TAXATION FAQ

Stages or Aspects of Taxation

Taxation embraces two (three) aspects or phases.

1. Levy or imposition of taxes – legislative in character, includes the determination of persons, property or
excises to be the taxes, the sums to be raised, the due date thereof and the time and manner of levying and
collecting taxes
2. Assessment and collection – executive in character, consists of the manner of enforcement of the obligation
on the part of those who are taxed.
3. Payment – executive. Other authors will only say 2 aspects lng daw pero others say na tulo.

2 and 3, we collectively call tax administration

Non-revenue/ Sumptuary Purpose of taxation

The sumptuary purpose of taxation is to promote the general welfare and to protect the health, safety or morals
of the inhabitants. It is in the joint exercise of the power of taxation and police power where regulatory taxes are
collected.
Taxation may be made the implement of the state’s police power. The motivation behind many taxation
measures is the implementation of police power goals. [Southern Cross Cement Corporation v. Cement Manufacturers
Association of the Philippines, et al., G. R. No. 158540, August 3, 2005 citing Lutz v. Araneta, 98 Phil. 148, 152 (1955); ]
The reader should note that the August 3, 2005 Southern Cross case is the decision on the motion for reconsideration of
the July 8, 2004 Southern Cross decision.

The so-called “sin taxes” on alcohol and tobacco manufacturers help dissuade the consumers from excessive
intake of these potentially harmful products. (Southern Cross Cement Corporation v. Cement Manufacturers
Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)

Explain the compensatory purpose of taxation.

The compensatory purpose of taxation is to implement the social justice provisions of the constitution through the
progressive system of taxation, which would result to equal distribution of wealth, etc.
Progressive income taxes alleviate the margin between rich and poor. (Southern Cross Cement Corporation v.
Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)

Caltex v. Commissioner, 208 SCRA 755

Taxation is no longer a measure merely to raise revenue to support the existence of government. Taxes may be
levied with a regulatory purpose 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. The oil industry is greatly imbued
with public interest as it vitally affects the general welfare.

Essential Characteristic of Taxes [ LEMP3S ]

1. It is levied by the law-making body of the State

The power to tax is a legislative power which under the Constitution only Congress can exercise through the
enactment of laws. Accordingly, the obligation to pay taxes is a statutory liability.

2. It is an enforced contribution

A tax is not a voluntary payment or donation. It is not dependent on the will or contractual assent, express or implied,
of the person taxed. Taxes are not contracts but positive acts of the government.

3. It is generally payable in money

Tax is a pecuniary burden – an exaction to be discharged alone in the form of money which must be in legal tender,
unless qualified by law, such as RA 304 which allows backpay certificates as payment of taxes.
4. It is proportionate in character - It is ordinarily based on the taxpayer’s ability to pay.
5. It is levied on persons, property, or the exercise of a right or privilege (Excise tax).
6. It is levied for public purpose or purposes - Taxation involves, and a tax constitutes, a burden to provide
income for public purposes.
7. It is levied by the State which has jurisdiction over the subject or object of taxation.

System of Taxation

The Global system of income taxation is a system employed where the tax system views indifferently the tax base
and generally treats in common all categories of taxable income of the individual. (Tan v. del Rosario, Jr., 237 SCRA
324, 331)

The Schedular system of income taxation is a system employed where the income tax treatment varies and is made
to depend on the kind or category of taxable income of the taxpayer. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)

Internal Revenue Taxes

Collection of Taxes, Injunctive Authority and Prescription

There are four (4) prescriptive periods for the collection of an internal revenue tax:

a. Collection upon a false or fraudulent return or no return without assessment. In case of a false or
fraudulent return with the intent to evade tax or of failure to file a return, “a proceeding in court for the collection of such
tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or
omission.” [Sec. 222 (a), NIRC of 1997)

b. Collection upon a false or fraudulent return or no return with assessment. Any internal revenue tax
which has been assessed (because the return is false or fraudulent with intent to evade tax or of failure to fail a return),
within a period of ten (10) years from discovery of the falsity, fraud or omission “ may be collected by distraint or levy
or by a proceeding in court within five (5) years following the assessment of the tax.” [Sec. 222 (c), in relation to
Sec. 222 (a) NIRC of 1997, emphasis supplied)

c.Collection upon an extended assessment. Where a tax has been assessed with the period agreed upon
between the Commissioner and the taxpayer in writing (which should initially be within three (3) years from the time the
return was filed or should have been filed), or any extensions before the expiration of the period agreed upon, the tax
“may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing
before the expiration of the five (5) year period. The period so agreed upon may be extended by subsequent written
agreements made before the expiration of the period previously agreed upon.” [Sec. 222 (d), in relation to Secs. 222 (b)
and 203, NIRC of 1997, emphasis supplied)

d. Collection upon a return that is not false or fraudulent, or where the assessment is not an extended
assessment. “Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after
the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the
collection of such taxes shall be begun after the expiration of such period; Provided, That in case where a return
is filed beyond the period prescribed by law, the three (3) year period shall be computed from the day the return was
filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be
considered filed on such last day.” (Sec. 203, NIRC of 1997, emphasis supplied)

When the BIR validly issues an assessment within the three (3)-year period, it has another three (5) years
within which to collect the tax due by distraint, levy, or court proceeding. (Section 222(c) of the Tax Code of 1997)

Injunction

As a general rule, “No court shall have the authority to grant an injunction to restrain the collection of any national
internal revenue tax, fee or charge.” (Sec. 218, NIRC)

However, the Court of Tax Appeals is empowered to enjoin the collection of taxes through administrative
remedies when collection could jeopardize the interest of the government or taxpayer. (Sec. 11, Rep. Act No. 1125)

Where the collection of the amount of the taxpayer’s liability, sought by means of a demand for payment, by levy,
distraint or sale of property of the taxpayer, or by whatever means, as provided under existing laws, may jeopardize the
interest of the government or the taxpayer, an interested party may file a motion for the suspension of the collection of
the tax liability (Sec. 1, Rule 10, RRCTA effective December 15, 2005) with the Court of Tax Appeals.
 The motion for suspension of the collection of the tax may be filed together with the petition for review or with the
answer, or in a separate motion filed by the interested party at any stage of the proceedings. (Sec. 3, Rule 10, RRCTA
effective December 15, 2005)

Direct vs Indirect Taxes

It may be useful to make a distinction, for the purpose of this disposition, between a direct tax and an
indirect tax. A direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in. On
the other hand, "indirect taxes are taxes primarily paid by persons who can shift the burden upon someone else
(Maceda vs Macaraig)

Tax Avoidance vs Tax Evasion

Define tax avoidance and tax evasion.

