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I.

General Principles of Taxation Taxation I

Part I. General Taxation

Principles

of

carried on illegally are subject to tax if the purpose is primarily for revenue or if revenue is one of the real and substantial purposes, then the exaction is a tax (PAL vs. Edu, 1988) where a permit collected from alien job applicants is in excess of the cost of regulation, the exaction is a tax (Villegas vs. Hiu Chiong Tsai Pao Ho, 1978) however, in the case of license fees for nonuseful occupations, the exaction may be very large without necessarily being a tax (Physical Therapy vs. Municipal Board of Manila, 101 Phil 1142) three kinds of licenses licenses for regulation of useful occupations licenses for regulation or restriction of non-useful occupations or enterprises licenses for revenue only

I. Meaning, Nature, Basis, Characteristics and Purpose of Taxation


A. SURVEY OF PHILIPPINE TAXES / OVERVIEW OF PHILIPPINE TAX SYSTEM 1. 2. 3. 4. Internal Revenue taxes National Internal Revenue Code (NIRC), as amended Local/Municipal Taxes Local Government Code, Book II Tariff / Duties Tariff and Customs Code, as amended Taxes / incentives under special laws

B. MEANING OF TAX / TAXATION TAXATION / ACT


OF

LEVYING TAX / INHERENT POWER

OF THE

STATE

Special Assessment Tax Special Assessment

Taxation is the act of laying tax, i.e. the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government. It is merely a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and, therefore, must bear its burdens. (51 Am. Jur. 34) Taxation refers to the inherent power of the State to demand enforced contributions for public purposes. TAX DISTINGUISHED FROM OTHER TERMS License and Regulatory Fees Tax License Fee or for

Imposed on persons, Levied only on land property or services Personal taxpayer Based on benefit liability of the Liability is limited only to the land involved and Based wholly on benefits Exceptional both as to time and locality

necessity

Has general application

Toll

Enforced contribution Legal compensation assessed by sovereign reward of an officer authority to defray public specific services expenses Levied in the exercise of Emanates from the taxing power power of the State Purpose revenue is to generate Purpose is to regulate

an exemption from taxation does not include exemption from special assessments but the power to tax carries with it the power to levy a special assessment

police

Tax Demand of sovereignty

Toll Demand of ownership

There is generally no limit The amount of exaction or on the amount of tax that charge must only be may be imposed sufficient to cover expenses of : 1. issuing the license 2. cost of necessary inspection or police surveillance Imposed also on persons Imposed on the right and property exercise a privilege to

Paid for the support of the Paid for the use of anothers government property There is generally no limit The amount of toll depends on amount of tax that may upon the cost of construction be imposed or maintenance of the public improvement used May be imposed only by the May be imposed by the government government or private individuals or entities Penalty Tax Civil liability Penalty Punishment for commission of a crime the

Failure to pay does not Failure to pay makes the act necessarily make the act or or business illegal business illegal could be a ground for criminal prosecution even businesses

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I. General Principles of Taxation Taxation I


Intended to raise revenue Designed conduct to regulate it still has a pending claim for refund or credit, this would adversely affect the government revenue system. Atlas Consolidate d vs. CTA (2002) We reject the petitioners contention (that the petitioners tax liabilities and its claims for VAT refunds can be the subject of set-off or compensation) for the following reasons: First, compensation shall take place when two persons, in their own right, are creditors and debtors of each other. The parties herein are the Government and the petitioner as taxpayer. They are not mutually creditors and debtors of each other. Second, a tax is not a debt, but an enforced proportionate contribution imposed upon persons, property, or interest by the legislature for a public purpose and generally payable in money. Third, taxes are not in the nature of contracts between the parties but grow out of a duty to, and are positive acts of, the Government, to the making and enforcing of which, the personal consent of the taxpayer is not required. Exception: Domingo vs. Garlitos (1963) Another ground for denying the petition of the provincial fiscal (order for the payment by the estate of the estate and inheritance tax) is the fact that the court having jurisdiction of the state against the Government has been recognized and an amount of P262,200 has already been appropriated for the purpose by a corresponding law. Under the above circumstances both the claim of the estate against the Government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable as well as fully liquidated. Compensation, therefore, takes place by operation of law. C. ESSENTIAL CHARACTERISTICS OF TAX 1. Enforced contribution it is not a voluntary payment or donation its imposition is not dependent upon the will or assent, express or implied, of the person taxed not contracts but positive acts of the government Proportionate in character Laid by some rule of apportionment according to which persons share the public burden Conformably with the constitutional mandate on progressivity of a taxing system Pecuniary burden payable in money But a tax is not necessarily confined to those payable in money Imposed by the State on persons, property or services within its jurisdiction Levied by the legislative body of the State The taxing power is peculiarly and exclusively legislative in character Levied for a public purpose

a person is criminally liable in taxation only because he fails to satisfy his civil obligation to pay taxes the violation of a tax law may give rise to imposition of penalty

Tariff / Custom Duties custom duties and fees are charged upon commodities on their being imported into or exported from a country these are taxes tax is a broader term that include not only custom duties but other taxes as well
TO

OBLIGATION

PAY TAX

VS.

OBLIGATION

TO

PAY DEBT

Art. 1279, CC In order that compensation may be proper, it is necessary: 1. That each of the obligors be bound principally and that he be at the same time a principal creditor of the other; 2. That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter ahs been stated; 3. That the two debts be due; 4. That they be liquidated and demandable; 5. That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (1196) Republic vs. Mambulao Lumber Company (1962) The general rule, based on grounds of public policy is well settled that no set off is admissible against demands for taxes levied for general or local governmental purposes. Taxes are not in the nature of contracts between the party and party but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of which, the personal consent of the individual taxpayers is not required. Philex Mining vs. CIR (1998) Taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and a debt. Debts are due to the government in its corporate capacity, while taxes are due to the government in its sovereign capacity xxx A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. xxx To be sure, we cannot allow Philex to refuse payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any taxpayer can defer the payment of taxes by raising the defense that

2.

3.

4.
5. 6.

D. THEORY AND BASIS OF TAXATION 1. 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

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I. General Principles of Taxation Taxation I


those means, it has the right to compel all citizens and property within its limits to contribute ones hard-earned income to the taxing authorities, every person who is able to 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 for taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

Taxation is a power that emanating from necessity. It is a necessary burden to preserve the States sovereignty (Philippine Guaranty vs. CIR, 1965)

Commissioner vs. Algue (1988) It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of ones hard-earned income to the taxing authorities, every person who is able to 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 for taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. NPC vs. City of Cabanatuan (2003) Taxes are the lifeblood of the government for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity, without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people. 2. BENEFIT RECEIVED PRINCIPLE The State demands and receives taxes from the subjects of taxation within its jurisdiction so that it may be enabled to carry its mandate into effect and perform the functions of government The citizen pays from his property the portion demanded in order that he may be secured in the enjoyment of the benefits of an organized society The benefits are enjoyed even by those who do not pay taxes because they are not able to

PAL vs. Edu (1988) Fees may properly be regarded as taxes even though they also serve as an instrument of regulation. Indeed, taxation may be made the implement of the states police power. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. xxx It is quite apparent that vehicle registration fees were originally simple exactions intended only for regulatory purposes in the exercise of the States police powers. Over the years, however, as vehicular traffic exploded in number and motor vehicles became absolute necessities without which modern life as we know it would stand still, Congress found the registration of vehicles a very convenient way of raising such revenues. Without changing the earlier denomination of registration payments as fees, their nature has become that of taxes. In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant to the Land Transportation and Traffic Code are actually taxes intended for additional revenues of government even if one fifth or less of the amount collected is set aside for the operating expenses of the agency administering the program. Tolentino vs. Secretary of Finance (1995) A license tax, unlike an ordinary tax, is mainly for regulation. Its imposition on the press is unconstitutional bcoz it lays a prior restraint on the exercise of its rt. Hence, although its application to others, such those selling goods, is valid, its application to the press or to religious groups, e.g. Jehovah's Witnesses, in the latter's sale of religious books & pamphlets, is unconstitutional. As the U.S. SC put it, "it is one thing to impose a tax on income or property of a preacher. It is quite another thing to exact a tax on him for delivering a sermon." The VAT is, however, diff. It is not a license tax. It is not a tax on the exercise of a privilege, much less a constitutional rt. It is imposed on the sale, barter, lease or exchange of goods or properties or the sale or exchange of services & the lease of properties purely for revenue purposes. To subj the press to its pmt is not to burden the exercise of its rt any more than to make the press pay income tax or subj it to gen regulation is not to violate its freedom under the Constitution. 2. NON-REVENUE / SPECIAL a. b.
OR

Lorenzo vs. Posadas (1937) The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to, a citizen by the government, but upon the necessity of money for the support of the state. For this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him can be pointed out. E. PURPOSE / OBJECTIVES OF TAXATION 1. GENERAL / FISCAL / REVENUE The purpose of taxation is to provide funds or property with which the State promotes the general welfare and protection of its citizens

REGULATORY

Commissioner vs. Algue (1988) It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of

Taxation also has a regulatory purpose Taxation may also be used to implement police power in order to promote the general welfare of the people

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I. General Principles of Taxation Taxation I


c. d. e. Taxes may be levied to reduce inequalities of wealth and income Taxation can grant incentives and exemptions in order to encourage investments and promote the countrys economic growth Taxes sometimes provide protection to local industries The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of RA 7716. The phrase in the course of trade or business means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstick, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business. RA 9337 SEC. 106 Value-Added Tax on Sale of Goods or Properties. Rate and Base of Tax. - There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and onehalf percent (1 1/2%).

Osmea vs. Orbos (1993) Hence, it seems clear that while the funds collected may be referred to as taxes, they are exacted in the exercise of the police power of the State. xxx Although the provision authorizing the ERB to impose additional amounts could be construed to refer to the power of taxation, it cannot be overlooked that the overriding consideration is to enable the delegate to act with expediency in carrying out the objectives of the law which are embraced by the police power of the State. Caltex vs. Commission on Audit (1992) We find no merit in the petitioners contention that the OPSF contributions are not for a public purpose because they go to a special fund of the government. Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the 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. Xxx Also, PD 1956, as amended by EO 137, explicitly provides that the source of OPSF is taxation. No amount of semantical juggleries could dim this fact. Esso Standard Eastern vs. Commissioner (1989) As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence should not form part of the exchange rate, suffice it to state that we have already held the contrary for the reason that a tax is levied to provide revenue for government operations, while the proceeds of the margin fee are applied to strengthen our countrys international reserves. F. CLASSIFICATION OF TAXES 1. AS TO SCOPE

(A)

(1)

a. b. a.
b.

National Government

tax

imposed

by

the

National

Local tax imposed by municipal corporations or local government units


THE

2. AS TO WHO SHOULDERS

BURDEN

OF THE

TAX

Direct Tax Tax which is demanded from the person who also shoulders the burden of the tax Indirect Tax Tax which is demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, falling finally upon the ultimate purchaser or consumer

Sec 105, NIRC Persons Liable Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: (a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business (b) The right or the privilege to use patent, copyright, design or model, plan secret formula or process, goodwill, trademark, trade brand or other like property or right; (c) The right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment; (d) The right or the privilege to use motion picture films, films, tapes and discs; and (e) Radio, television, satellite transmission and cable television time. The term 'gross selling price' means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value- added tax. The excise

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I. General Principles of Taxation Taxation I


tax, if any, on such goods or properties shall form part of the gross selling price. (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business; (2) Distribution or transfer to: (a) Shareholders or investors as share in the profits of the VAT-registered persons: or (b) Creditors in payment of debt; (3) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods, were consigned; and (4) Retirement from or cessation of business, with respect to inventories of taxable aoods existing as of such retirement or cessation.

(a) Export

Sales. - The term 'export sales' means: (1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas,(BSP); (2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): (3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production; (4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); (5) Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws; and (6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations.

(C)

Changes in or Cessation of Status of a VATregistered Person. The tax imposed in Subsection (A) of this Section shall also apply to goods disposed of or existing as of a certain date if under circumstances to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, the status of a person as a VAT-registered person changes or is terminated.

(D)

Sales Returns, Allowances and Sales Discounts. - The value of goods or properties sold and subsequently returned or for which allowances were granted by a VAT-registered person may be deducted from the gross sales or receipts for the quarter in which a refund is made or a credit memorandum or refund is issued. Sales discount granted and indicated in the invoice at the time of sale and the grant of which does not depend upon the happening of a future event may be excluded from the gross sales within the same quarter it was given.

(E)

Authority of the Commissioner to Determine the Appropriate Tax Base. - The Commissioner shall, by rules and regulations prescribed by the Secretary of Finance, determine the appropriate tax base incases where a transaction is deemed a sale, barter or exchange of goods or properties under Subsection (B) hereof, or where the gross selling price is unreasonably lower than the actual market value." SEC. 107 Value-Added Tax on Importation of Goods.

(b) Foreign Currency Denominated Sale. -

(A)

The phrase 'foreign currency denominated sale' means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.

(B)

Transactions Deemed Sale. - The transactions shall be deemed sale:

following

In General. - There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any: Provided, further, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of valueadded tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or

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(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). phrase 'sale or exchange of services' shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (2) The lease or the use of, or the right to use of any industrial, commercial or, scientific equipment; (3) The supply of scientific, technical, industrial or commercial knowledge or information; (4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (2) or any such knowledge or information as is mentioned in subparagraph (3); (5) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; (6) The supply of technicai advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; (7) The lease of motion picture films, films, tapes and discs; and (8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time. Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines. The term 'gross receipts' means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax.

