Salas Orchestra. Joel advanced P100,000 to the PNRC for which he
was issued a promissory note. Before its maturity, Joel cancelled and returned the note to PNRC. An
advertising man, Joel also undertook the promotions of the Salas Orchestra. Part of the promotions
campaign was to ask prominent personalities to publicly donate blood to PNRC a day before the
concert. Joel himself donated 100 cc of blood. Joel intends to claim as deductions the value of the
note, the cash value of the blood he donated. Give your legal advice.

In 2000, Bonifacia purchased a parcel of land for P1.5M. On May 3, 2004, she sold the parcel of land
to her friend, Marivic, for P1,300,000.00 incurring a loss of P200,000.00 She sold the property at a
loss because she needed money to finance her mother’s surgical operation. The current fair market
value of the property is P3.5M, the assessed value is P1.0M, and the BIR zonal valuation is P3.0M.
How much capital gains tax should Bonifacia pay?
 Supposing that Bonifacia sold the property to the Municipality of Compostela for P1.3M. How
should she be taxed?

The real property of Mr. Palang was expropriated by the government in 2004. he acquired said
property in 1995 for only P50,000.00 but the government paid him P1,000,000.00 which was the
market value at the time of the expropriation. How shall Mr. Cruz be taxed on the expropriation
proceeds? Explain.

Joan purchased a house and lot in 2000. Three years later, she fenced the whole premises, constructed
an annex to the house and put up a swimming pool, which costs her a total of P1,000,000. Joan sold
the property in 2004 for P3,000,000.00 Assessment was issued against Joan for a capital gain based on
P1,000,000.00. Is the assessment correct? Explain briefly.

In 1995, Mr. Gaviola bought a lot for P1,000,000 in a subdivision with the intention of building his
residence on it. In 2004, he abandoned his plan to build his residence on it because the surrounding
area became a depressed area and land values in the subdivision went down; instead he sold it for
P800,000.00. At the time of the sale, the zonal value was P500,000.00.

Is the land a capital asset or an ordinary asset? Explain.

Is there any income tax due on the sale? Explain.

Mar and Korina got married in 2003. A month before their marriage, Joy received, by way of donation,
a condominium worth P750,000.00 from her parents. After marriage, some renovations were made at a
cost of P150,000.00. In 2004, they sold the condominium unit and bought a new unit. What is the
income tax implications of the sale?

Differentiate capital gains from ordinary gains.

What are the different kinds of transfer taxes imposed under the NIRC? Briefly explain each.

What transfers of property are considered subject to the donor’s tax?

Amalia was engaged by Star Movies to the leading lady in a movie it was making. Amalia was to be
paid P50,000.00 for her performance and the parties signed the necessary contract. Amalia then
gratuitously assigned her rights under the contract to her daughter, Leizel. Leizel later on collected the
P50,000.00 from Star Movies. Is the P50,000.00 taxable to Amalia? Reasons.

Enumerate at least three (3) gifts which are not subject to donor’s taxes.
In 2000, Neil gave his parents a Christmas gift of P100,000.00 and a donation of P80,0000 to his parish
church. He also donated a parcel of land for the construction of a building of the P.U.P Alumni
Association, a nonstick, nonprofit organization. Portions of the building shall be leased to generate
income for the association.

Is the Christmas gift of P100,000.00 to Neil’s parents subject to tax?

How about the donation to the parish church?
How about the donation to the P.U.P. Alumni Association