Tax avoidance is the use of legally permissible means to reduce the tax while tax evasion is the use of illegal means to
escape the payment of taxes.

Tax evasion connotes the integration of three factors:

1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or
the non-payment of tax when it is shown that a tax is due;

2) an accompanying state of mind which is described as being “evil” on “bad faith,” “willful,” or ”deliberate
and not accidental”; and

3) a course of action or failure of action which is unlawful. (Commissioner of Internal Revenue v. The
Estate of Benigno P. Toda, Jr., , etc., G. R. No. 147188, September 14, 2004)

Distinguish between the tax avoidance and tax evasion.

SUGGESTED ANSWER:

a. Tax avoidance is legal while tax evasion is illegal.

b. The objective of tax avoidance in most instances is merely to reduce the tax that is due while is tax
evasion the object is to entirely escape the payment of taxes.

c.Tax evasion warrants the imposition of civil, administrative and criminal penalties while tax avoidance does not.

Tax Amnesty vs Tax Exemption

A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons
otherwise guilty of evasion or violation of a revenue or a tax law.

It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders
who wish to relent a chance to start with a clean slate. A tax amnesty, much like a tax exemption, is never favored nor
presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the
taxpayer and liberally in favor of the taxing authority. (Philippine Banking Corporation, etc., v. Commissioner of
Internal Revenue, G. R. No. 170574, January 30, 2009 citing Commissioner of Internal Revenue v. Marubeni Corp.,
423 Phil. 862, 874 (2001).

The purpose of tax amnesty is to

a. give tax evaders who wish to relent a chance to start a clean slate, and to

b. give the government a chance to collect uncollected tax from tax evaders without having to go
through the tedious process of a tax case. (Banas, Jr. v. Court of Appeals, et al., G.R. No. 102967, February
10, 2000)
Distinguish tax amnesty from tax exemption.

a. Tax amnesty is an immunity from all criminal, civil and administrative liabilities arising from
nonpayment of taxes (People v. Castaneda, G.R. No. L-46881, September 15, 1988) WHILE a tax exemption is an
immunity from civil liability only. It is an immunity or privilege, a freedom from a charge or burden to which others are
subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365)

b. Tax amnesty applies only to past tax periods, hence of retroactive application (Castaneda, supra)
WHILE tax exemption has prospective application.

Double Taxation

Double taxation in its generic sense, this means taxing the same subject or object twice during the same
taxable period.

In its particular sense, it may mean direct duplicate taxation, which is prohibited under the constitution because
it violates the concept of equal protection, uniformity and equitableness of taxation. Indirect duplicate taxation is not
anathematized by the above constitutional limitations.

What are the elements of direct duplicate taxation ?

SUGGESTED ANSWER:

a. Same

1) Subject or object is taxed twice

2) by the same taxing authority

3) for the same taxing purpose

4) during the same taxable period

b. Taxing all of the subjects or objects for the first time without taxing all of them for the second time.

If any of the elements are absent then there is indirect duplicate taxation which is not prohibited by the
constitution.

Double taxation a valid defense against the legality of a tax measure if the double taxation is direct duplicate
taxation, because it would violate the equal protection clause of the constitution.

What are the methods for avoiding double taxation (indirect duplicate taxation) ?

The following are the methods of avoiding double taxation:

a. Tax treaties which exempts foreign nationals from local taxation and local nationals from foreign
taxation under the principle of reciprocity.

b. Tax credits where foreign taxes are allowed as deductions from local taxes that are due to be paid.

c. Allowing foreign taxes as a deduction from gross income.

Tax credit generally refers to an amount that is subtracted directly from one’s total tax liability, an allowance
against the tax itself, or a deduction from what is owned.

A tax credit reduces the tax due, including –whenever applicable – the income tax that is determined after
applying the corresponding tax rates to taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, G. R. No. 159647, April 15, 2005)

A tax deduction is defined as a subtraction fro income for tax purposes, or an amount that is allowed by law to
reduce income prior to the application of the tax rate to compute the amount of tax which is due.
 A tax deduction reduces the income that is subject to tax in order to arrive at taxable income. (Commissioner of
Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005)

Tax Laws

Construction of local tax ordinances

In case of doubt, any tax ordinance or revenue measure shall be construed strictly against the local government unit
enacting it, and liberally in favor of the taxpayer. Any tax exemption, incentive or relief granted by any local
government unit pursuant to the provisions of this Code shall be construed strictly against the person claiming it. ( RA
7610)

BIR rulings

Sec. 246. Non-retroactivity of rulings. — Any revocation, modification, or reversal of any rules and regulations
promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the
Commissioner of Internal Revenue shall not be given retroactive application if the revocation, modification, or reversal
will be prejudicial to the taxpayers except in the following cases: a) where the taxpayer deliberately misstates or omits
material facts from his return or in any document required of him by the Bureau of Internal Revenue; b) where the
facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the
ruling is based; or c) where the taxpayer acted in bad faith.(Tax Code)

Rulings of first impression, according to Revenue Administrative Order No. 01-03, refer to rulings, opinions and
interpretations of the BIR Commissioner with respect to the provisions of the Tax Code and other tax laws without
established precedent, and which are issued in response to a specific request for a ruling or an opinion filed by a
taxpayer with the BIR. The same includes reversals, modifications or revocations of any existing rulings.