(B)

Transfer of Goods by Tax-exempt Persons. - In the case of tax free importation of goods into the Philippines by persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the Philippines to nonexempt persons or entities, the purchasers, transferees or recipients shall be considered the importers thereof, who shall be liable for any internal revenue tax on such importation. The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof. SEC. 108 Value-added Tax on Sale of Services and Use or Lease of Properties. Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of valueadded tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes; common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines; sales of electricity by generation companies, transmission, and distribution companies; services of franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The

(A)

(B)

Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

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I. General Principles of Taxation Taxation I


(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; (4) Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof; (5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production; (6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country; and (7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels. Tolentino vs. Secretary of Finance (1995) The Constitution does not really prohibit the imposition of indirect taxes w/c, like the VAT, are regressive. What it simply provides is that Congress shall "evolve a progressive system of taxation." The constitutional provision has been interpreted to mean simply that "direct taxes are to be preferred [&] as much as possible, indirect taxes should be minimized." Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, w/c perhaps are the oldest form of indirect taxes, would have been prohibited Sales taxes are also regressive. Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of certain transactions, while granting exemptions to other transactions. Maceda vs. Macaraig (1991) It may be useful to make a distinction, for the purpose of this disposition, b/w a direct tax & an indirect tax. A direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in. Examples are the custom duties and ad valorem taxes paid by the oil cos. to the Bureau of Customs for their importation of crude oil, and the specific and ad valorem taxes they pay to the BIR after converting the crude oil into petroleum products. On the other hand, "indirect taxes are taxes primarily paid by persons who can shift the burden upon someone else." For example, the excise and ad valorem taxes that oil cos. pay to the BIR upon removal of petroleum products from its refinery can be shifted to its buyer, like the NPC, by adding them to the "cash" and/or "selling price." Commissioner vs. John Gotamco (1987) Direct taxes are those that are demanded from the very person who, it is intended or desired, should pay them; while indirect taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else. The contactors tax is payable by the contractor but in the last analysis it is the owner of the building that shoulders the burden of the tax because the same is shifted by the contractor to the owner as a matter of self-preservation. Thus, it is an indirect tax. Commissioner vs. PLDT (2005) In context, direct taxes are those that are exacted from the very person who, it is intended or desired, should pay them; they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in. On the other hand, indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else. Indirect taxes are taxes wherein the liability for the payment of tax falls on one person but the burden thereof can be shifted or passed on to another person. 3. AS TO OBJECT OR SUBJECT MATTER OF TAX a. Property Taxes assessed on all property or all property of a certain class within the jurisdiction of the taxing power. Example: real estate tax b. Personal c. Poll / Capitation Taxes of a fixed amount upon all persons of a certain class within the jurisdiction of the taxing power without regard to the amount of their property, or the occupations or businesses in which they are engaged. Example: community d. Excise Also called privilege taxes Laid upon the manufacture, sale or consumption of commodities within the country; upon licenses to pursue certain occupations and upon corporate privileges Example: income tax, VAT, estate tax, donors tax Commissioner vs. CA (1995) Ad valorem tax is a tax not on the minerals, but upon the privilege of severing or extracting the same from the earth, the government's right to exact the said impost springing from the Regalian theory of State Ownership of its natural resources." Villanueva vs. City of Iloilo (1968) In the case at bar, Ordinance No. 11, series of 1960, of the City of Iloilo, which imposed a municipal license tax on tenement houses, is valid and constitutional. The tax in question is not a real estate tax. The tax imposed in question does not possess the attributes of a real estate tax. It is not a tax on land on which the tenement houses are erected, although both land and tenement houses belong to the same owner. The tax is not a fixed proportion of the assessed value of the tenement houses, and does not require the intervention of assessors or appraisers. It is not payable at a designed time or date, and is not enforceable against tenement houses either by sale or distraint. Clearly therefore, the tax in question is not a real estate tax. The contention that the petitioners are doubly taxed, because they are paying the real estate taxes and the tenement tax imposed by the ordinance in question, is also

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devoid of merit. It is well-settled rule that 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. xxx It has been shown that a real estate tax and the tenement tax imposed by the ordinance, although imposed by the same taxing authority, are not of the same kind or character. 4. AS
TO

CLASSIFICATION Progressive / Regressive System of Taxation Progressive system of taxation is when there are more direct taxes than indirect taxes

Regressive system of taxation is when there are more indirect taxes imposed than direct taxes

MANNER

OF

COMPUTING

THE

TAX

a.

Ad Valorem tax of a specific portion of the value of the property with respect to which the tax is assessed; it requires the intervention of assessors or appraisers to estimate the value of the property before the amount due to each taxpayer can be determined Literally means according to value Specific tax of a fixed amount imposed by the head or number or by some standard of weight or measurement. It requires no assessment other than a listing or classification of the object to be taxed

Progressive System vs. Progressive Rate of Tax Tolentino vs. Secretary of Finance (1995) The Constitution does not really prohibit the imposition of indirect taxes w/c, like the VAT, are regressive. What it simply provides is that Congress shall "evolve a progressive system of taxation." The constitutional provision has been interpreted to mean simply that "direct taxes are to be preferred [&] as much as possible, indirect taxes should be minimized." Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, w/c perhaps are the oldest form of indirect taxes, would have been prohibited Sales taxes are also regressive. Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of certain transactions, while granting exemptions to other transactions. BASIC PRINCIPLES TAX) 1.
OF A

b.

Title VI, NIRC Excise Taxes on Certain Goods 5. AS


TO

GRADUATION

OR

RATE

a. b. c.

Proportional / Flat Rate tax based on a fixed percentage of the amount of the property, receipts or other basis to be taxed Progressive tax the rate of which increases as the tax base or bracket increases Regressive tax the rate of which decreases as the tax base or bracket increases

SOUND TAX SYSTEM (MEANING

OF

NEUTRAL

Fiscal adequacy Sources of government revenues must be adequate to meet government expenditures and their variations To avoid budget deficits and minimize local and foreign borrowings Theoretical justice A good tax system must be based on the taxpayers ability to pay Ability-to-pay principle Connotes that the contribution of each person towards the expense of the government should be so apportioned such that he would feel neither more or less inconvenienced from his share of the payment than every other person experiences from his Administrative feasibility Taxes should be capable of being effectively enforced The legislature can require that taxes be paid with sacks of rice. However, this will entail lots of problems with regard to enforcement

2.

G. ASPECTS OF TAXATION 1. LEVY / IMPOSITION


BY

LEGISLATIVE BODY 3.

2. COLLECTION / ADMINISTRATION Pay as you earn Income tax Pay as you are assessed Real property tax Pay as you file Business tax Pay as you transact VAT 3. PAYMENT H. TAX SYSTEMS

Chavez vs. Ongpin (1990) We agree with the observation of the OSG that without EO 73, the basis for collection of real property taxes will still be the 1978 revision of property values. Certainly, to continue collecting real property taxes based on valuations arrived at several years ago, in disregard of the increases in the value of real properties that have occurred since then, is not in consonance with a sound tax system. Fiscal adequacy, which is one of the characteristics

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I. General Principles of Taxation Taxation I


of a sound tax system, requires that sources of revenues must be adequate to meet government expenditures and their variations. Taganito Mining Corporation vs. Commissioner This set-up established by the petitioner is contrary to the principle of administrative feasibility which is one of the basic principles of a sound tax system. Tax laws should be capable of convenient, just and effective administration which is why it fixes a standard or a uniform tax base upon which taxes should be paid. receives the equivalent of the tax in the form of protection and benefits from the government receives the market value of the property taken from him receives no direct benefits but only such as may arise from the maintenance of a healthy economic standard of society Amount imposed should not be more than sufficient to cover the cost of the license & necessary expenses Relatively free form constitutional limitations. It is superior to the impairment provisions.

II. Nature and Limitations of the Power of Taxation


A. NATURE OF THE POWER OF TAXATION 1. INHERENT IN SOVEREIGNTY / DISTINGUISHED AND EMINENT DOMAIN Taxation
Authority who exercises power
FROM

Amount of Imposition

POLICE POWER

Eminent Domain May be exercised by the government or its political subdivisions or granted to public service companies or public utilities The property is taken for public use and must be compensated

Police Power May be exercised only by the government or its political subdivision

Generally, there is no limit on the amt of tax that may be imposed as long as it is not iniquitous and unconscionable Is subect to certain constitutional limits including the prohibition against impairment of the obligation of contracts

No amount imposed but rather the owner is paid the market value of the property taken

May be exercised only by the government or its political subdivision

Relationship to Constitution

Purpose

The property (generally in the form of money) is taken for the support of the government

The use of the property is regulated for the purpose of promoting the general welfare; it is not compensable Operates upon a community or class of individuals There is no transfer of title. At most, there is restraint on the injurious use of property The person affected

Inferior to the impairment prohibition; government cannot expropriate private prop, whichc under contract it had previously bound itself to purchase from the other contracting party

Roxas vs. CTA (1968) The power to tax is sometimes called the power to destroy. Therefore, it should be exercised with caution to minimize 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 egg. Tanada v. Angara (1997) The power to tax is sometimes called the power to destroy. Therefore, it should be exercised with caution to minimize 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 egg. Land Transportation Office vs. City of Butuan (2000) Police power and taxation, along with eminent domain, are inherent powers of sovereignty which the State might share with local government units by delegation given under a constitutional or statutory fiat. All these inherent powers are for a public purpose and legislative in nature but the similarities just about end there. The basic aim of police power is public good and welfare. Taxation, in its case, focuses on the power of the government to raise revenue in order to support its

Persons affected

Operates upon a community or class of individual

Operates on an individual as the owner of a particular prop There is transfer of the right to the property

Effect

The money contributed becomes part of public funds

Benefits Received

Assumed that Person the individual affected

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I. General Principles of Taxation Taxation I


existence and carry out legitimate objectives. Although correlative to each other in many respects, the grant of one does not necessarily carry with it the grant of the other. The two powers are by tradition and jurisprudence, separate and distinct powers, varying in their respective concepts, character, scopes and limitations. 2. EXCLUSIVELY LEGISLATIVE IN NATURE The power to tax is peculiarly and exclusively legislative and cannot be exercised by the executive or judicial branch of the government. The levy of tax, however, may also be made by a local legislative body subject to such limitations as may be imposed by law. Tan vs. Del Rosario (1994) With the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a 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 proscriptions. The due process clause may correctly be invoked only when there is clear contravention of inherent or constitutional limitations in the exercise of tax power. Commissioner vs. Santos (1997) There is no doubt in the Courts mind, despite protestations to the contrary, that respondent judge encroached upon matters properly falling within the province of legislative functions. In citing as basis for his decision unproven comparative data pertaining to differences between tax rates of various Asian countries, and concluding that the jewelry industry in the Philippines suffers as a result, the respondent judge took it upon himself to supplant legislative policy regarding jewelry taxation. xxx There are reasons why jewelry, a nonessential item, is taxed as it is in this country, and these reasons, deliberated upon by our legislature, are beyond the reach of judicial questioning. What we see here is a debate on the wisdom of the laws in question. This is a matter on which the RTC is not competent to rule 3. SUBJECT
TO

petitioner must show he has sustained direct injury as a result of the action and that it is not sufficient for him to have a mere general interest common to all members of the public. The Court however agrees with the petitioner that as a taxpayer he may file the instant petition following the ruling in Lozada when it involves illegal expenditure of public money. The petition ?s the legality of the tax refund to NPC by way of tax credit certificates & the use of said assigned tax credits by respondent oil cos. to pay for their tax & duty liabilities to the BIR and Bureau of Customs. Chavez vs. PCGG (1998) In Albano vs. Reyes, we said that while expenditure of public funds may not have been involved under the questioned contract for the development, management and operation of the MICT, public interest was definitely involved considering the important role of the subject contract xxx in the economic development of the country & the magnitude of the financial consideration involved. We concluded that, as a consequence, the disclosure provision in the Constitution would constitute sufficient authority for upholding the petitioners standing. Gonzales vs. Narvasa (2000) A taxpayer is deemed to have the standing to raise a constitutional issue when it is established that public funds have been disbursed in contravention of the law or the Constitution. Thus, a taxpayers action is properly brought only when there is an exercise by Congress of its taxing or spending power. In Sanidad v. COMELEC, the petitioners therein were allowed to bring a taxpayers suit to question several president decrees promulgated by the Pres. Marcos in his legislative capacity calling for a national referendum, w/ the Ct explaining that xxx At the instance of taxpayers, laws providing for the disbursement of public funds may be enjoined, upon the theory that the expenditure of public funds by an officer of the State for the purpose of executing an unconstitutional act constitutes a misapplication of such funds. BAYAN vs. Executive Secretary (2000) As taxpayers, petitioners have not established that the VFA involves the exercise by Congress of its taxing or spending powers. On this point, it bears stressing that a taxpayers suit refers to a case where the act complained of directly involves the illegal disbursement of public funds derived from taxation. Thus, in Bugnay Const. & Development Corp. vs. Laron, we held: xxx it is exigent that the taxpayer-plaintiff sufficiently show that he would be benefited or injured by the judgment or entitled to the avails of the suit as a real party in interest. Before he can invoke the power of judicial review, he must specifically prove that he has sufficient interest in preventing the illegal expenditure of money raised by taxation and that he will sustain a direct injury as a result of the enforcement of the questioned statute or contract. It is not sufficient that he has merely a general interest common to all members of the public. Del Mar vs. PAGCOR (2001) Melo, Dissenting: Petitioners have brought this suit in their capacity as taxpayers & legislators. In order for a taxpayers suit to prosper, petitioners must have locus standi. In a dissenting opinion in Kilosbayan vs. Guingona, Jr., I stated that:

INHERENT

AND

CONSTITUTIONAL LIMITATIONS
A

WHO MAY QUESTION THE VALIDITY OF EXPENDITURE OF TAXES (TAXPAYERS SUIT)

TAX MEASURE

OR

Lozada vs. Commissioner (1983) As taxpayers, petitioners may not file the instant petition, for nowhere therein is it alleged that tax money is being illegally spent. The act complained of is the inaction of the COMELEC to call a special election, as is allegedly its ministerial duty under the constitution, & therefore, involves no expenditure of public funds. It is only when an act complained of, w/c may include a legislative enactment or statute, involves the illegal expenditure of public money that the so-called taxpayer suit may be allowed. Maceda vs. Macaraig (1991) In the petition it is alleged that petitioner is "instituting this suit in his capacity as a taxpayer and a duly-elected Senator of the Philippines." Public respondent argues that

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A taxpayers suit refers to a case where the act complained of directly involves the illegal disbursement of public funds derived from taxation Miranda vs. Carreon (2003) Even as a taxpayer, petitioner does not stand "to be benefited or injured by the judgment of the suit." Not every action filed by a taxpayer can qualify to challenge the legality of official acts done by the government. It bears stressing that "a taxpayers suit refers to a case where the act complained of directly involves the illegal disbursement of public funds from taxation." The issue in this case is whether respondents services were illegally terminated. Clearly, it does not involve the illegal disbursement of public funds; hence, petitioners action cannot be considered a taxpayers suit. B. INHERENT LIMITATIONS 1. PURPOSE MUST BE PUBLIC IN NATURE Public purpose a purpose affecting the inhabitants of the state or taxing district as a community and not merely as individuals That the tax is laid for a public purpose is the first requisite of lawful taxation, and this is so whether the Constitution expressly so provides or not since this purpose is inherent and implied in the levy of every tax (Mendoza vs. Municipality, 1954) A tax levied for a private for a private, not public purpose constitutes a taking of property without due process of law as it is beyond the power of the government to impose The purposes to be accomplished by taxation need not be exclusively public. It is not necessary that the tax be for the use of the whole inhabitants. Although private individuals are directly benefited, the tax would still be valid provided such benefit is only incidental Tests for determining if it is for public purpose a. The proceeds must be for the support of the government b. The proceeds must be for any recognized objects of the government c. The proceeds must be used to promote the welfare of the community Pascual vs. Secretary of Public Works (1960) It is a general rule that the legislature is w/o power to appropriate public revenue for anything but a public purpose It is the essential character of the direct object of the expenditure w/c must determine its validity as justifying a tax, and not the magnitude of the interests to be affected nor the degree to w/c the general advantage of the community, & thus the public welfare, may be ultimately benefited by their promotion. Incidental advantage to the public or to the state, w/c results from the promotion of private interests & the prosperity of private enterprises or business, does not justify their aid by the use of public money. The rule is set forth in Corpus Juris Secundum in the following language: "In accordance with the rule that the taxing power must be exercised for public purposes only, money raised by taxation can be expanded only for public purposes and not for the advantage of private individuals." Explaining the reason underlying said rule, Corpus Juris Secundum states: "Generally, under the express or implied provisions of the Constitution, public funds may be used for a public purpose. The right of the legislature to appropriate funds is correlative w/ its right to tax, under Constitutional provisions against taxation except for public purposes & prohibiting the collection of a tax for one purpose and the devotion thereof to another purpose, no appropriation of state funds can be made for other than a public purpose" "The test of the constitutionality of a statute requiring the use of public funds is whether the statute is designed to promote the public interests, as opposed to the furtherance of the advantage of individuals, although each advantage to individuals might incidentally serve the public" Caltex vs. Commissioner (1992) Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the government; taxes may be levied w/ a regulatory purpose to provide means for the rehabilitation & stabilization of a threatened industry w/c is affected w/ pub interest as to be w/in the police power of the state. There can be no doubt that the oil industry is greatly imbued w/ pub interest as it vitally affects the general welfare. Any unregulated increase in oil prices could hurt the lives of a majority of the people & cause economic crisis of untold proportions. It would have a chain reaction in terms of, among others, demands for wage increases & upward spiraling of the cost of basic commodities. The stabilization then of oil prices is one of prime concern w/c the state, via its police power, may properly address. 2. PROHIBITION AGAINST DELEGATION OF TAXING POWER The power of taxation being purely legislative, Congress cannot delegate power to others EXCEPTIONS 1. Delegation to Local Governments Sec 5, Art X, 1987 Constitution Each local government unit shall have the power to create its own sources of revenues 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, and charges shall accrue exclusively to the local governments. Local Government Code, Book II It is in-line with the well-accepted principle that the power to create municipal corporations for the purposes of local self-government carries with it, by necessary implication the power to confer the power to tax on such local governments