Note under Sec 7 of NIRC, this power cannot be delegated;

SEC. 7. Authority of the Commissioner to Delegate Power - The Commissioner may delegate the powers vested in
him under the pertinent provisions of this Code to any or such subordinate officials with the rank equivalent to a
division chief or higher, subject to such limitations and restrictions as may be imposed under rules and regulations to
be promulgated by the Secretary of finance, upon recommendation of the Commissioner: Provided, however, That
the following powers of the Commissioner shall not be delegated:

(a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance;

(b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau;

(c) The power to compromise or abate, under Sec. 204 (A) and (B) of this Code, any tax liability: Provided, however,
That assessments issued by the regional offices involving basic deficiency taxes of Five hundred thousand pesos
(P500,000) or less, and minor criminal violations, as may be determined by rules and regulations to be promulgated
by the Secretary of finance, upon recommendation of the Commissioner, discovered by regional and district officials,
may be compromised by a regional evaluation board which shall be composed of the Regional Director as Chairman,
the Assistant Regional Director, the heads of the Legal, Assessment and Collection Divisions and the Revenue
District Officer having jurisdiction over the taxpayer, as members; and(d) The power to assign or reassign internal
revenue officers to establishments where articles subject to excise tax are produced or kept.

Tax exemption, nature and coverage

Why are tax exemptions are strictly construed against the taxpayer and liberally in favor of the State ?

Taxes are necessary for the continued existence of the State.

Strict interpretation of tax exemption laws. Taxes are what civilized people pay for civilized society. They are the
lifeblood of the nation. Thus, statutes granting tax exemptions are construed stricissimi juris against the taxpayer and
liberally in favor of the taxing authority. A claim of tax exemption must be clearly shown and based on language in
law too plain to be mistaken. Otherwise stated, taxation is the rule, exemption is the exception. (Quezon City, et al.,
v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing Mactan Cebu International Airport
Authority v. Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680) The burden of proof rests upon the
party claiming the exemption to prove that it is in fact covered by the exemption so claimed. (Quezon City, supra
citing Agpalo, R.E., Statutory Construction, 2003 ed., p. 301)

Rationale for strict interpretation of tax exemption laws. The basis for the rule on strict construction to statutory
provisions granting tax exemptions or deductions is to minimize differential treatment and foster impartiality, fairness
and equality of treatment among taxpayers. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008) He who claims an exemption from his share of common burden must justify his claim that
the legislature intended to exempt him by unmistakable terms. For exemptions from taxation are not favored in law,
nor are they presumed. They must be expressed in the clearest and most unambiguous language and not left to
mere implications. It has been held that “exemptions are never presumed the burden is on the claimant to establish
clearly his right to exemption and cannot be made out of inference or implications but must be laid beyond
reasonable doubt. In other words, since taxation is the rule and exemption the exception, the intention to make an
exemption ought to be expressed in clear and unambiguous terms. (Quezon City, supra citing Agpalo, R.E., Statutory
Construction, 2003 ed., p. 302)

What is the effect of a BIR reversal of a previous ruling interpreting a law as exempting a taxpayer ?

SUGGESTED ANSWER: A reversal of a BIR ruling favorable to a taxpayer would not necessarily create a perpetual
exemption in his favor, for after all the government is never estopped from collecting taxes because of mistakes or errors
on the part of its agents. (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92,
99)

Power of Taxation

What are the inherent limitations on the power of taxation ?

The inherent limitations are

a. Public purpose. The revenues collected from taxation should be devoted to a public purpose.

b. No improper delegation of legislative authority to tax. Only the legislature can exercise the power of
taxes unless the same is delegated to some other governmental body by the constitution or through a law which does
not violate any provision of the constitution.

c.Territoriality. The taxing power should be exercised only within territorial boundaries of the taxing authority.

d. Recognition of government exemptions; and

e. Observance of the principle of comity. Comity is the respect accorded by nations to each other
because they are equals. On the other hand taxation is an act of sovereign. Thus, the power should be imposed upon
equals out of respect.

Some authorities include no double taxation.

What are the constitutional limitations on the power of taxation ?

SUGGESTED ANSWER: The general or indirect constitutional limitations as well as the specific or direct
constitutional limitations.

What are the general or indirect constitutional limitations on the power of taxation ?

SUGGESTED ANSWER: The general or indirect constitutional limitations are the following:

a. Due process clause;

 b. Equal protection clause;

c. Freedom of the press;

d. Religious freedom;

e. No taking of private property without just compensation;

f. Non-impairment clause;

g. Law-making process:

1) Bill should embrace only one subject expressed in the title thereof;

2) Three (3) readings on three separate days;

3) Printed copies in final form distributed three (3) days before passage.

h. Presidential power to grant reprieves, commutations and pardons and remittal of fines and forfeiture
after conviction by final judgment.

What are the specific or direct constitutional limitation ?

SUGGESTED ANSWER:

a. No imprisonment for non-payment of a poll tax;

b. Taxation shall be uniform and equitable;

c. Congress shall evolve a progressive system of taxation;

d. All appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives, but
the Senate may propose and concur with amendments;

e. The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff
bill, but the veto shall not affect the item or items to which he does not object;

f. Delegated power of the President to impose tariff rates, import and export quotas, tonnage and
wharfage dues:

1) Delegation by Congress

2) through a law

3) subject to Congressional limits and restrictions

4) within the framework of national development program.

g. Tax exemption of charitable institutions, churches, parsonages and convents appurtenant thereto,
mosques, and all lands, buildings and improvements of all kinds actually, directly and exclusively used for religious,
charitable or educational purposes;

h. No tax exemption without the concurrence of majority vote of all members of Congress;

i. No use of public money or property for religious purposes except if priest is assigned to the armed
forces, penal institutions, government orphanage or leprosarium;

j. Money collected on tax levied for a special purpose to be used only for such purpose, balance if any,
to general funds;
 k. The Supreme Court's power to review judgments or orders of lower courts in all cases involving the
legality of any tax, impose, assessment or toll or the legality of any penalty imposed in relation to the above;

l. Authority of local government units to create their own sources of revenue, to levy taxes, fees and
other charges subject to guidelines and limitations imposed by Congress consistent with the basic policy of local
autonomy;

m. Automatic release of local government's just share in national taxes;

n. Tax exemption of all revenues and assets of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purposes;

o. Tax exemption of all revenues and assets of proprietary or cooperative educational institutions subject to
limitations provided by law including restrictions on dividends and provisions for reinvestment of profits;

p. Tax exemption of grants, endowments, donations or contributions used actually, directly and
exclusively for educational purposes subject to conditions prescribed by law.

Equality and uniformity of taxation may mean the same as equal protection. In such a case, the terms would
mean that all subjects and objects of taxation which are similarly situated shall be subject to the same burdens and
granted the same privileges without any discrimination whatsoever.

Uniformity may have a restrictive meaning different from equality and equal protection. It would mean then that
the same rate shall be imposed for the same subjects and objects within the territorial boundaries of a taxing authority.

Equal protection clause

Equality guaranteed under the equal protection clause is equality under the same conditions and among persons
similarly situated; it is equality among equals, not similarity of treatment of persons who are classified based on
substantial differences in relation to the object to be accomplished. When things or persons are different in fact or
circumstance, they may be treated in law differently.

The guaranty of equal protection of the laws is not a guaranty of equality in the application of the laws upon all
citizens of the [S]tate. It is not, therefore, a requirement, in order to avoid the constitutional prohibition against
inequality, that every man, woman and child should be affected alike by a statute. Equality of operation of statutes
does not mean indiscriminate operation on persons merely as such, but on persons according to the circumstances
surrounding them. It guarantees equality, not identity of rights.

The Constitution does not require that things which are different in fact be treated in law as though they were
the same. The equal protection clause does not forbid discrimination as to things that are different. It does not prohibit
legislation which is limited either in the object to which it is directed or by the territory within which it is to operate.
[ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008]

Rule on Set-off or Compensation of Taxes

What are the reasons why national taxes cannot be the subject of compensation and set-off with debts ?

SUGGESTED ANSWER:

a. The lifeblood theory;

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not
be the subject of set-off or compensation. We stated that:

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of
set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any
indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a
proper subject of recoupment since they do not arise out of the contract or transaction sued on. ... (80 C.J.S., 7374).
"The general rule based on grounds of public policy is well-settled that no set-off admissible against demands for
taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes
are not in the nature of contracts between the party and party but grow out of duty to, and are the positive acts of the
government to the making and enforcing of which, the personal consent of individual taxpayers is not required. ..."
( Francia vs IAC)

Compensation takes place by operation of law, where the local government and the taxpayer are in their own right
reciprocally debtors and creditors of each other, and that the debts are both due and demandable, in consequence of
Articles 1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8 SCRA 443)

Taxpayer’s Suit

Taxpayers’ suit is a case where the act complained of directly involves the illegal disbursement of public funds derived
from taxation. (Justice Melo, dissenting in Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110)

A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money
is being deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of an
invalid or unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)

Tax pyramiding/Tax Cascading

A tax should not be imposed upon another tax. This is tax pyramiding, which has no basis either in fact or in law.
Equally important, tax pyramiding has since 1922 been rejected by this Court, the legislature, and our tax authorities.
The intent behind the law is clearly to obviate a tax imposed upon another tax. Ratio legis est anima legis. The
reason for the law is its spirit. ( People vs Sandiganbayan, Tan)

INCOME TAXATION

Gross Income

Except when otherwise provided in this Title, gross income means all income derived from whatever source, including
(but not limited to) the following items:

(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions,
and similar items;

(2) Gross income derived from the conduct of trade or business or the exercise of a profession;

(3) Gains derived from dealings in property;

(4) Interests;

(5) Rents;

(6) Royalties;

(7) Dividends;

(8) Annuities;

(9) Prizes and winnings;

(10) Pensions; and

(11) Partner's distributive share from the net income of the general professional partnership. (Sec. 32 Tax Code)
Taxable Income

Taxable Income Defined. - The term taxable income means the pertinent items of gross income specified in this
Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by
this Code or other special laws.( Section 31, Tax Code)

Income

Income as contrasted with capital or property is to be the test. The essential difference between capital and income is
that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. 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 is called an income. Capital is wealth, while income is the service of
wealth. (Madrigal vs Rafferty)

For income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation (CHAMBER OF REAL ESTATE AND BUILDERS'
ASSOCIATIONS, INC., Petitioner, vs.THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO)

All events test

The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be
determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if its basis is
unchangeable; the test is satisfied where a computation may be unknown, but is not as much as unknowable, within
the taxable year. The amount of liability does not have to be determined exactly; it must be determined with
"reasonable accuracy." Accordingly, the term "reasonable accuracy" implies something less than an exact or
completely accurate amount. (CIR vs Isabela Cultural Corporation)

Filing of Income Tax return

See Codal na lang

Fringe Benefits Tax

See codal not much case

Persons subject to tax

ection 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:

(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and
without the Philippines;

(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;

(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas
contract worker is taxable only on income derived from sources within the Philippines: Provided, That a
seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as
a member of the complement of a vessel engaged exclusively in international trade shall be treated as an
overseas contract worker;

(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from
sources within the Philippines;
 (E) A domestic corporation is taxable on all income derived from sources within and without the Philippines;
and

(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on
income derived from sources within the Philippines.

Taxability of Moral Damages

Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or under
Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages
received, whether by suit or agreement, on account of such injuries or sickness.(Exclusions from gross income, Sec.
32 Tax Code)

Withholding Tax agent can file refund

In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation,40 a withholding
agent was considered a proper party to file a claim for refund of the withheld taxes of its foreign parent company.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this Court pointed out that a withholding
agent is in fact the agent both of the government and of the taxpayer, and that the withholding agent is not an
ordinary government agent:

"The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the
withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax
as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. Thus,
the withholding agent is constituted the agent of both the Government and the taxpayer. With respect to the collection
and/or withholding of the tax, he is the Government’s agent. In regard to the filing of the necessary income tax return
and the payment of the tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no
ordinary government agent especially because under Section 53 (c) he is held personally liable for the tax he is duty
bound to withhold; whereas the Commissioner and his deputies are not made liable by law."

As to Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue43 cited by the petitioner, we find the same
inapplicable as it involves excise taxes, not withholding taxes. In that case, it was ruled that the proper party to
question, or seek a refund of, an indirect tax "is the statutory taxpayer, the person on whom the tax is imposed by law
and who paid the same even if he shifts the burden thereof to another."

The right of a withholding agent to claim a refund of erroneously or illegally withheld taxes comes with the
responsibility to return the same to the principal taxpayer. ( CIR vs Smart Communications Inc.)