LTO vs. City of Butuan (2000) LGUs indubitably now have the power to regulate the operation of tricycles-for-hire & to grant franchises for the operation thereof. "To regulate" means to fix, establish, or control; to adjust by rule, method, or established mode; to direct by rule or restriction; or to subject to governing principles or laws. A franchise is defined to be a special privilege to do certain things conferred by government on an individual or corp., & w/c does not belong to citizens generally of common right. On the other hand, "to register" means to record formally & exactly, to enroll, or

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to enter precisely in a list or the like, & a "driver's license" is the cert or license issued by the government w/c authorizes a person to operate a motor vehicle. The devolution of the functions of the DOTC, performed by the LTFRB, to the LGUs, as so aptly observed by the SolGen, is aimed at curbing the alarming increase of accidents in national highways involving tricycles. It has been the perception that local governments are in good position to achieve the end desired by the law-making body because of their proximity to the situation that can enable them to address that serious concern better than the national government. It may not be amiss to state, nevertheless, that under Art. 458 (a)[3-VI] of the Local Government Code, the power of LGUs to regulate the operation of tricycles and to grant franchises for the operation thereof is still subject to the guidelines prescribed by the DOTC. In compliance therewith, the DOTC issued "Guidelines to Implement the Devolution of LTFRBs Franchising Authority over TricyclesFor-Hire to LGUs pursuant to the Local Government Code." The City Government of Quezon City vs. Bayan Telecommunications, Inc. (2006) While the system of local government taxation has changed w/ the onset of the 1987 Constitution, the power of LGUs to tax is still ltd. As we explained in Mactan Cebu International Airport Authority: The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Sec. 5, Art. X of the Constitution. Under the latter, the exercise of the power may be subject to such guidelines & limitations as the Congress may provide w/c, however, must be consistent w/ the basic policy of local autonomy. Clearly then, while a new slant on the subject of local taxation now prevails in the sense that the former doctrine of LGUs delegated power to tax had been effectively modified w/ Art. X, Sec. 5 of the 1987 Constitution now in place, the basic doctrine on local taxation remains essentially the same. For as the Court stressed in Mactan: the power to tax is [still] primarily vested in the Congress. This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a Commissioner of the 1986 Constitutional Commission which crafted the 1987 Constitution, thus: What is the effect of Sec. 5 on the fiscal position of municipal corporations? Sec. 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation. What it does is to confer municipal corporations a general power to levy taxes & otherwise create sources of revenue. They no longer have to wait for a statutory grant of these powers. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. Moreover, these limitations must be consistent with the basic policy of local autonomy. The important legal effect of Sec. 5 is thus to reverse the principle that doubts are resolved against municipal corporations. Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is understood, however, that taxes imposed by local government must be for a public purpose, uniform w/in a locality, must not be confiscatory, & must be w/in the jurisdiction of the local unit to pass. 2. Delegation to the President Sec 28 (2), Art VI, 1987 Constitution xxx (2) 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. Sec 401, Tariff and Customs Code Flexible Clause.

a.

b.

c.

d.

e.

f.

The President, upon investigation by the Commission and recommendation of the National Economic Council, is hereby empowered to reduce by not more than fifty per cent or to increase by not more than five times the rates of import duty expressly fixed by statute (including any necessary change in classification) when in his judgment such modification in the rates of import duty is necessary in the interest of national economy, general welfare and/or national defense. Before any recommendation is submitted to the President by the Council pursuant to the provisions of this section, the Commission shall conduct an investigation in the course of which it shall hold public hearings wherein interested parties shall be afforded reasonable opportunity to be present, to produce evidence and to be heard. The Commission may also request the views and recommendations of any government office, agency or instrumentality, and such office, agency or instrumentality shall cooperate fully with the Commission. The President shall have no authority to transfer articles from the duty-free list to the dutiable list nor from the dutiable list to the duty-free list of the tariff. The power of the President to increase or decrease rates of import duty within the limits fixed in subsection "a" shall include the authority to modify the form of duty. In modifying the form of duty the corresponding ad valorem or specific equivalents of the duty with respect to imports from the principal concerning foreign country for the most recent representation period shall be used as basis. The Commissioner of Customs shall regularly furnish to the Commission a copy each of all customs import entries containing every pertinent information appearing in the collectors' liquidated duplicates, including the consular invoice and/or the commercial invoice. The Commission or its duly authorized agents shall have access to and the right to copy all the customs import entries and other documents appended thereto as finally in the General Auditing Office. The Commission is authorized to adopt such reasonable procedure, rules and regulations as it may deem necessary to carry out the provisions of this section.

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I. General Principles of Taxation Taxation I


g. h. Any order issued by the President pursuant to the provisions of this section shall take effect thirty days after its issuance. The provisions of this section shall not apply to any article the importation of which into the Philippines is or may be governed by Section 402 of this Code. The authority herein granted to the President shall be exercised only when Congress is not in session. With regard to the alleged undue delegation of legislative power, the Ct finds that the provision conferring the authority upon the ERB to impose additional amts on petroleum products provides a sufficient standard by w/c the authority must be exercised. The interplay & constant fluctuation of the various factors involved in the determination of the price of oil & petroleum products, & the frequently shifting need to either augment or exhaust the Fund, do not conveniently permit the setting of fixed or rigid parameters in the law as proposed by the petitioner. To do so would render the ERB unable to respond effectively so as to mitigate or avoid the undesirable consequences of such fluidity. As such, the standard as it is expressed suffices to guide the delegate in the exercise of the delegated power, taking acct of the circumstances under w/c it is to be exercised. For a valid delegation of power, it is essential that the law delegating the power must be (1) complete in itself, that is it must set forth the policy to be executed by the delegate and (2) it must fix a standard limits of w/c are sufficiently determinate or determinable to w/c the delegate must conform. The standard, as the Ct has already stated, may even be implied. In that light, there can be no ground upon w/c to sustain the petition, inasmuch as the challenged law sets forth a determinable standard w/c guides the exercise of the power granted to the ERB. By the same token, the proper exercise of the delegated power may be tested w/ ease. It seems obvious that what the law intended was to permit the additional imposts for as long as there exists a need to protect the general public & the petroleum industry from the adverse consequences of pump rate fluctuations. "Where the standards set up for the guidance of an administrative officer & the action taken are in fact recorded in the orders of such officer, so that Congress, the courts & the public are assured that the orders in the judgment of such officer conform to the legislative standard, there is no failure in the performance of the legislative functions." This Ct thus finds no serious impediment to sustaining the validity of the legislation; the express purpose for w/c the imposts are permitted & the general objectives & purposes of the fund are readily discernible, & they constitute a sufficient standard upon w/c the delegation of power may be justified. 3. EXEMPTION INSTRUMENTALITY
OF

i.

Garcia vs. Executive Secretary (1993) Under Sec. 24, Art. VI of the Constitution, the enactment of appropriation, revenue & tariff bills, like all other bills is, of course, w/in the province of the Legislative rather than the Exec Dept. It does not follow, however, that therefore EOs 475 & 478, assuming they may be characterized as revenue measures, are prohibited to the Pres., that they must be enacted instead by the Congress of the Philippines. Sect. 28(2) of Art. VI of the Constitution provides: "(2) 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." There is thus explicit constitutional permission to Congress to authorize the President "subject to such limitations and restrictions as [Congress] may impose" to fix "within specific limits" "tariff rates and other duties or imposts ..." The relevant congressional statute is the Tariff and Customs Code of the Philippines, and Sections 104 and 401, the pertinent provisions thereof. These are the provisions which the President explicitly invoked in promulgating Executive Orders Nos. 475 and 478. 3. Delegation to Administrative Agencies Powers which may be vested to administrative bodies a. Power to value property for purposes of taxation pursuant to fixed rules b. Power to assess and collect the taxes c. Power to perform any of the innumerable details of computation, appraisement, and adjustment, and delegation of such details Powers which cannot be delegated a. Determination of the subject to be taxed b. The purpose of the tax c. The amount or rate of tax d. The manner, means and agencies of collection e. Prescribing of the necessary rules with respect thereto Osmena vs. Orbos (1993) Hence, it seems clear that while the funds collected may be referred to as taxes; they are exacted in the exercise of the police power of the State. Moreover, that the OPSF is a special fund is plain from the special treatment given it by E.O. 137. It is segregated from the general fund; and while it is placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the COA. The Court is satisfied that these measures comply with the constitutional description of a "special fund." Commissioner vs. CA (1996)

GOVERNMENT

ENTITIES,

AGENCIES,

AND

Sec 27 (C), NIRC Rates of Income Tax on Domestic Corporations (C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in s similar business, industry, or activity. Executive Order 93

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Sec. 1. The provisions of any general or special law to the contrary notwithstanding, all tax and duty incentives granted to government and private entities are hereby withdrawn, except: a) those covered by the non-impairment clause of the Constitution; b) those conferred by effective international agreements to which the Government of the Republic of the Philippines is a signatory; c) those enjoyed by enterprises registered with: (i) the Board of Investments pursuant to Presidential Decree No. 1789, as amended; (ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66, as amended; (iii) the Philippine Veterans Investment Development Corporation Industrial Authority pursuant to Presidential Decree No. 538, as amended; d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of Instruction No. 1416; e) those conferred under the four basic codes namely: (i) the Tariff and Customs Code, as amended; (ii) the National Internal Revenue Code, as amended; (iii) the Local Tax Code, as amended; (iv) the Real Property Tax Code, as amended; f) those approved by the President upon the recommendation of the Fiscal Incentives Review Board. PD 1931 Sec. 1 The provisions of special or general laws to the contrary notwithstanding, all exemptions from the payment of duties, taxes, fees, imposts and other charges heretofore granted in favor of government-owned or controlled corporations including their subsidiaries are hereby withdrawn. Maceda vs. Macaraig (1991) Moreover, it is a recognized principle that the rule on strict interpretation does not apply in the case of exemptions in favor of a government political subdivision or instrumentality. "The basis for applying the rule of strict construction to statutory provisions granting tax exemptions or deductions, even more obvious than with reference to the affirmative or levying provisions of tax statutes, is to minimize differential treatment and foster impartiality, fairness, and equality of treatment among tax payers. The reason for the rule does not apply in the case of exemptions running to the benefit of the government itself or its agencies. In such case the practical effect of an exemption is merely to reduce the amount of money that has to be handled by government in the course of its operations. For these reasons, provisions granting exemptions to government agencies may be construed liberally, in favor of non tax-liability of such agencies." In the case of property owned by the state or a city or other public corporations, the express exemption should not be construed with the same degree of strictness that applies to exemptions contrary to the policy of the state, since as to such property "exemption is the rule and taxation the exception." Mactan Cebu Airport vs. Marcos (1996) As a general rule, the power to tax is an incident of sovereignty & 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 w/c imposes the tax on the constituency who are to pay it. Nevertheless, effective limitations thereon may be imposed by the people thru their Constitutions. Our Constitution, for instance, provides that the rule of taxation shall be uniform & equitable & Congress shall evolve a progressive system of taxation. So potent indeed is the power that it was once opined that "the power to tax involves the power to destroy." Accordingly, tax statutes must be construed strictly against the government & liberally in favor of the taxpayer. But since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation & statutes granting tax exemptions are thus construed strictissimi juris against the taxpayers & liberally in favor of the taxing authority. A claim of exemption from tax payment must be clearly shown & based on language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception. However, if the grantee of the exemption is a political subdivision or instrumentality, the rigid rule of construction does not apply because the practical effect of the exemption is merely to reduce the amount of money that has to be handled by the government in the course of its operations. Thus, reading together Secs. 133, 232 & 234 of the LGC, we conclude that as a general rule, as laid down in Sec. 133 the taxing powers of LGUs cannot extend to the levy of "taxes, fees, and charges of any kind of the National Government, its agencies and instrumentalities, and local government units"; however, pursuant to Sec. 232, provinces, cities, municipalities in the Metropolitan Manila Area may impose the real prop tax except on "real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial used thereof has been granted, for consideration or otherwise, to a taxable person", as provided in item (a) of the first paragraph of Sec. 234. The terms "Republic of the Philippines" & "National Government" are not interchangeable. The former is boarder & synonymous w/ "Government of the Republic of the Philippines" w/c the Administrative Code of the 1987 defines as the "corporate governmental entity though which the functions of the government are exercised through at the Philippines, including, saves as the contrary appears from the context, the various arms through which political authority is made effective in the Philippines, whether pertaining to the autonomous reason, the provincial, city, municipal or barangay subdivision or other forms of local government." These autonomous regions, provincial, city, municipal or barangay subdivisions" are the political subdivision. On the other hand, "National Government" refers "to the entire machinery of the central government, as distinguished from the different forms of local Governments." The National Government then is composed of the three great departments the executive, the legislative and the judicial. An "agency" of the Government refers to "any of the various units of the Government, including a department, bureau, office instrumentality, or government-owned or controlled corporation, or a local government or a distinct unit therein;" while an "instrumentality" refers to "any agency of the National Government, not integrated within the department framework, vested with special functions

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or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy; usually through a charter. This term includes regulatory agencies, chartered institutions and government-owned and controlled corporations" Manila International Airport Authority vs. CA (2006) Under Secs 2(10) & (13) of the Introductory Provisions of the Administrative Code, w/c governs the legal relation & status of government units, agencies & offices w/in the entire government machinery, MIAA is a government instrumentality & not a GOCC. Under Sec. 133(o) of the LGC, MIAA as a government instrumentality is not a taxable person because it is not subject to [t]axes, fees or charges of any kind by local governments. The only exception is when MIAA leases its real prop to a taxable person as provided in Sec. 234(a) of the LGC, in w/c case the specific real prop leased becomes subject to real estate tax. Thus, only portions of the Airport Lands & Buildings. leased to taxable persons like private parties are subject to real estate tax by the City of Paraaque. Under Art 420 CC, the Airport Lands & Buildings. of MIAA, being devoted to public use, are properties of public dominion & thus owned by the State or the RP. Art. 420 specifically mentions ports xxx constructed by the State, w/c includes public airports & seaports, as properties of public dominion & owned by the Republic. As properties of public dominion owned by the Republic, there is no doubt whatsoever that the Airport Lands & Buildings are expressly exempt from real estate tax under Sec. 234(a) of the LGC. BIR Ruling No. 013-2004 September 13, 2004 City of Makati is a political subdivision of the Republic of the Philippines. As an LGU, it serves as an instrumentality of the State in carrying out governmental functions. The City collects taxes, fees and other charges. It also maintains deposit accounts and investments in government securities, commercial papers and the like. The depositary banks and other financial institutions withhold the final tax 20% on the interest earned from such investments pursuant Sec.27(D)(1). The City claims that it is not subject to the provisions of Chapter IV-Tax on Corporations of the Tax Code of 1997. WON the interest derived from the Citys bank deposits and yields from investments in government securities and other commercial papers subject to final tax on passive income under Sec.27(D)(1). YES In previous BIR rulings, it was established that LGUs are liable for income tax on the interest on their bank deposits and yields from deposit substitutes, trust funds and similar arrangements because tax exemption privileges were withdrawn by PD 1931 and EO 93. Under Sec.27(C), GOCCs, agencies or instrumentalities of the government are no longer exempt from taxation. The Citys argument that subjecting its income to taxation would result to taking money out of its pocket and inserting it into the other pocket is contradicted by the fact that the taxation being collected from here is national in character since it is under the NIRC and therefore, the tax accrues to the national government. The City will only get an allotment out of the total of the national internal revenue taxes. It is important to distinguish activities of the city in performance of its government function and those in performance of its corporate or proprietary function. If it is in the former, the city is executing a legislative mandate with respect to a public duty while in the case of the latter, it is exercising private rights as a corporate body. Under the LGC, LGUs are mandated to keep a separate depositary accounts. However, this act cannot be construed as an act in promotion of public welfare nor an act included in the legislative, judicial, public or political powers of the City. It is in the nature of a function for the special benefit and advantage of the City and hence, proprietary in character. Moreover, it will also necessarily enter into contracts with banks. WRT investments, the Court said in Sison v. Ancheta that income realized from its investment activities or received by it in proprietary powers is subject to income tax as other private corporations similarly situated. 4. INTERNATIONAL COMITY Sec 2, Art II, 1987 Constitution The Philippines renounces war as an instrument of national policy, adopts the generally accepted principles of international law of the land and adheres to the policy of peace, equality, justice, freedom, cooperation, and amity with all nations. This principle is based on the following grounds a. Sovereign equality among states b. Usage among states that when one enters the territory of another, there is an implied understanding that the former does not intend to degrade its dignity by placing itself under jurisdiction of the latter c. Rule that a foreign government may not be sued without its consent so that it is useless to assess tax since it cannot be collected anyway

Tanada vs. Angara (1997) Unquestionably, the Constitution did not envision a hermit-type isolation of the country from the rest of the world. In its Declaration of Principles & State Policies, the Constitution "adopts the generally accepted principles of international law as part of the law of the land, & adheres to the policy of peace, equality, justice, freedom, cooperation & amity, w/ all nations." By the doctrine of incorporation, the country is bound by generally accepted principles of international law, which are considered to be automatically part of our own laws. Mitsubishi Corp. vs. Commissioner (CTA, 2003) Dissent: While international comity is invoked in this case on the nebulous representation that the funds involved in the loans are those of a foreign govt, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax laws. Otherwise, the mere expedient of having a Phil. corp. enter into a contract for loans or other domestic securities w/ private foreign entities, w/c in turn will negotiate independently w/ their governments, could be availed of to take advantage of the tax exemption law. 5. LIMITATION OF TERRITORIAL JURISDICTION A state may not tax property lying outside its borders or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege derived from the laws of another state and therein exercised and enjoyed.

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The property which is wholly and exclusively within the jurisdiction of another state receives none of the protection for which a tax is supposed to be a compensation But a person may be taxed where there is a privity of relationship justifying the levy E.g. income tax of citizens residing abroad residing therein, who enjoy the benefits & protection from the said state are not exempt from contributing their share in the running of the government. They have the bounden duty to surrender part of their hard-earned income to the taxing authorities. C. CONSTITUTIONAL LIMITATIONS 1. DUE PROCESS
OF

Iloilo Bottlers vs. City of Iloilo (1988) The tax imposed under Ordinance No. 5 is an excise tax. It is a tax on the privilege of distributing, mfg. or bottling soft drinks. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges or businesses are done or performed w/in the jurisdiction of said authority. Specifically, the situs of the act of distributing, bottling or mfg. soft drinks must be w/in city limits, before an entity engaged in any of the activities may be taxed in Iloilo City. Commissioner vs. BOAC (1987) The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here & pmts for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, & occurred w/in, Phil. territory, enjoying the protection accorded by the Phil. government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. Hopewell Power vs. Commissioner (CTA, 1998) The power to levy an excise upon the performance of an act or the engaging in an occupation does not depend upon the domicile of the person subject to the excise, or the physical location of the prop & in connection w/ the act or occupation taxed, but depends upon the place in w/c the act was performed or occupation engaged in. Thus, the gauge of taxability does not depend on the location of the office, but attaches upon the place where the respective transaction(s) is perfected & consummated. Smith vs. Commissioner (1984) Individual aliens employed w/in the Subic Special Economic Zone (SSEZ) are not exempt from the awesome power of Phil. taxation especially so that they sourced out their earnings from w/in the Philippines To buttress the point that SSEZ is indeed w/in the Phil. jurisdiction, Sec. 12 (h) of RA 7227, actually placed the fenced-off area of SSEZ under the responsibility of the Philippine National Government, thus: The defense of the zone and the security of its perimeters shall be the responsibility of the National Government in coordination with the Subic Bay Metropolitan Authority. The Subic Bay Metropolitan Authority shall provide and establish its own internal security and fire-fighting forces. Such being the case, all subjects over w/c the Philippines. can exercise dominion are necessarily objects of taxation. As such, all subjects of taxation w/in its jurisdiction are required to pay tax in exchange of the protection that the state gives. Thus, the SSEZ, being w/in the territorial boundaries of the Philippines, the aliens

LAW

Sec 1, Art III, 1987 Constitution No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws. Sison vs. Ancheta (1984) It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amt to the confiscation of prop. That would be a clear abuse of power. It then becomes the duty of this Ct to say that such an arbitrary act amounted to the exercise of an authority not conferred. That properly calls for the application of the Holmes dictum. It has also been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh & unreasonable, it is subject to attack on due process grounds. 2. EQUAL PROTECTION
OF THE

LAWS

Sec 1, Art III, 1987 Constitution No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws. Tan vs. Del Rosario (1994) Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities. Uniformity does not prohibit classification as long as: (1) the standards that are used therefore are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class. Phil. Rural Electric vs. Secretary (2003) The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the same protection of laws w/c is enjoyed by other persons or other classes in the same place & in like circumstances. Thus, the guaranty of the equal protection of the laws is not violated by a law based on reasonable classification. Classification, to be reasonable, must (1) rest on substantial distinctions; (2) be germane to the purposes of the law; (3) not be limited to existing conditions only; & (4) apply equally to all members of the same class. 3. UNIFORMITY
AND

EQUITY

IN

TAXATION

Sec 28 (1), Art VI, 1987 Constitution

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(1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. Uniformity implies that all taxable articles or properties of the same class shall be taxed at the same rate Uniformity implies equality in burden, not equality in the amount or equality in the strict sense obligation of the existing contract, but the impairment must be substantial. What constitutes substantial impairment was explained by this Court in Clemons v. Nolting: A law which changes the terms of a legal contract between parties, either in the time or mode of performance, or imposes new conditions, or dispenses with those expressed, or authorizes for its satisfaction something different from that provided in its terms, is law which impairs the obligation of a contract and is therefore null and void. Moreover, to constitute impairment, the law must affect a change in the rights of the parties with reference to each other and not with respect to non-parties. 6. PROHIBITION AGAINST INFRINGEMENT
OF

Sison vs. Ancheta (1984) Equality & uniformity in taxation means that all taxable articles or kinds of prop of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable & natural classifications for purposes of taxation As clarified by J. Tuason: where "the differentiation" complained of "conforms to the practical dictates of justice & equity" it "is not discriminatory w/in the meaning of this clause & is therefore uniform." There is quite a similarity then to the standard of equal protection for all that is required is that the tax "applies equally to all persons, firms & corporations placed in similar situation. Tolentino vs. Secretary of Finance (1995) Equality & uniformity of taxation means that all taxable articles or kinds of prop of the same class must be taxed at the same rate. The taxing power has the authority to make reasonable & natural classification for purposes of taxation. To satisfy this requirement it is enough that the statute or ordinance applies equally to all persons, firms & corporations placed in similar situation. 4. PROHIBITION AGAINST IMPRISONMENT TAX
FOR

RELIGIOUS FREEDOM

Sec 5, Art III, 1987 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. American Bible Society vs. City of Manila (1957) We do not mean to say that religious groups & the press are free from all financial burdens of government. We have here something quite diff, for example, from a tax on the income of one who engages in religious activities or a tax on property used or employed in connection w/ those activities. It is one thing to impose a tax on the income or property of a preacher. It is quite another thing to exact a tax from him for the privilege of delivering a sermon Those who can tax the exercise of this religious practice can make its exercise so costly as to deprive it of the resources necessary for its maintenance. Those who can tax the privilege of engaging in this form of missionary evangelism can close all its doors to all those who do not have a full purse. Spreading religious beliefs in this ancient & honorable manner would thus be denied the needy. 7. PROHIBITION TAXATION REGARDING APPROPRIATION
OF

NONPAYMENT

OF

POLL

Sec 20, Art III, 1987 Constitution No person shall be imprisoned for debt or nonpayment of a poll tax 5. PROHIBITION AGAINST IMPAIRMENT
OF

OBLIGATION

OF

CONTRACTS

Sec 10, Art III, 1987 Constitution No law impairing the obligation of contracts shall be passed. Sec 11, Art XII, 1987 Constitution No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines. Phil. Rural Electric vs. Secretary (2003) It is ingrained in jurisprudence that the constitutional prohibition on the impairment of the obligation of contracts does not prohibit every change in existing laws. To fall within the prohibition, the change must not only impair the

PROCEEDS

OF

Sec 29, Art VI, 1987 Constitution (1) No money shall be paid out of the Treasury except in pursuance of an appropriation made by law. (2) No public money or property shall be appropriated, applied, paid, or employed, directly or indirectly, for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister, or dignitary as such, except when such priest, preacher, minister, or dignitary is assigned to the armed forces, or to any penal institution, or government orphanage or leprosarium. (3) All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purposes only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government. Osmena vs. Orbos (1993) Hence, it seems clear that while the funds collected may be referred to as taxes, they are exacted in the exercise of the police power of the State. Moreover, that the OPSF is a special fund is plain from the special

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treatment given it by E.O. 137. It is segregated from the general fund; & while it is placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny & review of the COA. The Ct is satisfied that these measures comply w/ the constitutional description of a "special fund." Gaston vs. Republic Planters Bank (1988) That the fees were collected from sugar producers, planters and millers, & that the funds were channeled to the purchase shares of stock in respondent Bank do not convert the funds into a trust fund for their benefit nor make them the beneficial owners of the shares so purchased The investment in shares of respondent Bank is not alien to the purpose intended because of the Bank's character as a commodity bank for sugar conceived for the industry's growth & development. To rule in petitioners' favor would contravene the general principle that revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private persons. The Stabilization Fund is to be utilized for the benefit of the entire sugar industry, "and all its components, stabilization of the domestic market including the foreign market," the industry being of vital importance to the country's economy and to national interest. 8. PROHIBITION AGAINST TAXATION ENTITIES AND EDUCATIONAL ENTITIES
OF

taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law including restrictions on dividends and provisions for reinvestment. (4) Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax. Sec 28 (3), Art VI, 1987 Constitution (3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, nonprofit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable or educational purposes shall be exempt from taxation. Sec 27 (B), NIRC Rates Of Income Tax on Domestic Corporations (B) Proprietary Educational Institutions and Hospitals. Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A "Proprietary educational institution" is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. Sec 30 (H), NIRC Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such: xxx (H) A nonstock and nonprofit educational institution; xxx Department of Finance Order 137-87 An educational institution means a non-stock, non-profit corporation or association duly registered under Philippine law, and operated exclusively for educational purposes, maintained and administered by a private individual or group offering formal education, and with an issued permit to operate from the DECS. Revenues derived from and assets used in the operation of cafeteria/canteens, dormitories, and bookstores are exempt from taxation provided they are owned and operated by the educational institution as ancillary activities and the same are located within the school premises.

RELIGIOUS, CHARITABLE

Sec 28 (3), Art VI, 1987 Constitution (3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, nonprofit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable or educational purposes shall be exempt from taxation. Abra Valley College vs. Aquino (1988) The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. It must be stressed however, that while this Ct allows a more liberal & non-restrictive interpretation of the phrase "exclusively used for educational purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935 Philippine Constitution, reasonable emphasis has always been made that exemption extends to facilities w/c are incidental to & reasonably necessary for the accomplishment of the main purposes. Otherwise stated, the use of the school building or lot for commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the use of the second floor of the main building in the case at bar for residential purposes of the Director and his family, may find justification under the concept of incidental use, which is complimentary to the main or primary purpose educational, the lease of the first floor thereof to the Northern Marketing Corporation cannot by any stretch of the imagination be considered incidental to the purpose of education. 9. PROHIBITION AGAINST TAXATION EDUCATIONAL INSTITUTIONS
OF

NON-STOCK, NON-PROFIT

Sec 4 (3,4), Art XIV, 1987 Constitution (3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from