Sale of Principal residence: conditions

See Codal

Deductions

See codal

Bad debts

This pronouncement of respondent Court of Appeals relied on the ruling of this Court in Collector vs. Goodrich
International Rubber Co., 6 which established the rule in determining the "worthlessness of a debt." In said case,
we held that for debts to be considered as "worthless," and thereby qualify as "bad debts" making them deductible,
the taxpayer should show that (1) there is a valid and subsisting debt. (2) the debt must be actually ascertained to be
worthless and uncollectible during the taxable year; (3) the debt must be charged off during the taxable year; and (4)
the debt must arise from the business or trade of the taxpayer. Additionally, before a debt can be considered
worthless, the taxpayer must also show that it is indeed uncollectible even in the future.

Ordinary Business Expenses

To be deductible, therefore, an expense must be (1) ordinary and necessary;(2) paid or incurred within the taxable
year; and, (3) paid or incurred in carrying on a trade or business.( Gutierrez vs Collector)

Tax Benefit rule

What is the “tax benefit” rule ?

The “tax benefit rule” posits that the recovery of bad debts previously allowed as deduction in the preceding year or
years shall be included as part of the taxpayer’s gross income in the year of such recovery to the extent of the income
tax benefit of said deduction.

If in the year the taxpayer claimed deduction of bad debts written-off, he realized a reduction of the income tax due from
him on account of the said deduction, his subsequent recovery thereof from his debtor shall be treated as a receipt of
realized taxable income. (Sec. 4, Rev. Regs. 5-99)

If the said taxpayer did not benefit from the deduction of the said bad debt written-off because it did not result to any
reduction of his income tax in the year of such deduction (i.e. where the result of his business operation was a net loss
even without deduction of the bad debts written-off), then his subsequent recovery thereof shall be treated as a mere
recovery or a return of capital, hence, not treated as receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)

OSD irrevocability

See Codal not much cases

Exclusions

See Codal

Constitutional Exemptions

Section 28(3), Article VI of the 1987 Constitution provides:

xxxx

(3) 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.

In Lung Center of the Philippines v. Quezon City,31 this Court held that only portions of the hospital actually, directly
and exclusively used for charitable purposes are exempt from real property taxes, while those portions leased to
private entities and individuals are not exempt from such taxes. We explained the condition for the tax exemption
privilege of charitable and educational institutions, as follows:

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner
is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as possessed
and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a
manner to exclude; as enjoying a privilege exclusively." If real property is used for one or more commercial purposes,
it is not exclusively used for the exempted purposes but is subject to taxation. The words "dominant use" or "principal
use" cannot be substituted for the words "used exclusively" without doing violence to the Constitutions and the law.
Solely is synonymous with exclusively.1âwphi1
What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate
and actual application of the property itself to the purposes for which the charitable institution is organized. It is not
the use of the income from the real property that is determinative of whether the property is used for tax-exempt
purposes

CIR vs St Luke

To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center. The
issue in Lung Center concerns exemption from real property tax and not income tax. However, it provides for the test
of charity in our jurisdiction. Charity is essentially a gift to an indefinite number of persons which lessens the burden
of government. In other words, charitable institutions provide for free goods and services to the public which would
otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which
should have been spent to address public needs, because certain private entities already assume a part of the
burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the government is
compensated by its relief from doing public works which would have been funded by appropriations from the
Treasury.

As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply
because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies
from the government, so long as the money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to
extend the exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially
different from Section 28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or
association that is exempt from income tax. On the other hand, Section 28(3), Article VI of the Constitution does not
define a charitable institution, but requires that the institution "actually, directly and exclusively" use the property for a
charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer
or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted "exclusively" for charitable
purposes. The organization of the institution refers to its corporate form, as shown by its articles of incorporation, by-
laws and other constitutive documents. Section 30(E) of the NIRC specifically requires that the corporation or
association be non-stock, which is defined by the Corporation Code as "one where no part of its income is
distributable as dividends to its members, trustees, or officers" 49 and that any profit "obtain[ed] as an incident to its
operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the
corporation was organized." 50 However, under Lung Center, any profit by a charitable institution must not only be
plowed back "whenever necessary or proper," but must be "devoted or used altogether to the charitable object which
it is intended to achieve."

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution. However, this
does not automatically exempt St. Luke's from paying taxes. This only refers to the organization of St. Luke's. Even if
St. Luke's meets the test of charity, a charitable institution is not ipso facto tax exempt. To be exempt from real
property taxes, Section 28(3), Article VI of the Constitution requires that a charitable institution use the property
"actually, directly and exclusively" for charitable purposes. To be exempt from income taxes, Section 30(E) of the
NIRC requires that a charitable institution must be "organized and operated exclusively" for charitable purposes.
Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be "operated
exclusively" for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated exclusively" by
providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for
profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. (Emphasis
supplied)

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it is
nevertheless allowed to engage in "activities conducted for profit" without losing its tax exempt status for its not-for-
profit activities. The only consequence is that the "income of whatever kind and character" of a charitable institution
"from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to
tax." Prior to the introduction of Section 27(B), the tax rate on such income from for-profit activities was the ordinary
corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It cannot be disputed that
a hospital which receives approximately P1.73 billion from paying patients is not an institution "operated exclusively"
for charitable purposes. Clearly, revenues from paying patients are income received from "activities conducted for
profit."

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or social welfare
purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict
interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G).
Section 30(E) and (G) of the NIRC requires that an institution be "operated exclusively" for charitable or social welfare
purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax
exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from
sharing in the expenses of government and yet benefits from them. Tax exemptions for charitable institutions should
therefore be limited to institutions beneficial to the public and those which improve social welfare. A profit-making
entity should not be allowed to exploit this subsidy to the detriment of the government and other taxpayers.1âwphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from
all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does
not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St.
Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-
profit activities.

CORPORATIONS and PARTNERSHIPS

Airline

Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are liable for 32% tax on all
income from sources within the Philippines. Sec. 28(A)(3) is an exception to this general rule.

An exception is defined as "that which would otherwise be included in the provision from which it is excepted. It is a
clause which exempts something from the operation of a statue by express words."9 Further, "an exception need not
be introduced by the words ‘except’ or ‘unless.’ An exception will be construed as such if it removes something from
the operation of a provision of law."10

In the instant case, the general rule is that resident foreign corporations shall be liable for a 32% income tax on their
income from within the Philippines, except for resident foreign corporations that are international carriers that derive
income "from carriage of persons, excess baggage, cargo and mail originating from the Philippines" which shall be
taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an international carrier with no flights originating
from the Philippines, does not fall under the exception. As such, petitioner must fall under the general rule. This
principle is embodied in the Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing not
being excepted must be regarded as coming within the purview of the general rule.11
To reiterate, the correct interpretation of the above provisions is that, if an international air carrier maintains flights to
and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air
carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the
country will be taxed at the rate of 32% of such income. (South African Airways vs CIR)

Irrevocability of Carry over excess

In Commissioner of Internal Revenue v. Bank of the Philippine Islands,13 the Court, citing the aforequoted
pronouncement in Philam Asset Management, Inc., points out that Section 76 of the NIRC of 1997 is clear and
unequivocal in providing that the carry-over option, once actually or constructively chosen by a corporate taxpayer,
becomes irrevocable. The Court explains:

Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose an option; and once
it had already done so, it could no longer make another one. Consequently, after the taxpayer opts to carry-over its
excess tax credit to the following taxable period, the question of whether or not it actually gets to apply said tax credit
is irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once the option to carry over has been made,
"no application for tax refund or issuance of a tax credit certificate shall be allowed therefor."

MCIT

The MCIT and when should be imposed and the four (4) year grace period. “A minimum corporate income tax of
two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such
corporation commenced its business operations, when the minimum corporate income tax is greater than the tax
computed under Subsection (A) of this section for the taxable year.” [Sec. 27 (E) (1), NIRC of 1997]

b. Period when a corporation becomes subject to the MCIT. “(5) Specific rules for determining the
period when a corporation becomes subject to the MCIT (minimum corporate income tax) -

For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which
the domestic corporation registered with the Bureau of Internal Revenue (BIR).

Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January
1, 1998. x x x” (Rev. Regs. No. 9-98)

Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006 did not
apply Rev. Regs. No. 9-98 because Rev. Regs. No. 4-95 specifically refers to thrift banks.)

c.Purpose of the four (4) year grace period. The intent of Congress relative to the MCIT is to grant a four (43)
– year suspension of tax payment to newly organized corporations. Corporations still starting their business operations
have to stabilize their venture in order to obtain a stronghold in the industry. It does not come as a surprise then when
many companies reported losses in their initial years of operations.

Thus, in order to allow new corporations to grow and develop at the initial stages of their operations, the
lawmaking body saw the need to provide a grace period of four years from their registration before they pay their
minimum corporate income tax. (Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118,
August 26, 2006)

Immediacy Test

In Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue,29 we ruled:

To determine the "reasonable needs" of the business in order to justify an accumulation of earnings, the
Courts of the United States have invented the so-called "Immediacy Test" which construed the words
"reasonable needs of the business" to mean the immediate needs of the business, and it was generally held
that if the corporation did not prove an immediate need for the accumulation of the earnings and profits, the
accumulation was not for the reasonable needs of the business, and the penalty tax would apply. (Mertens.
Law of Federal Income Taxation, Vol. 7, Chapter 39, p, 103).30

Dividends
See codal

Capital gains tax

See codal (presumed gain) applicability to other disposition

Tax Free Exchanges

Sec. 40 C) Exchange of Property. -

(1) General Rule. - Except as herein provided, upon the sale or exchange or property, the entire
amount of the gain or loss, as the case may be, shall be recognized.

(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or

consolidation -

(a) A corporation, which is a party to a merger or consolidation, exchanges property solely

for stock in a corporation, which is a party to the merger or consolidation; or

(b) A shareholder exchanges stock in a corporation, which is a party to the merger or

consolidation, solely for the stock of another corporation also a party to the merger or
consolidation; or

(c) A security holder of a corporation, which is a party to the merger or consolidation,

exchanges his securities in such corporation, solely for stock or securities in such
corporation, a party to the merger or consolidation.

No gain or loss shall also be recognized if property is transferred to a corporation by a person in

exchange for stock or unit of participation in such a corporation of which as a result of such
exchange said person, alone or together with others, not exceeding four (4) persons, gains control
of said corporation: Provided, That stocks issued for services shall not be considered as issued in
return for property.

TRANSFER TAXES

Filing & Extension

Section 90

(B) Time for filing. - For the purpose of determining the estate tax provided for in Section 84 of this Code, the
estate tax return required under the preceding Subsection (A) shall be filed within six (6) months from the
decedent's death.

A certified copy of the schedule of partition and the order of the court approving the same shall be furnished
the Commissioner within thirty (30) after the promulgation of such order.

(C) Extension of Time. - The Commissioner shall have authority to grant, in meritorious cases, a reasonable
extension not exceeding thirty (30) days for filing the return.
Effect of Renunciation

Renunciation by the surviving spouse of his/her share in the conjugal partnershipor absolute community after the
dissolution of the marriage in favor of the heirs of the deceased spouse or any other person/s is subject to donor’s tax
whereas general renunciation by an heir, including the surviving spouse, of his/her share in the hereditary estate left
by the decedent is not subject to donor’s tax, unless specifically and categorically done in favor of identified heir/s to
the exclusion or disadvantage of the other co-heirs in the hereditary estate. (RR 2-2003)

Inclusion/exclusion (insurance proceeds) See Codal

Valuation

We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of the U.S. Supreme
Court in Ithaca Trust Co. v. United States.68 First. There is no law, nor do we discern any legislative intent in our tax
laws, which disregards the date-of-death valuation principle and particularly provides that post-death developments
must be considered in determining the net value of the estate. It bears emphasis that tax burdens are not to be
imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being
construed strictissimi juris against the government.69 Any doubt on whether a person, article or activity is taxable is
generally resolved against taxation.70 Second. Such construction finds relevance and consistency in our Rules on
Special Proceedings wherein the term "claims" required to be presented against a decedent's estate is generally
construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in
his lifetime, or liability contracted by the deceased before his death.71Therefore, the claims existing at the time of
death are significant to, and should be made the basis of, the determination of allowable deductions. (Dizon vs CTA)

Vanishing Deduction

See codal

Approval of probate court

The approval of the court sitting in probate, or as a settlement tribunal over the estate of the deceased is not a
mandatory requirement for the collection of the estate.