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Department of Finance Order 149-95 Non-stock, non-profit educational institutions are exempt from taxes on all their revenues and assets used actually, directly and exclusively for educational purposes. However they shall be subject to internal revenue tax on income from trade business or other activity the conduct of which is not related to the exercise or performance by such educational institution or its educational purpose or function. Interest income shall be exempt only when used directly and exclusively for educational purposes. To substantiate this claim the institution must submit an ann8ual information return and duly audited financial statement. A certification of actual utilization and the Board resolution of the proposed project o be funded out of the money deposited in bans shall also be submitted. Revenue Memorandum Circular 76-2003 SUBJECT : Tax Exemptions of Non-Stock, Non-Profit Corporations Section 30, Tax Code of 1997 and Non-stock, Non-Profit Educational Institutions under Paragraph 3, Section 4, Article XIV of the Constitution. TO : All Internal Revenue Officials, Employees and other Concerned It has been observed that substantial revenue losses have been incurred due to the non-implementation of taxes due to non-stock, non-profit corporations and non-stock, nonprofit educational institutions. For the information and guidance of all internal revenue officers and others concerned, please be informed as follows: NON-STOCK, NON-PROFIT CORPORATIONS Organizations enumerated under Section 30 of the Tax Code of 1997 are exempt from the payment of income tax on income received by them as such organization. However, they are subject to the corresponding internal revenue taxes imposed under the Tax Code of 1997 on their income derived from any of their properties, real or personal, or any activity conducted for profit regardless of the disposition thereof (i.e. rental payment from their building/premises), which income should be returned for taxation. In addition, their interest income from currency bank deposits and yield or any other monetary benefit from deposit substitute instruments and from trust funds and similar arrangement, and royalties derived from sources within the Philippines are subject to the 20% final withholding tax: provided, however, that interest income derived by them from a depository bank under the expanded foreign currency deposit system shall be subject to 71/2% final withholding tax pursuant to Section 27(D) (1) in relation to Section 57(A), both of the Tax Code of 1997. It shall also be constituted as a withholding agent for the government if they acts as an employer and any of their employee receives compensation income subject to withholding tax under Section 79(A), Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, or if they makes income payments to individuals or corporations subject to the withholding tax provided for in Section 57 of the Tax Code of 1997, also as implemented by Revenue Regulations No. 2-98. NON-STOCK, NON-PROFIT EDUCATIONAL INSTITUTIONS The exemption of non-stock, non-profit educational institutions refers to internal revenue taxes imposed by the National Government on all revenues and assets used actually, directly and exclusively for educational purposes (Paragraph 3, Section 4, Article XIV of the Constitution). Furthermore, revenues derived from assets used in the operation of cafeterias/canteens and bookstores are exempt from taxation provided they are owned and operated by the educational institution as ancillary activities and the same are located within the school premises. Pursuant to Section 109(m) of the Tax Code of 1997, private educational institutions shall be exempt from valueadded tax provided they are accredited as such either by the Department of Education, Culture and Sports or by the Commission on Higher Education. However, this exemption does not extend to their other activities involving sale of goods and services. However, they shall be subject to internal revenue taxes on income from trade, business or other activity, the conduct of which is not related to the exercise or performance by such educational institutions of their educational purposes or functions (Sec. 2, Finance Department Order No. 137-87 as amended by Finance Department Order No. 92-88) i. e. rental payment from their building/premises. Unlike non-stock, non-profit corporations, their interest income from currency bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in pursuance of their purposes as an educational institution, are exempt from the 20% final tax and 7 % tax on interest income under the expanded foreign currency deposit system imposed under Section 27(D)(1) of the Tax Code of 1997, subject to compliance with the conditions that as a tax-exempt educational institution, they shall on an annual basis submit to the Revenue District Office concerned an annual information return and duly audited financial statement together with the following: (a) Certification from their depository banks as to the amount of interest income earned from passive investment not subject to the 20% final withholding tax and 7 % tax on interest income under the expanded foreign currency deposit system imposed by Section 27(D)(1) of the Tax Code of 1997; (b) Certification of actual utilization of the said income; and (c) Board Resolution by the school administration on proposed projects (i.e., construction and/or improvement of school buildings and facilities, acquisition of equipment, books and the like) to be funded out of the money deposited in banks or placed in money markets, on or before the 14th day of the fourth month following the end of its taxable year (Sec. 3, Finance Department Order No. 137-87). Finally, the exemption does not cover withholding taxes. As an educational institution, they are constituted as withholding agents for the government required to withhold the tax on compensation income of their employees, or the withholding tax on income payments to persons subject to tax pursuant to Section 57 of the Tax Code of 1997. In both cases, in order to monitor the activities being conducted by these institutions, it is mandatory that they should maintain their respective set of books of accounts as prescribed in Section 235 of the Tax Code of 1997.

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Furthermore, both institutions are subject to the payment of the annual registration fee of P500.00 as prescribed in Section 236(B) of the Tax Code of 1997. They are also required under Section 6(C) in relation to Section 237 of the same Code to issue duly registered receipts or sales or commercial invoices for each sale or transfer of merchandise or for services rendered which are not directly related to the activities for which they are registered. Revenue Regulations No. 13-98 Issued December 14, 1998; prescribes the regulations to implement Republic Act No. 8424 entitled "An Act Amending the National Internal Revenue Code as amended", specifically Section 34 (H) relative to the deductibility of contributions or gifts actually paid or made to accredited donee institutions in computing taxable income. SEC 1 Definition of Terms. - For purposes of these Regulations, the terms herein enumerated shall have the following meanings: (a) "Non-stock, non-profit corporation or organization" shall refer to a corporation or association/organization referred to under Section 30 (E) and (G) of the Tax Code created or organized under Philippine laws exclusively for one or more of the following purposes: (i) religious; (ii) charitable; (iii) scientific; (iv) athletic; (v) cultural; (vi) rehabilitation of veterans; and (vii) social welfare No part of the act income or asset of which shall belong to or inure to the benefit of any member, organizer, officer or any specific person. (d) "Accrediting Entity" shall refer to a non-stock, non-profit organization composed of NGO networks, duly designated by the Secretary of Finance to establish and operationalize a system of accreditation to determine the qualification of non-stock, nonprofit corporations or organizations and NGOs for accreditation as qualified-donee institutions. The Secretary of Finance and the Commissioner of Internal Revenue shall oversee, monitor and coordinate with the Accrediting Entity to ensure that the provisions of these Regulations are complied with. In this connection, the Secretary of Finance or the Commissioner of Internal Revenue or their duly authorized representative shall sit as ex officio, member of the Board of Trustees of the Accrediting entity with die right to vote. The Secretary of Finance may also designate an official of a concerned government agency, e.g. Department of Science and Technology, to assist the Board of Trustees in the accreditation of foundations. (j) "Educational activity" - shall refer to and include the granting of scholarships to deserving students and professional chairs for the enhancement of professional courses, and instructing or training of individuals either through formal and informal methods, viz: (i) Formal method of instruction refers to the institutionalized, chronologically graded and hierarchically structured educational system at all levels of education; (ii) Non-formal method of instruction refers to any deliberately organized, systematic educational activity carried on outside the framework of the formal system to provide selected types of learning to particular subgroups of the population, particularly out of-school youths and adults, for the purpose of communicating ideas, developing skills, changing attitudes or modifying behavior to improve their character and to provide them with tools necessary for the achievement of a higher standard of living. For the purpose of this section, a certification from the Technical Education and Skills Development Authority (TESDA) is required for the accreditation of the non-formal educational program which is implemented or carried out by a non-stock non-profit corporation, organization or an NGO. (iii) It also includes upgrading of existing facilities to support the conduct of the above activities. SEC. 3 Donations to Accredited Non-stock, Non-profit Corporations/NGOs Donations to accredited non-stock, non-profit corporations/ NGOs shall be entitled to the following benefits: (1) Limited Deductibility. - Donations, contributions or gifts actually paid or made within the taxable year to accredited non-stock, non-profit corporations shall be allowed limited deductibility in an amount not in excess of ten percent (10%) for an individual donor, and five percent (5%) for a corporate donor, of the donor's income derived from trade, business or profession as computed without the benefit of this deduction. (2) Full Deductibility. - Donations, contributions or gifts actually paid or made within the taxable year to accredited NGOs shall be allowed full deductibility, subject to the following conditions: (i) The accredited NGO shall make utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, not later than the fifteenth (15th) day of the third month after the close of the accredited NGOs taxable year in which contributions are received, unless an extended period is granted by the Secretary of Finance, upon recommendation of the Commissioner. For this purpose, the term "utilization" shall have the meaning as defined under Sec. l(c) of these Regulations. (ii) The level of administrative expenses of the accredited NGO, shall, on an annual basis, not exceed thirty percent (30%) of the total expenses for the-taxable year; (iii) In the event of dissolution, the assets of the accredited NGO, would be distributed to another accredited NGO organized for similar purpose or purposes, or to the State for public purpose, or purposes, or to the state for public purpose, or would be distributed by a competent court of justice to another accredited NGO to be used in such manner as in the judgment of said court shall best accomplished the general purpose for which the dissolved organization was organized. (iv) The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property.

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(v) All the members of the Board of Trustees of the non-stock, non-profit corporation, organization or NGO do not receive compensation or remuneration for their service to the aforementioned organization. Exemption from Donor's Tax - Donations and gifts made in favor of accredited non-stock, non-profit corporations/NGOs shall be exempt from the donor's tax: Provided, however, That not more than thirty percent (30%) of the said donations and gifts for the taxable year shall be used by such accredited non-stock, non-profit corporations/NGOs institutions qualified-donee institution for administration purposes pursuant to the provisions of Section 101 (A)(3) and (B)(2) of the Tax Code. Commissioner vs. CA (1998) Is the YMCA an educational institution within the purview of Article XIV, Section 4 (3) of the Constitution? We rule that it is not. The term "educational institution" or "institution of learning" has acquired a well-known technical meaning, of which the members of the Constitutional Commission are deemed cognizant. The school system is synonymous with formal education, which "refers to the hierarchically structured and chronological graded learnings organized and provided by the formal school system and for which certification is required in order for the learner to progress through the grades or move to the higher levels." The Court has examined the "Amended Articles of Incorporation" and "By-Laws" of the YMCA, but found nothing in them that even hints that it is a school or an educational institution. corporation for such period derived from sources within the Philippines bears to its gross income from all sources. (3) Services. - Compensation for labor or personal services performed in the Philippines; (4) Rentals and Royalties. - Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for (a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment; (c) The supply of scientific, technical, industrial or commercial knowledge or information; (d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); (e) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; (f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and (g) The use of or the right to use: (i) Motion picture films; (ii) Films or video tapes for use in connection with television; and (iii) Tapes for use in connection with radio broadcasting. (5) Sale of Real Property. - Gains, profits and income from the sale of real property located in the Philippines; and (6) Sale of Personal Property. - Gains; profits and income from the sale of personal property, as determined in Subsection (E) of this Section. (B) Taxable Income From Sources Within the Philippines. (1) General Rule. - From the items of gross income specified in Subsection (A) of this Section, there shall be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot definitely be allocated to some items or class of gross income: Provided, That such items of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation. The remainder, if any, shall be treated in full as taxable income from sources within the Philippines. (2) Exception. - No deductions for interest paid or incurred abroad shall be allowed from the item of gross income specified in subsection (A) unless indebtedness was actually incurred to provide funds for use in connection with the conduct or operation of trade or business in the Philippines. (C) Gross Income From Sources Without the Philippines. - The following items of gross income shall be treated as income from sources without the Philippines: (1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section;

III. Situs of Taxation and Double Taxation


A. MEANING OF SITUS OF TAXATION Situs of taxation literally means place of taxation The state where the subject to be taxed has a situs may rightfully levy and collect the tax

B. SITUS OF SUBJECTS OF TAXATION Sec 42, NIRC Income from Sources Within the Philippines.(A) Gross Income From Sources Within the Philippines. - The following items of gross income shall be treated as gross income from sources within the Philippines: (1) Interests. - Interests derived from sources within the Philippines, and interests on bonds, notes or other interestbearing obligation of residents, corporate or otherwise; (2) Dividends. - The amount received as dividends: (a) from a domestic corporation; and (b) from a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of this Section; but only in an amount which bears the same ration to such dividends as the gross income of the

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I. General Principles of Taxation Taxation I


(2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section; (3) Compensation for labor or personal services performed without the Philippines; (4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and (5) Gains, profits and income from the sale of real property located without the Philippines. (D) Taxable Income From Sources Without the Philippines. - From the items of gross income specified in Subsection (C) of this Section there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be treated in full as taxable income from sources without the Philippines. (E) Income From Sources Partly Within and Partly Without the Philippines.- Items of gross income, expenses, losses and deductions, other than those specified in Subsections (A) and (C) of this Section, shall be allocated or apportioned to sources within or without the Philippines, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. Where items of gross income are separately allocated to sources within the Philippines, there shall be deducted (for the purpose of computing the taxable income therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be included in full as taxable income from sources within the Philippines. In the case of gross income derived from sources partly within and partly without the Philippines, the taxable income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income; and the portion of such taxable income attributable to sources within the Philippines may be determined by processes or formulas of general apportionment prescribed by the Secretary of Finance. Gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines. Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely form sources within the country in which sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely form sources within the Philippines regardless of where the said shares are sold. The transfer by a nonresident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in its book unless: (1) the transferor has filed with the Commissioner a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transferor and the corporation the shares of which are sold or transferred, to advise the transferee of this requirement. (F) Definitions. - As used in this Section the words "sale" or "sold" include "exchange" or "exchanged"; and the word "produced" includes "created", "fabricated", "manufactured", "extracted", "processed", "cured" or "aged". Sec 104, NIRC Definitions. - For purposes of this Title, the terms "gross estate" and "gifts" include real and personal property, whether tangible or intangible, or mixed, wherever situated: Provided, however, That where the decedent or donor was a nonresident alien at the time of his death or donation, as the case may be, his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his "gross estate" or "gross gift": Provided, further, That franchise which must be exercised in the Philippines; shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the business of which is located in the Philippines; shares, obligations or bonds issued by any 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, shall be considered as situated in the Philippines: Provided, still further, that no tax shall be collected under this Title in respect of intangible personal property: (a) if the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. The term "deficiency" means: (a) the amount by which tax imposed by this Chapter exceeds the amount shown as the tax by the donor upon his return; but the amount so shown on the return shall first be increased by the amount previously assessed (or collected without assessment) as a deficiency, and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax, or (b) if no amount is shown as the tax by the donor, then the amount by which the tax exceeds the amounts previously assessed, (or collected without assessment) as a deficiency, but such amounts previously assessed, or collected without assessment, shall first be decreased by the amount previously abated, refunded or otherwise repaid in respect of such tax. Factors affecting the taxable situs: 1. Nature of the tax and subject matter thereof

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I. General Principles of Taxation Taxation I


2. 3. 4. Possible protection and benefit that may accrue both to the government and the taxpayer Residence or citizenship of the taxpayer Sources of income workable substitute for the reasons which may exist in any particular case to support the constitutional power of each state concerned to tax. xxx In the instant case, the actual situs of the shares of stock is in the Philippines, the corporation being domiciled therein. C. MULTIPLICITY OF SUITS same income or intangible may be subject to taxation in several taxing jurisdictions to avoid multiplicity of situs or reduce this burden provide for exemptions or allowance of deductions tax treaties

Situs: 1. Persons Poll tax may be levied upon inhabitants or residents of the state, whether citizens or not 2. Real property subject to taxation in the state where it is located Lex rei sitae

3.
4.

5. 6. 7.

Tangible personal property Taxable in the state where it has actual situs (lex rei sitae) Intangible personal property situs is at the domicile of the owner Mobilia sequuntur personam Not controlling when inconsistent with statute or justice Shares of stock of a domestic corporation of a non-resident foreigner are taxable in the Philippines. The shares of stock receive the benefit and protection of our laws Income taxed by state where income is derived Business, occupation, transaction place where transaction took place gratuitous transfer of property subject to taxation where the transferor was a citizen or resident or where the property is located

Collector of Internal Revenue vs. Lara (1958) The decedent, being a non-resident of the Philippines, the only properties of his estate subject to estate and inheritance taxes are those shares of stock issued by Philippine corporations. Considering, however, the State of California, of which he was a resident, as a foreign country in relation to Sec 122, NIRC, the decedent is entitled to exemption from inheritance tax on the intangible property found in the Philippines. Incidentally, this exemption granted to nonresidents was to reduce multiple taxation. D. DOUBLE TAXATION 1. STRICT SENSE direct double taxation or direct duplicate taxation elements: a. taxing twice b. same taxing authority c. within same taxing jurisdiction d. for the same purpose e. in the same year f. same property or subject matter Commissioner vs. Solidbank Corp. (2003) Double taxation means taxing the same property twice when it should be taxed only once; that is, taxing the same person twice by the same jurisdiction for the same thing. Otherwise described as direct duplicate taxation, the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character. 2. BROAD SENSE indirect double taxation or indirect duplicate taxation double taxation other than direct duplicate Villanueva vs. City of Iloilo (1968) 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 during the same taxing period, and they must be of the same kind or character of tax. It has been shown that a real estate tax and the tenement tax imposed by the ordinance, although imposed by the same taxing authority, are not of the same kind or character. 3. CONSTITUTIONALITY
OF

Metro Alliance Holdings vs. Commissioner (CA, 2003) The source of the income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. Commissioner vs. BOAC (1987) In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was engaged in business in the Philippines through a local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines. Wells Fargo vs. Collector (1940) Originally, the settled law in the US is that intangibles have only one situs for the purpose of inheritance tax, and such situs is in the domicile of the decedent at the time of his death. But this rule, as of late, has been relaxed. The maxim Mobilia sequuntur personam, upon which the rule rests, has been decried as a mere fiction of law having its origin in considerations of general convenience and public policy, and cannot be applied to limit or control the right of the state to tax property within its jurisdiction and must yield to established fact of legal ownership, actual presence and control elsewhere, and cannot be applied if to do so would result in inescapable and patent injustice. xxx But when the taxpayer extends his activities with respect to his intangibles, so as to avail himself of the protection and benefit of the laws of another state, in such a way as to bring his person or property within the reach of the tax gatherer there, the reason for the single place of taxation no longer obtains, and the rule is not even

DOUBLE TAXATION

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double taxation in strict sense is unconstitutional in broad sense, not necessarily doubts as to whether double taxation has been imposed should be resolved in favor of the taxpayer where double taxation in the strict sense, taxpayer may seek relief under uniformity rule or equal protection guarantee That point on which tax burden finally rests or settles down Incidence = Burden

B. TAX EVASION Sec 254, NIRC Attempt to Evade or Defeat Tax. - Any person who willfully attempts in any manner to evade or defeat any tax imposed under this Code or the payment thereof shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine not less than Thirty thousand (P30,000) but not more than One hundred Thousand pesos (P100, 000) and suffer imprisonment of not less than two (2) years but not more than four (4) years: Provided, That the conviction or acquittal obtained under this Section shall not be a bar to the filing of a civil suit for the collection of taxes. Tax evasion is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the tax Factors:

City of Baguio vs. De Leon (1968) As to why double taxation is not violative of due process, Justice Holmes made clear in this language: The objection to the taxation as double may be laid down on one side The 14th amendment no more forbids double taxation than it does doubling the amount of tax, short of confiscation or proceedings unconstitutional on other grounds. Pepsi Cola Bottling Co. vs. Butuan (1968) Double taxation in general is not forbidden by our fundamental law. We have not adopted, as part thereof, the injunction against double taxation found in the Constitution of the US and of some States of the Union. China Banking vs. CA The rule, however, is well-settled that there is no constitutional prohibition against double taxation.

a.
b. c.

Nonpayment of tax or payment of tax which is less than due Bad faith A course of action which is unlawful

IV.

Means of Avoiding Burden of Taxation

or

Minimizing

the

A. SHIFTING OF TAX BURDEN Shifting is the transfer of the burden of tax by the original payer or the one on whom the tax was assessed or imposed to someone else. 1. WAYS
OF

SHIFTING

THE

TAX BURDEN

Republic vs. Gonzales (1965) Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances of the case. The failure of the defendant (Gonzales) to declare for taxation purposes his true and actual income derived from his furniture business at the Clark Field Air Base for 2 consecutive years is an indication of his fraudulent intent to cheat the Government of its due taxes. C. TAX AVOIDANCE Tax avoidance is the use by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable properties or income in order to avoid or reduce tax liability. Tax minimization Tax evader breaks the law; tax avoider sidesteps it Classic distinction given by a US Senator: A man approaches a river which can be crossed by two bridges, one a toll bridge and the other a free bridge. If he passes on the toll bridge and fails to pay the toll, this is tax evasion. If, however, he crosses by way of the free bridge, this is tax avoidance. Delpher Trades Corp. vs. IAC (1988) The records do not point to anything wrong or objectionable about this estate planning scheme resorted to by the Pachecos. The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted. Commissioner vs. Lincoln Philippine Life Insurance (2002) It should be emphasized that while tax avoidance schemes and arrangements are not prohibited, tax laws cannot be circumvented in order to evade payment of just

Forward Shifting Burden of tax is transferred from one a factor of production through the factors of distribution until it finally settles on the ultimate purchaser Backward Shifting Burden of tax is transferred from the purchaser through the factors of distribution to the factor of production Onward Shifting

Tax is shifted two or more times either forward or backward

2. TAXES THAT CAN BE SHIFTED Indirect taxes Taxes that are purely personal cannot be shifted 3. MEANING
OF

IMPACT

AND

INCIDENCE

OF

TAXATION

Impact of Taxation That point on which tax is originally imposed In so far as the law is concerned, the statutory taxpayer is the one who must pay the tax Impact = Liability Incidence of Taxation

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I. General Principles of Taxation Taxation I


taxes. In the case at bar, to claim that the increase in the amount insured (by virtue of the automatic increase clause incorporated into the policy at the time of issuance) should not be included in the computation of the documentary stamp taxes due on the policy would be a clear evasion of the law requiring that the tax be computed on the basis of the amount insured by the policy. D. EXEMPTION FROM TAXATION 1. MEANING OF EXEMPTION FROM TAXATION Exemption from taxation is the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay. Immunity or privilege distribution is provided for by their respective charters or by special law." WHEREAS, to support its development projects and social services, the government must equitably share in the earnings of the government- owned or controlled corporations without impairing the viability of these companies and the purposes for which they have been established; NOW, THEREFORE, I, CORAZON C. AQUINO, President of the Philippines, by virtue of the powers vested in me by law, do hereby order: Sec. 1 The rate of cash dividends to be declared by governmentowned or controlled corporations under Section 17 of Executive Order No. 518, S. 1979, is hereby increased from at least five percent (5%) to at least ten percent (10%) of their respective net earnings of each year. Sec. 2 This Executive Order shall not apply to the Government Service Insurance System, the Social Security System, and those government-owned or controlled corporations whose profit distribution is provided or by their respective charters or by special law. Sec. 3 This Executive Order shall take effect (15) days following its publication in a national newspaper of general circulation. 24 April 1990 Revenue Regulations No. 6-2005 SUBJECT: Salient Features of Supreme Court Decision on Waiver of the Statute of Limitations under the Tax Code 1. A waiver of the statute of limitations under the Tax Code must conform strictly with the provisions of Revenue Memorandum Order No. 20-90 in order to be valid and binding. 1.1. The waiver must specify a definite agreed date between the BIR and the taxpayer within which the former may assess and collect revenue taxes. 2005cdtai 1.2. The waiver must be accepted by the Commissioner of Internal Revenue or his duly authorized representative, and the date of acceptance must be indicated. 1.3. The taxpayer must be furnished a copy of the waiver accepted by the BIR. 2. A waiver of the statute of limitations under the Tax Code, to a certain extent, is a derogation of the taxpayer's right to security against prolonged and unscrupulous investigations and must therefore be carefully and strictly construed. 3. A waiver of the statute of limitations is not a waiver of the right to invoke the defense of prescription. It is an agreement between the taxpayer and the BIR that the

Greenfield vs. Meer The phrase in the nature of a deduction was inserted in the old law as a means of extreme caution because even without it the exemption the amount would still be deducted. Because exemption is an immunity and privilege; it is freedom from a charge or burden to which others are subjected. Compared with Other Terms Tax Remission / Tax Condonation It is in the nature of a tax exemption but it presupposes an existing liability

Surigao Consolidated Mining vs. Collector (1963) The condonation of a tax liability is equivalent and in the nature of tax exemption. Being so, it should be sustained only when expressed in explicit terms, and it cannot be extended beyond the plain meaning of those terms. Where the law clearly refers to the condonation of unpaid taxes, it is held that it cannot be extended to authorize the refund of paid taxes. Tax Amnesty EO 399 INCREASING THE RATE OF CASH DIVIDENDS TO BE DECLARED BY GOVERNMENT OWNED OR CONTROLLED CORPORATIONS SUBJECT TO CERTAIN EXCEPTIONS WHEREAS, Executive Order No. 518, S. of 1979, Section 17, provides that: "Sec. 17 Cash Dividends. Each corporation shall declare at least five per cent of net earnings of each year as cash dividends: Provided, That cash dividends accruing to the National Government shall be received by the Treasury and recorded as income of the General Fund: Provided, Further, That the fraction of net earnings that shall be declared by a corporation as cash dividends may be changed by the President/Prime Minister upon recommendation of the Minister of Finance: Provided, Finally, That this Section shall not apply to the Government Service Insurance System, the Social Security System, and those government-owned or controlled corporations whose profit

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I. General Principles of Taxation Taxation I


period to issue an assessment and collect the taxes due is extended to a date certain. 4. A waiver of the statute of limitations is not a unilateral act by the taxpayer or the BIR, but is a bilateral agreement between two parties. Revenue Regulations No. 10-2005 SUBJECT: Publishing the full text of PROCLAMATION NO. 812 by the President of the Philippines dated March 21, 2005 entitled Declaring the Month of April 2005 as Tax Awareness Month BY THE PRESIDENT OF THE PHILIPPINES PROCLAMATION NO. 812 DECLARING THE MONTH OF APRIL AWARENESS MONTH To maximize revenue collection with least administration costs, to encourage voluntary tax compliance, and to maintain harmonious relation with taxpayers by minimizing inconvenience relative to investigation, the taxpaying public is hereby granted the opportunity to avail of the privilege of last priority in audit under this Program in accordance with the rules herein prescribed. SECTION 1 Coverage. The privilege of last priority in audit and investigation herein granted shall apply to all internal revenue taxes covering taxable years ending December 31, 2005 and fiscal year ending on any day not later than June 30, 2006 and all prior years, including one-time transactions such as estate tax, donor's tax, capital gains tax, final withholding tax, expanded withholding tax and documentary stamp tax on the transfer, sale, exchange, or disposition of assets. This Program shall likewise cover taxpayers enjoying preferential tax treatment. Any person, natural or juridical, including estates and trusts, liable to pay any of the above-cited internal revenue taxes for the above specified period/s who, due to inadvertence or otherwise, erroneously paid his/its internal revenue tax liabilities or failed to file tax returns/pay taxes, may avail of the IVAP, except those falling under any of the following instances: a. Those taxpayers who have already been issued a Preliminary Assessment Notice (PAN) and/or Final Assessment Notice (FAN) on or before the effectivity of these regulations with respect to the internal revenue taxes applicable to the taxable period(s) covered by the PAN or FAN; b. Persons under investigation as a result of verified information filed by a Tax Informer under Section 282 of the NIRC, duly processed and recorded in the BIR Official Registry Book on or before the effectivity of these regulations; c. Tax fraud cases filed and pending in the Department of Justice or in the courts for adjudication; d. Those with unpaid tax liability as admitted and reflected in the books of accounts/records, or financial statements and tax returns of the covered period, with respect to the tax type covered by the said admitted tax liability, unless they first pay the same (i.e., DST payable, withholding tax payable, and unpaid individuals' second installment of income tax, etc.); e. Cases handled by the Bureau of Internal Revenue under the Run After Tax Evader (RATE) Program; and f. Cases in which Letter Notices (LNs) were issued, where the discrepancy in sales exceeds 30% of sales of base year or the discrepancy in purchases exceeds 30% of the purchases of the base year. SECTION 2 Taxpayer's Benefit from Availment of the IVAP. A taxpayer who has availed of the IVAP shall not be audited, except upon prior authorization and approval of the Commissioner of Internal Revenue when there is strong evidence or finding of understatement in the payment of a taxpayer's correct tax liability by more than thirty percent (30%), as supported by a written report of the appropriate office stating in detail the facts and the law on which such finding is based: Provided, however, that any IVAP payment should be allowed as tax credit against the deficiency tax due, if any, in case the concerned taxpayer has been subjected to tax audit.

2005

AS

TAX

WHEREAS, the observance of Tax Awareness Month will be a step towards promoting, enhancing and instilling nationwide awareness and appreciation of the importance and value of taxes to our society, while at the same time, obtaining the support and commitment of the taxpaying public to help improve the tax collection of the country; NOW, THEREFORE, I, GLORIA MACAPAGAL-ARROYO, President of the Philippines, by virtue of the powers vested in me by law, do hereby declare the month of April 2005 as Tax Awareness Month under the auspices of the Bureau of Internal Revenue. Revenue Regulations No. 7-2006 SUBJECT: Publishing the Full text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent SUBJECT: RECOMMENDATION TO INCREASE THE VALUE ADDED TAX RATE FROM 10 PERCENT TO 12 PERCENT EFFECTIVE FEBRUARY 1, 2006 Pursuant to your recommendation contained in your Memorandum for the President dated January 30. 2006, copy hereto attached, please be informed that the same has been approved by the President, pursuant to Section 4 of Republic Act (RA) No. 9337. Revenue Regulations No. 18-06 SUBJECT: Improved Voluntary Assessment Program (IVAP) for Taxable Year 2005 and Prior Years under Certain Conditions Pursuant to Section 244, in relation to Sections 6, 204, 254, 255, 256, and other pertinent provisions of the National Internal Revenue Code (NIRC), these Regulations are hereby promulgated to provide for the policies, procedures and guidelines in the implementation of IVAP for the collection of additional tax revenue, which could otherwise be collected through audit and enforcement effort. The program covers all types of taxes including taxes for one-time transactions, and may be availed of by qualified taxpayers on a per taxable year/period and on a per taxtype basis. POLICY STATEMENT

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I. General Principles of Taxation Taxation I