There is nothing in the Tax Code, and in the pertinent remedial laws that implies the necessity of the probate or estate
settlement court's approval of the state's claim for estate taxes, before the same can be enforced and collected.

The enforcement of tax laws and the collection of taxes are of paramount importance for the sustenance of
government. Taxes are the lifeblood of government and should be collected without unnecessary hindrance.
However, such collection should be made in accordance with law as any arbitrariness will negate the existence of
government itself. (Marcos, II v. Court of Appeals, et al., 273 SCRA 47)

Secrecy of Bank Deposits

Rep. Act No. 1405, the Bank Deposits Secrecy Law prohibits inquiry into bank deposits. As exceptions to Rep.
Act No. 1405, the Commissioner of Internal Revenue is only authorized to inquire into the bank deposits of:

a. a decedent to determine his gross estate; and

b. any taxpayer who has filed an application for compromise of his tax liability by reason of financial
incapacity to pay his tax liability. [Sec. 5 (F), NIRC of 1997]

c. A taxpayer who authorizes the Commissioner to inquire into his bank deposits.

DONORs TAX

Dowry exclusion

What is the donor’s tax rate if the donee is a stranger ?

When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net
gifts.

For purposes of the donor’s tax who is a stranger ?

A stranger is a is person who is not a:

a. Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal

descendant; or

b. Relative by consanguinity in the collateral line within the fourth degree of

relationship.” [Sec. 99 (B), NIRC of 1997]

NOTES AND COMMENTS: All relatives by affinity, irrespective of the degree, are
considered as strangers.

What is the tax base for donations ?

The net gifts made during the calendar year. [Sec. 99 (A), NIRC of 1997]

For purposes of the donor’s tax, what is meant by “net gifts ?”

The net economic benefit from the transfer that accrues to the donee. Accordingly, if a
mortgaged property is transferred as a gift, but imposing upon the donee the obligation to pay
the mortgage liability, then the net gift is measured by deducting from the fair market value of
the property the amount of the mortgage assumed. (last par., Sec. 11, Rev. Regs.No.2-2003)

How are gifts of personal property to be valued for donor’s tax purposes ?

The market value of the personal property at the time of the gift shall be considered the amount of
the gift. (Sec. 102, NIRC of 1997)

What is the valuation of donated real property for donor’s tax purposes ?

The real property shall be appraised at its fair market value as of the time of the gift.

However, the appraised value of the real property at the time of the gift shall be whichever is the
higher of:

a. the fair market value as determined by the Commissioner of Internal Revenue

(zonal valuation) or
 b. the fair market value as shown in the schedule of values fixed by the Provincial
and City Assessors. [Sec. 102, in relation to Sec. 88 (B) both of the NIRC of 1997]

A died leaving as his only heirs, his surviving spouse B, and three minor children, X, Y and
Z. Since B does not want to participate in the distribution of the estate, she renounced her
hereditary share in the estate.

a. Is the renunciation subject to donor’s tax ? Explain.

SUGGESTED ANSWER: No. The general renunciation by an heir, including the

surviving spouse, as in the case B, of her share in the hereditary estate left by the decedent is
not subject to donor’s tax. (4th par., Sec. 11, Rev. Regs. No. 2-2003)

This is so because the general renunciation by B was not specifically and categorically
done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the
hereditary estate.

Supposing that instead of a general renunciation, B renounced her hereditary share in

A’s estate to X who is a special child, would your answer be the same ? Explain.

SUGGESTED ANSWER: My answer would be different. The renunciation in favor of X

would be subject to donor’s tax.

This is so because the renunciation was specifically and categorically done in favor of X
and identified heir to the exclusion or disadvantage of Y and Z, the other co-heirs in the
hereditary estate. (4th par., Sec. 11, Rev. Regs. No. 2-2003)

Give some donations that are exempt from donor’s tax.

SUGGESTED ANSWER:

a. The first P100,000.00 net donation during a calendar year is exempt from donor’s
tax [Sec. 99 (A), NIRC of 1997] made by a resident or non resident;

b. The donation by a resident or non-resident of a prize to an athlete in an

international sports tournament held abroad and sanctioned by the national sports association is
exempt from donor’s tax (Sec. 1, Rep. Act No. 7549)

c. Political contributions made by a resident or non-resident individual if registered

with the COMELEC irrespective of whether donated to a political party or individual.

However, the Corporation Code prohibits corporations from making political contributions.
(Corp. Code, Title IV, Sec. 36.9)

d. Dowries or gifts made on account of marriage and before its celebration or

within one year thereafter by residents who are parents to each of their legitimate, recognized
natural, or adopted children to the extent of the first ten thousand pesos (P10,000.00);
 e. Gifts made by residents or non-residents to or for the use of the National
Government or any entity created by any of its agencies which is not conducted for profit, or to
any political subdivisions of the said Government;

f. Gifts made by residents or non residents in favor of an educational and/or

charitable, religious, cultural or social welfare corporation, institution, foundation, trust or
philanthropic organization or research institution or organization: Provided, however, That not
more than thirty percent (30%) of said gifts shall be used by such donee for administration
purposes. [Sec. 101 (A), NIRC of 1997, numbering and arrangement supplied]

g. Gifts made by non-resident aliens outside of the Philippines to Philippine residents

are exempt from donor’s taxes because taxation is basically territorial. The transaction, which
should have been subject to tax was made by non-resident aliens and took place outside of the
Philippines.

What is the concept of donation or gift splitting ? Illustrate.

SUGGESTED ANSWER: Donation or gift splitting is spreading the gift over numerous
calendar years in order to avail of lower donor’s taxes.

In 2008 Leon was thinking of donating a P200,000.00 to Miklos, his first cousin. The
P200,000.00 is the totality of the net gifts for 2008. If he donated the P200,000.00 in 2008
the first P100,000 would be exempt and the remaining P50,000.00 would be subject to donor’s
tax

If Leon spreads the P200,000 donation over two (2) calendar years, donating
P100,000.00 on December 30, 2008 and the remaining P100,000.00 on January 1, 2009 the
transaction would be exempt from donor’s tax. This is so even if the donation is separated only
by two days because the basis is the calendar year. Leon would be enjoying the exemption for
the first P100,000.00 net gifts for each calendar year.