Audit of taxpayers shall automatically be suspended upon filing of application and payment of the IVAP amount. However, if the audit case is prescribing within six (6) months from date of application and payment of the IVAP, the availment should be evaluated by the investigating office within 5 days from receipt of the payment to determine its qualification hereunder. If after evaluation, the taxpayer has been disqualified under these regulations, the audit shall be revived and should proceed accordingly. Letters of Authority (LAs)/Audit Notices (ANs), Letter Notices (LNs), Taxpayer Verification Notices (TVNs) and Mission Orders (MOs) shall be cancelled and withdrawn for IVAP availments with issued Certificate of Qualification. The suspension of audit/investigation and the cancellation of the authority to audit/investigate, shall be on a per taxable year/period and on a per tax type basis or only on the kind of tax covered by the IVAP availment. Before any LA/AN, TVN or MO is issued against a taxpayer for the taxable year/s covered by IVAP, it is incumbent upon the investigating office to ensure that the taxpayer has not validly availed of the IVAP. Revenue Regulations No. 15-06 SUBJECT: Implementing a One-Time Administrative Abatement of all Penalties/Surcharges and Interest on Delinquent Accounts and Assessments (Preliminary or Final, Disputed or Not) as of June 30, 2006. SECTION 1 Purpose. These regulations prescribe the guidelines for the availment by taxpayers of the opportunity to settle their delinquent accounts or assessments, preliminary and final, disputed or not, by way of application for abatement of all penalties, including surcharge and interest, under Section 204 of the National Internal Revenue Code (NIRC) of 1997 as another step towards the collection and reduction of the Bureau's Accounts Receivables and pending assessments. SECTION 2 Coverage The following cases shall be covered hereof: a.) Delinquent Accounts/Accounts Receivable Cases except those cases where the Presidential Commission on Good Government (PCGG) has an interest and/or there is a need to coordinate with the PCGG; b.) Income Tax 2nd Installment Cases; c.) Dishonored Checks Cases; d.) Cases with administrative protest pending in the Regional Office, Revenue District Office, Legal Service, Large Taxpayer's Service (LTS), Collection Service, Enforcement Service and other Offices in the National Office except those cases where the Presidential Commission on Good Government (PCGG) has an interest and/or there is a need to coordinate with the PCGG; e.) Assessed cases, whether preliminary or final, as of June 30, 2006 except those cases where the Presidential Commission on Good Government (PCGG) has an interest and/or there is a need to coordinate with the PCGG; f.) Civil tax cases being disputed before the Department of Justice and the courts, e.g., MTC, RTC, CTA, CA and SC including decided cases which are not yet final and executory except those cases where the Presidential Commission on Good Government (PCGG) has an interest and/or there is a need to coordinate with the PCGG; g.) Collection Cases filed with the Courts except those cases where the Presidential Commission on Good Government (PCGG) has an interest and/or there is a need to coordinate with the PCGG; h.) Cases with pending request for Compromise Settlement under RR No. 6-2000, RR No. 7-2001, and RR No. 302002, as amended by RR No. 8-2004, and other prior years' issuances which are under evaluation by the TWGNEB, TWG-REB, NEB and REB; provided that, pending requests for compromise settlement pursuant to the aforementioned RRs where the amounts offered have already been approved or where partial or full payments have already been made shall not be covered by these Regulations; i.) Cases with pending request for abatement under RR 132001 for evaluation by the Commissioner of Internal Revenue (CIR) or his authorized representative; provided that, pending requests for abatement pursuant to the aforementioned RR, where the amounts offered have already been approved or where partial or full payments have already been made shall not be covered by these Regulations; j.) Failure to withhold Withholding Taxes discovered upon audit; k.) Criminal violations (except those already filed in Court, those involving Criminal Tax Fraud, those under the Rate Program of the Bureau, and tax fraud cases which are the results of confidential information, unless allowed to avail by the Commissioner or his representative on meritorious grounds); l.) Letter Notice Cases; m.) "Accounts Payable or Due to BIR" account duly recorded or acknowledged by the taxpayer in his books of accounts. SECTION 6 Mode of Payment. Upon filing of the application for/acceptance of the offer to avail of the Abatement Program, the amount offered in complete settlement of the delinquent account/assessed tax cases shall be paid with the Authorized Agent Banks (AABs) located within the jurisdiction of the RDO/LTS/LTDO where the taxpayer is registered. In the absence of AABs, the payment may be made to the Revenue Collection Officer/Deputized Treasurer of the City/Municipality of the RDO/LTDO that has jurisdiction over the taxpayer. Staggered payments of the amounts payable under this Abatement Program may be considered on a case to case basis in accordance with the existing regulations of the Bureau upon approval of the Regional Director for regional cases, and concerned ACIR (LTS, Collection, Legal, or Enforcement) for National Office cases. Nonetheless, cases pending in courts shall not be withdrawn unless the concerned taxpayer shall fully pay one hundred percent (100%) of the basic tax. If the amount, as abated, is not paid as required herein, the approved staggered payment is automatically nullified and the delinquent account or the assessment shall be reverted to the original amount which includes the statutory increments incident to delinquency, which shall be collected thru the summary remedies and/or judicial processes provided for by law. RA 9399 AN ACT DECLARING A ONE-TIME AMNESTY ON CERTAIN TAX AND DUTY LIABILITIES, INCLUSIVE OF FEES, FINES, PENALTIES, INTERESTS AND OTHER ADDITIONS THERETO, INCURRED BY CERTAIN BUSINESS ENTERPRISES OPERATING WITHIN THE SPECIAL ECONOMIC ZONES AND

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FREEPORTS CREATED UNDER PROCLAMATION NO. 163, SERIES OF 1993; PROCLAMATION NO. 216, SERIES OF 1993; PROCLAMATION NO. 420, SERIES OF 1994; AND PROCLAMATION NO. 984, SERIES OF 1997, PURSUANT TO SECTION 15 OF REPUBLIC ACT NO. 7227, AS AMENDED, AND FOR OTHER PURPOSES SECTION 1 Grant of Tax Amnesty. - Registered business enterprises operating prior to the effectivity of this Act within the special economic zones and freeports created pursuant to Section 15 of Republic Act No. 7227, as amended, such as the Clark Special Economic Zone created under Proclamation No. 163, series of 1993; Poro Point Special Economic and Freeport Zone created under Proclamation No. 216, series of 1993; John Hay Special Economic Zone created under Proclamation No. 420, series of 1994; and Morong Special Economic Zone created under Proclamation No. 984, series of 1997, may avail themselves of the benefits of remedial tax amnesty herein granted on all applicable tax and duty liabilities, inclusive of fines, penalties, interests and other additions thereto, incurred by them or that might have accrued to them due to the rulings of the Supreme Court in the cases of John Hay Peoples Coalition v. Lim, et al., G.R. No. 119775 dated 23 October 2003 and Coconut Oil Refiners Association, Inc. v. Torres, et al., G.R. No. 132527 dated 29 July 2005, by filing a notice and return in such form as shall be prescribed by the Commissioner of Internal Revenue and the Commissioner of Customs and thereafter, by paying an amnesty tax of Twenty-five thousand pesos (P25,000.00) within six months from the effectivity of this Act: Provided, That the applicable tax and duty liabilities to be covered by the tax amnesty shall refer only to the difference between: (i) all national and local tax impositions under relevant tax laws, rules and regulations; and (ii) the five percent (5%) tax on gross income earned by said registered business enterprises as determined under relevant revenue regulations of the Bureau of Internal Revenue and memorandum circulars of the Bureau of Customs during the period covered: Provided, however, That the coverage of the tax amnesty herein granted shall not include the applicable taxes and duties on articles, raw materials, capital goods, equipment and consumer items removed from the special economic zone and freeport and entered in the customs territory of the Philippines for local or domestic sale, which shall be subject to the usual taxes and duties prescribed in the National Internal Revenue Code (NIRC) of 1997, as amended, and the Tariff and Customs Code of the Philippines, as amended. SECTION 2 Immunities and Privileges. - Those who have availed themselves of the tax amnesty and have fully complied with all its conditions shall be relieved of any civil, criminal and/or administrative liabilities arising from or incident to the nonpayment of taxes, duties and other charges covered by the tax amnesty granted under Section 1 herein. RA 9480 AN ACT ENHANCING REVENUE ADMINISTRATION AND COLLECTION BY GRANTING AN AMNESTY ON ALL UNPAID INTERNAL REVENUE TAXES IMPOSED BY THE NATIONAL GOVERNMENT FOR TAXABLE YEAR 2005 AND PRIOR YEARS SECTION 1 Coverage. There is hereby authorized and granted a tax amnesty which shall cover all national internal revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued therefore, that have remained unpaid as of December 31, 2005: Provided, however, That the amnesty hereby authorized and granted shall not cover persons or cases enumerated under Section 8 hereof. SECTION 2 Availment of the Amnesty. Any person, natural or juridical, who wishes to avail himself of the tax amnesty authorized and granted under this Act shall file with the Bureau of Internal Revenue (BIR) a notice and Tax Amnesty Return accompanied by a Statement of Assets, Liabilities and Net worth (SALN) as of December 31, 2005, in such form as may be prescribed in the implementing rules and regulations (IRR) of this Act, and pay the applicable amnesty tax within six months from the effectivity of the IRR. SECTION 3 What to Declare in the SALN. The SALN shall contain a declaration of the assets, liabilities and net worth as of December 31, 2005, as follows: (a) Assets within or without the Philippines, whether real or personal, tangible or intangible, whether or not used in trade or business: Provided, That property other than money shall be valued at the cost at which the property was acquired: Provided, further, That foreign currency assets and/or securities shall be valued at the rate of exchange prevailing as of the date of the SALN; (b) All existing liabilities which are legitimate and enforceable, secured or unsecured, whether or not incurred in trade or business; and (c) The net worth of the taxpayer, which shall be the difference between the total assets and total liabilities. SECTION 5 Grant of Tax Amnesty.Except for the persons or cases covered in Section 8 hereof, any person, whether natural or juridical, may avail himself of the benefits of tax amnesty under this Act, and pay the amnesty tax due thereon, based on his net worth as of December 31, 2005 as declared in the SALN as of said period, in accordance with the following schedule of amnesty tax rates and minimum amnesty tax payments required: (a) Individuals (whether resident or nonresident citizens, including resident or nonresident aliens), Trusts and Estates (b) Corporations (1) With subscribed capital of above P50 Million (2) With subscribed capital of above P20 Million up to P50 Million 5% or P500,000 whichever is higher 5% or P250,000, whichever is higher 5% or P100,000, whichever is 5% or P50,000, whichever is higher

(3) With subscribed capital of P5 Million to P20 Million

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higher (4) With subscribed capital of below P5 Million (c) Other juridical entities, including, but not limited to, cooperatives and foundations, that have become taxable as of December 31, 2005 5% or P25,000, whichever is higher 5% or P50,000, whichever is higher When and Where to File and Pay.-The filing of the Tax Amnesty Return and the payment of the amnesty tax for those availing themselves of the tax amnesty shall be made within six months starting from the effectivity of the IRR. It shall be filed at the office of the Revenue District Officer which has jurisdiction over the legal residence or principal place of business of the filer. The Revenue District Officer shall issue an acceptance of payment form authorizing an authorized agent bank, or in the absence thereof, the collection agent or municipal treasurer concerned, to accept the amnesty tax payment SECTION 8 Exceptions.The tax amnesty provided in Section 5 hereof shall not extend to the following persons or cases existing as of the effectivity of this Act: a. Withholding agents with respects to their withholding tax liabilities; b. Those with pending cases falling under the jurisdiction of the Presidential Commission on Good Government; c. Those with pending cases involving unexplained or unlawfully acquired wealth or under the Anti-Graft and Corrupt Practices Act; d. Those with pending cases filed in court involving violation of the Anti-Money Laundering Law; e. Those with pending criminal cases for tax evasion and other criminal offenses under Chapter II of Title X of the National Internal Revenue Code of 1997, as amended, and the felonies of frauds, illegal exactions and transactions, and malversation of public funds and property under Chapters III and IV of Title VII of the Revised Penal Code; and f. Tax cases subject of final and executory judgment by the courts. SECTION 11 Moratorium on the Grant of Tax Amnesty.-In order to encourage and improve tax compliance by taxpayers, it is hereby declared the policy of this Congress that the grant of tax amnesty, in whatever manner and form, shall not henceforth be allowed: Provided, That this moratorium shall likewise apply to any administrative tax amnesty by the BIR. Commissioner vs. CA (1995) EO 41 was promulgated declaring a one-time tax amnesty on unpaid income taxes, later amended to include estate and donors taxes and taxes on business, for the taxable years 1981 to 1985. RMO 4-87 issued by the Commissioner implementing EO 41 had construed the amnesty coverage to include only assessments issued by the BIR after the promulgation of the EO and not to assessments theretofore made. WON the RMO coincides with the meaning of EO 41? No. EO 41 is quite explicit and requires hardly anything beyond a simple application of its provisions. If, as the Commissioner argues, EO 41 had not been intended to include 1981-1985 tax liabilities already assessed prior to the issuance of the EO, the law could have simply so provided in its exclusionary clauses. It did not. The conclusion is unavoidable, and it is that the EO has been designed to be in the nature of a general grant of tax amnesty subject only to the cases specifically excepted by it.

(d) Taxpayers who filed their balance sheet/SALN, together with their income tax returns for 2005, and who desire to avail of the tax amnesty under this Act shall amend such previously filed statements by including still undeclared assets and/or liabilities and pay an amnesty tax equal to five percent (5%) based on the resulting increase in net worth: Provided, That such taxpayers shall likewise be categorized in accordance with, and subjected to the minimum amounts of amnesty tax prescribed under the provisions of this Section. SECTION 6 Immunities and Privileges.Those who availed themselves of the tax amnesty under Section 5 hereof, and have fully complied with all its conditions shall be entitled to the following immunities and privileges: a. The taxpayer shall be immune from the payment of taxes, as well as addition thereto, and the appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code of 1997, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years. b. The taxpayer's Tax Amnesty Returns and the SALN as of December 31, 2005 shall not be admissible as evidence in all proceedings that pertain to taxable year 2005 and prior years, insofar as such proceedings relate to internal revenue taxes, before judicial, quasi-judicial or administrative bodies in which he is a defendant or respondent, and except for the purpose of ascertaining the net worth beginning January 1, 2006, the same shall not be examined, inquired or looked into by any person or government office. However, the taxpayer may use this as a defense, whenever appropriate, in cases brought against him. The books of accounts and other records of the taxpayer for the years covered by the tax amnesty availed of shall not be examined: Provided, That the Commissioner of Internal Revenue may authorize in writing the examination of the said books of accounts and other records to verify the validity or correctness of a claim for any tax refund, tax credit (other than refund or credit of taxes withheld on wages), tax incentives, and/or exemptions under existing laws. All these immunities and privileges shall not apply where the person failed to file a SALN and the Tax Amnesty Return, or where the amount of net worth as of December 31, 2005 is proven to be understated to the extent of thirty percent (30%) or more, in accordance with the provisions of Section 3 hereof. SECTION 7

c.

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Commissioner vs. Marubeni (2001) EO 41 and 64 are tax amnesty issuances. 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 tax law. It partakes of an absolute forgiveness or waiver by the government of its right to collect what is due it and 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. If granted, the terms of the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority. For the right of taxation is inherent in government. The State cannot strip itself of the most essential power of taxation by doubtful words. He who claims an exemption (or an amnesty) from the common burden must justify his claim by the clearest grant of organic or state law. It cannot be allowed to exist upon a vague implication. If doubt arises as to the intent of the legislature, that doubt must be resolved in favor of the state. Exclusion / Deduction Sec 32 (B), NIRC Gross Income (B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: (1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. (2) Amount Received by Insured as Return of Premium. The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. (3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income. (4) 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. (5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. (6) Retirement Benefits, Pensions, Gratuities, etc.(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. (b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death sickness or other physical disability or for any cause beyond the control of the said official or employee. (c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public. (d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration. (e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282. (f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees. (7) Miscellaneous Items. (a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments. (b) Income Derived by the Government or its Political Subdivisions. - Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof. (c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if: (i) The recipient was selected without any action on his part to enter the contest or proceeding; and (ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award. (d) Prizes and Awards in Sports Competition. - All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations. (e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under

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this subparagraph shall not exceed Thirty thousand pesos (P30, 000) which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686; (ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; (iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year. (f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals. (g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the same or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years. (h) Gains from Redemption of Shares in Mutual Fund. Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22 (BB) of this Code. Sec 34, NIRC SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income; (A) Expenses. (1) Ordinary and Necessary Trade, Business or Professional Expenses.(a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including: (i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid; (ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession; (iii) A reasonable allowance for rentals and/or other payments which are required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor; (iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals public policy or public order shall in no case be allowed as a deduction. (b) Substantiation Requirements. - No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. (c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income shall be allowed under Subsection (A) hereof for any payment made, directly or indirectly, to an official or employee of the national government, or to an official or employee of any local government unit, or to an official or employee of a government-owned or -controlled corporation, or to an official or employee or representative of a foreign government, or to a private corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback. (2) Expenses Allowable to Private Educational Institutions. - In addition to the expenses allowable as deductions under this Chapter, a private educational institution, referred to under Section 27 (B) of this Code, may at its option elect either: (a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or (b) to deduct allowance for depreciation thereof under Subsection (F) hereof. (B) Interest.(1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equal to the following percentages of the interest income subjected to final tax: Forty-one percent (41%) beginning January 1, 1998; Thirty-nine percent (39%) beginning January 1, 1999; and Thirty-eight percent (38%) beginning January 1, 2000; (2) Exceptions. - No deduction shall be allowed in respect of interest under the succeeding subparagraphs: (a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed a deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year;