A sold to B and P7 million Jaguar for only P4 million. The proper VAT on the sale was paid.
If you are the BIR examiner assigned to review the sale, would you issue a tax assessment
on the transaction ? Explain your answer briefly.

SUGGESTED ANSWER: Donor’s taxes would be due on the insufficiency of

consideration.

Where property, other than real property that has been subjected to the final capital
gains tax, is transferred for less than an adequate and full consideration in money or money’s
worth, then the amount by which the fair market value of the property at the time of the
execution of the Contract to Sell or execution of the Deed of Sale which is not preceded by a
Contract to Sell exceeded the value of the agreed or actual consideration or selling price shall
be deemed a gift, and shall be included in computing the amount of gifts made during the
calendar year. (5th par., Sec. 11, Rev. Regs. No. 2-2003)

VAT

Characteristics of VAT

: A tax which is imposed only on the increase in the worth, merit or importance of goods,
properties or services, and not on the total value of the goods or services being sold or
rendered.

SUGGESTED ANSWSER: VAT is an indirect tax that may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services. As such, it should be
understood not in the context of the person or entity that is primarily, directly liable for its
payment, but in terms of its nature as a tax on consumption. [Commissioner of Internal
Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005 citing
various authorities}

As an indirect tax on services, its main object is the transaction itself or, more concretely,
the performance of all kinds of services conducted in the course of trade or business in the
Philippines. These services must be regularly conducted in this country, undertaken in “pursuit
of a commercial or an economic activity,” for a valuable consideration, and not exempt under the
Tax Code, other special laws, or any international agreement. (Commissioner, of Internal
Revenue v. American Express International, Inc. (Philipppine Branch), G. R. No. 152609, June
29, 2005 citing various cases and authorities)

VAT is a percentage tax imposed on any person whether or not a franchise grantee, who
in the course of trade or business, sells, barters, exchanges, leases, goods or properties,
renders services. It is also levied on every importation of goods whether or not in the course of
trade or business. The tax base of the VAT is limited only to the value added to such goods,
properties, or services by the seller, transferor or lessor. Further, the VAT is an indirect tax and
can be passed on to the buyer. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G.
R. No. 166408, October 6, 2008)

Covered Transactions

Threshold

0 rated

Effectively 0 rated

Transaction Deemed Sales

Person liable for payment

GPP

See Codal (Casasola)

VAT Refund
All doubts on whether or not the 120 and 30-day periods are merely discretionary and dispensable
were erased when the Court promulgated Aichi on October 6, 2010. There, the Court is definite and
categorical that the prescriptive period of 120 and 30 days under Sec. 112 of the 1997 NIRC is
mandatory and jurisdictional. Aichiexplained that the 2-year period provided in Sec. 112(A) of the
1997 NIRC refers only to the prescription period for the filing of an administrative claim with the
CIR. Meanwhile, the judicial claim contemplated under saidSec. 112(C) must be filed within
a mandatory and jurisdictional period of thirty (30) days after the taxpayer’s receipt of the CIR’s
decision denying the claim, or within thirty (30) days after the CIR’s inaction for a period of 120 days
from the submission of the complete documents supporting the claim. Hence, the period for filing the
judicial claim under Sec. 112(C) may stretch out beyond the 2-year threshold provided in Sec. 112(A)
as long as the administrative claim is filed within the said 2-year period. Aichi explained, thus:

Section 112 (D) [now Section 112 (C)] of the NIRC clearly provides that the CIR has "120 days, from
the date of the submission of the complete documents in support of the application [for tax
refund/credit]," within which to grant or deny the claim. In case of full or partial denial by the CIR, the
taxpayer’s recourse is to file an appeal before the CTA within 30 days from receipt of the decision of
the CIR. However, if after the 120-day period the CIR fails to act on the application for tax
refund/credit, the remedy of the taxpayer is to appeal the inaction of the CIR to CTA within 30 days.

In this case, the administrative and the judicial claims were simultaneously filed on September 30,
2004. Obviously, respondent did not wait for the decision of the CIR or the lapse of the 120-day
period. For this reason, we find the filing of the judicial claim with the CTA premature

(CIR vs San Roque Power Corporation)

Explain the proper interpretation of the term “In the Course of Trade or Business.

SUGGESTED ANSWSER: VAT is not a singular-minded tax on every transactional level. Its
assessment bears direct relevance to the taxpayer’s role or link in the production chain. Hence, as
affirmed by Section 99 of the Tax Code and its subsequent incarnations, the tax is levied only on the
sale, barter or exchange of goods or services by persons who engage in such activities, in the course of
trade or business. These transactions outside the course of trade or business may invariably contribute
to the production chain, but they do so only as a matter of accident or incident. As the sales of goods or
services do not occur within the course of trade or business, the providers of such goods or services
would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own
accumulated VAT collections since the accumulation of output VAT arises in the first place only through
the ordinary course of trade or business. (Commissioner of Internal Revenue v. Magsaysay Lines, Inc.,
et al., G. R. No. 146984, July 28, 2006)

What is the destination principle the VAT ?

SUGGESTED ANSWER: As a general rule, the VAT system uses the destination
principle as a basis for the jurisdictional reach of the tax.

Goods and services are taxed only in the country where they are consumed. Thus,
exports are zero-rated, while imports are taxed.

Zero-rated sale distinguished from exempt transactions:

 a. A zero-rated sale is a taxable transaction but does not result in an output tax
WHILE an exempt transaction is not subject to the output tax.

b. The input tax on the purchases of a VAT registered person who has zero-rated
sales may be allowed as tax credits or refunded WHILE the seller in an exempt transaction is
not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt.

c. Persons engaged in transactions which are zero rated being subject to VAT are
required to register WHILE registration is optional for VAT-exempt persons.

Sales to ecozone, such as PEZA, considered export-sale. Notably, while an ecozone is

geographically within the Philippines, it is deemed a separate customs territory and is regarded
in law as foreign soil. Sales by suppliers from outside the borders of the ecozone to this
separate customs territory are deemed as exports and treated as export sales. These sales are
zero-rated or subject to a tax rate of zero percent. (Commissioner of Internal Revenue v.
Sekisui Jushi Philippines, Inc., G. R. No. 149671, July 21, 2006 citing various authorities)

TAX REMEDIES