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(b) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36 (B); or (c)If the indebtedness is incurred to finance petroleum exploration. (3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest incurred to acquire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure. (C) Taxes.(1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction, except (a) The income tax provided for under this Title; (b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign countries); (c) Estate and donor's taxes; and (d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. (2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or business in the Philippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the extent that they are connected with income from sources within the Philippines. (3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with: (a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country; and (b) Partnerships and Estates. - In the case of any such individual who is a member of a general professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership 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 this Title. An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph. (4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid or incurred to any country 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 this Title bears to his entire taxable income for the same taxable year; and (b) 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 this Title bears to his entire taxable income for the same taxable year. (5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner; who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may require. (6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. (7) Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following: (a) The total amount of income derived from sources without the Philippines; (b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and (c) All other information necessary for the verification and computation of such credits. (D) Losses. (1) In General.- Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions: (a) If incurred in trade, profession or business; (b) Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, however, That the time limit to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss. (c) No loss shall be allowed as a deduction under this Subsection if at the time of the filing of the return, such

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loss has been claimed as a deduction for estate tax purposes in the estate tax return. (2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation, the losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the Philippines, when such losses are not compensated for by insurance or other forms of indemnity. The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, That the time to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss; and (3) Net Operating Loss Carry-Over. - The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, however, That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection: Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that (i) Not less than seventy-five percent (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; or (ii) Not less than seventy-five percent (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. For purposes of this subsection, the term "not operating loss" shall mean the excess of allowable deduction over gross income of the business in a taxable year. Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under Executive Order No. 226, as amended, otherwise known as the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining four (4) years. (4) Capital Losses. (a) Limitation. - Loss from sales or Exchanges of capital assets shall be allowed only to the extent provided in Section 39. (b) Securities Becoming Worthless. - If securities as defined in Section 22 (T) become worthless during the taxable year and are capital assets, the loss resulting therefrom shall, for purposes of this Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. (5) Losses From Wash Sales of Stock or Securities. Losses from "wash sales" of stock or securities as provided in Section 38. (6) Wagering Losses. - Losses from wagering transactions shall b allowed only to the extent of the gains from such transactions. (7) Abandonment Losses. (a) In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction: Provided, That accumulated expenditures incurred in that area prior to January 1, 1979 shall be allowed as a deduction only from any income derived from the same contract area. In all cases, notices of abandonment shall be filed with the Commissioner. (b) In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as the undepreciated costs of equipment directly used therein, shall be allowed as a deduction in the year such well, equipment or facility is abandoned by the contractor: Provided, That if such abandoned well is reentered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be. (E) Bad Debts. (1) In General. - 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 mentioned under Section 36 (B) of this Code: Provided, That recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction. (2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are ascertained to be worthless and charged off within the taxable year and are capital assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust company incorporated under the laws of the Philippines a substantial part of whose business is the receipt of deposits, for the purpose of this Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. (F) Depreciation. (1) General Rule. - There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the trust income allowable to each. (2) Use of Certain Methods and Rates. - The term "reasonable allowance" as used in the preceding paragraph shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, under any of the following methods: (a) The straight-line method;

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(b) 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 described in Subsection (F) (1); (c) The sum-of-the-years-digit method; and (d) any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner. (3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under rules and regulations prescribed by the Secretary of Finance upon recommendation of the Commissioner, the taxpayer and the Commissioner have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the national Government in the absence of facts and circumstances not taken into consideration during the adoption of such agreement. The responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change in the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effective for taxable years prior to the taxable year in which notice in writing by certified mail or registered mail is served by the party initiating such change to the other party to the agreement: Provided, however, that where the taxpayer has adopted such useful life and depreciation rate for any depreciable and claimed the depreciation expenses as deduction from his gross income, without any written objection on the part of the Commissioner or his duly authorized representatives, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of this Subsection. (4) Depreciation of Properties Used in Petroleum Operations. - An allowance for depreciation in respect of all properties directly related to production of petroleum initially placed in service in a taxable year shall be allowed under the straight-line or declining-balance method of depreciation at the option of the service contractor. However, if the service contractor initially elects the declining-balance method, it may at any subsequent date, shift to the straight-line method. The useful life of properties used in or related to production of petroleum shall be ten (10) years of such shorter life as may be permitted by the Commissioner. Properties not used directly in the production of petroleum shall be depreciated under the straight-line method on the basis of an estimated useful life of five (5) years. (5) Depreciation of Properties Used in Mining Operations. - an allowance for depreciation in respect of all properties used in mining operations other than petroleum operations, shall be computed as follows: (a) At the normal rate of depreciation if the expected life is ten (10) years or less; or (b) Depreciated over any number of years between five (5) years and the expected life if the latter is more than ten (10) years, and the depreciation thereon allowed as deduction from taxable income: Provided, That the contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate allowed by this Section will be used. (6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or Resident Foreign Corporations. - In the case of a nonresident alien individual engaged in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of Property arising out of its use or employment or its non-use in the business trade or profession shall be permitted only when such property is located in the Philippines. (G) Depletion of Oil and Gas Wells and Mines. (1) In General. - In the case of oil and gas wells or mines, a reasonable allowance for depletion or amortization computed in accordance with the costdepletion method shall be granted under rules and regulations to be prescribed by the Secretary of finance, upon recommendation of the Commissioner. Provided, That when the allowance for depletion shall equal the capital invested no further allowance shall be granted: Provided, further, That after production in commercial quantities has commenced, certain intangible exploration and development drilling costs: (a) shall be deductible in the year incurred if such expenditures are incurred for nonproducing wells and/or mines, or (b) shall be deductible in full in the year paid or incurred or at the election of the taxpayer, may be capitalized and amortized if such expenditures incurred are for producing wells and/or mines in the same contract area. "Intangible costs in petroleum operations" refers to any cost incurred in petroleum operations which in itself has no salvage value and which is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum: Provided, That said costs shall not pertain to the acquisition or improvement of property of a character subject to the allowance for depreciation except that the allowances for depreciation on such property shall be deductible under this Subsection. Any intangible exploration, drilling and development expenses allowed as a deduction in computing taxable income during the year shall not be taken into consideration in computing the adjusted cost basis for the purpose of computing allowable cost depletion. (2) Election to Deduct Exploration and Development Expenditures. - In computing taxable income from mining operations, the taxpayer may at his option, deduct exploration and development expenditures accumulated as cost or adjusted basis for cost depletion as of date of prospecting, as well as exploration and development expenditures paid or incurred during the taxable year: Provided, That the amount deductible for exploration and development expenditures shall not exceed twenty-five percent (25%) of the net income from mining operations computed without the benefit of any tax incentives under existing laws. The actual exploration and development expenditures minus twenty-five percent (25%) of the net income from mining shall be carried forward to the succeeding years until fully deducted. The election by the taxpayer to deduct the exploration and development expenditures is irrevocable and shall be binding in succeeding taxable years. "Net income from mining operations", as used in this Subsection, shall mean gross income from operations less "allowable deductions" which are necessary or related to mining operations. "Allowable deductions" shall include mining, milling and marketing expenses, and depreciation of properties directly used in the mining operations. This paragraph shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation. In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and development of oil and gas. The term "exploration expenditures" means expenditures paid or incurred for the

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purpose of ascertaining the existence, location, extent or quality of any deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of the mine or deposit. The term "development expenditures" means expenditures paid or incurred during the development stage of the mine or other natural deposits. The development stage of a mine or other natural deposit shall begin at the time when deposits of ore or other minerals are shown to exist in sufficient commercial quantity and quality and shall end upon commencement of actual commercial extraction. (3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual or Foreign Corporation. - In the case of a nonresident alien individual engaged in trade or business in the Philippines or a resident foreign corporation, allowance for depletion of oil and gas wells or mines under paragraph (1) of this Subsection shall be authorized only in respect to oil and gas wells or mines located within the Philippines. (H) Charitable and Other Contributions. (1) In General. - Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporation or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-government organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (%) in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs. (2) Contributions Deductible in Full. - Notwithstanding the provisions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full; (a) Donations to the Government. - Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to a National Priority Plan determined by the National Economic and Development Authority (NEDA), In consultation with appropriate government agencies, including its regional development councils and private philanthropic persons and institutions: Provided, That any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection; (b) Donations to Certain Foreign Institutions or International Organizations. - Donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws; (c) Donations to Accredited Nongovernment Organizations. - The term "nongovernment organization" means a non profit domestic corporation: (1) Organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual; (2) Which, not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner; (3) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of the total expenses; and (4) The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term "utilization" means: (i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized. (ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized. An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5) years, and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds. (3) Valuation. - The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. (4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if verified under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. (I) Research and Development.(1) In General. - a taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred.

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(2) Amortization of Certain Research and Development Expenditures. - At the election of the taxpayer and in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the following research and development expenditures may be treated as deferred expenses: (a) Paid or incurred by the taxpayer in connection with his trade, business or profession; (b) Not treated as expenses under paragraph 91) hereof; and (c) Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures). The election provided by paragraph (2) hereof may be made for any taxable year beginning after the effectivity of this Code, but only if made not later than the time prescribed by law for filing the return for such taxable year. The method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years unless with the approval of the Commissioner, a change to a different method is authorized with respect to a part or all of such expenditures. The election shall not apply to any expenditure paid or incurred during any taxable year for which the taxpayer makes the election. (3) Limitations on Deduction. - This Subsection shall not apply to: (a) Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion; and (b) Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas. (J) Pension Trusts. - An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under Subsection (A) (1) of this Section ) a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount (1) has not theretofore been allowed as a deduction, and (2) is apportioned in equal parts over a period of ten (10) consecutive years beginning with the year in which the transfer or payment is made. (K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section 58 and 81 of this Code. (L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding ten percent (10%) of his gross income. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard deduction shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross income during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner. (M) Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer. The amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided, That said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxable year: Provided, finally, That in the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction. Notwithstanding the provision of the preceding Subsections, The Secretary of Finance, upon recommendation of the Commissioner, after a public hearing shall have been held for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemized deductions under Subsections (A) to (J) of this Section: Provided, That for purposes of determining such ceilings or limitations, the Secretary of Finance shall consider the following factors: (1) adequacy of the prescribed limits on the actual expenditure requirements of each particular industry; and (2) effects of inflation on expenditure levels: Provided, further, That no ceilings shall further be imposed on items of expense already subject to ceilings under present law. Kinds of Tax Exemption Express vs. Implied (as to manner of creation) Express when certain persons, properties or transactions are, by express provision, exempted from taxation

Implied occurs when a tax is levied on certain classes of persons, properties or transactions and the other classes are not mentioned. Those not mentioned are deemed exempted

Total vs. Partial (as to scope) Total exemption when certain persons, properties or transactions are exempted from all taxes Partial exemption when certain persons, properties or transactions are exempted from certain taxes, either entirely or in part Exemption from Direct Tax vs. Indirect Tax Nature of Power to Grant Tax Exemption It is an attribute of sovereignty

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The power to tax carries with it the power to grant exemptions Legislative in nature a. b. c. d. Mere personal privilege of the grantee Generally revocable by the government Unless the exemption is founded on a contract protected from impairment Implies a waiver on the part of the Government to collect what would be due to it Must be strictly construed Not necessarily discriminatory as long as exemption has a reasonable foundation or rational basis

Basco vs. PAGCOR PD 1869 created PAGCOR to enable the Government to regulate and centralize all games of chance authorized by existing franchise or permitted by law. Sec 13(2) exempts PAGCOR from paying any tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever nature, whether National or local. Petitioners contend that PD 1869 constitutes a waiver of the right of City of Manila to impose taxes and legal fees. WON the contention is correct? No, they are without merit. 1. The City of Manila, being a mere Municipal corporation has no inherent right to impose taxes. Its power to tax must always yield to a legislative act which is superior having been passed upon by the State itself which has the inherent power to tax 2. The Charter of the City of Manila is subject to control by Congress. And if Congress can grant the City of Manila the power to tax certain matters, it can also provide for exemptions or even take back the power 3. Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a GOCC with an original charter. It has a dual role, to operate and to regulate gambling casinos. The latter role is governmental, which places it in the category of an agency or instrumentality of the government. The power to tax cannot be allowed to defeat an instrumentality or creation of the very entity which has the power to wield it Rationale / Grounds for Tax Exemption Grounds: a. Based on contract in which case the public, represented by the government is supposed to receive a full equivalent therefore As in the case of legislative franchise

PLDT vs. City of Davao (2001) The tax code provision withdrawing the tax exemption was not construed as prohibiting future grants of exemptions from all taxes. Tax exemptions are highly disfavored. The tax exemption must be expressed in the statute in clear language that leaves no doubt of the intention of the legislature to grant such exemption. And even if granted, the exemption must be interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Philippine Acetylene vs. Commissioner (1967) A tax exemption must be strictly construed. An exemption will not be considered unless the terms under which it is granted clearly and distinctly show that such was the intention of the parties. Tolentino vs. Secretary of Finance (1994) The Contract Clause has never been thought as a limitation on the exercise of the States power of taxation save only where a tax exemption has been granted for a valid consideration. Construction of Statutes Granting Tax Exemption General Rule Exemptions are not favored and are construed strictly against the taxpayer

b.

Based on some ground of public policy Encourage new industries, charitable institutions, etc c. Created on a treaty based on grounds or reciprocity or to lessen the rigors of international double or multiple taxation Equity is not a ground for tax exemption

Taxation is the rule and the exemption, the exception

Commissioner vs. CA (1998) Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict interpretation in construing tax exemptions. Misamis Oriental Association of Coco Traders, Inc. vs. Department of Finance Secretary (1994) In interpreting Sec 103 (a) and (b) of the NIRC, the CIR gave it strict construction consistent with the rule that tax exemptions must be strictly construed against the taxpayer and liberally in favor of the state.\ Nestle Philippines, Inc. vs. CA (2001) Any claim for refund of custom duties take the nature of tax exemptions that must be construed strictissimi juris against the claimants and liberally in favor of the taxing authority. The power of taxation being a high prerogative of sovereignty, its relinquishment is never presumed. Any reduction or diminution thereof with respect to its mode or its rate must be strictly construed, and the same must be couched in clear and unmistakable terms in order that it may be applied.

Maceda vs. Macaraig (1993) One common theme in all these laws is that NPC must be enabled to pay its indebtedness which, as of PD 938, was P12B in domestic indebtedness, at any one time, and US$4B in total foreign loans at any one time. The NPC must be and has to be exempt from all forms of taxes if this goal is to be achieved Davao Gulf Lumber Corporation vs. CIR (1998) Petitioner asserts that equity and justice demand that the computation of the tax refunds be based on actual amounts paid under Secs. 153 and 156, NIRC. The Court disagrees. According to an eminent authority on taxation (Vitug), there is no tax exemption solely on the ground of equity. Nature of Tax Exemption

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Coconut Oil Refiners Association, Inc. vs. Torres (2005) While Sec 12 of RA 7227 expressly provides for the grant of incentives to the SSEZ, it fails to make any similar grant in favor of other economic zones, including CSEZ. Tax and duty-free incentives being in the nature of tax exemptions, the basis thereof should be categorically and unmistakably expressed from the language of the statute. Exceptions When the law itself provides for a liberal construction in favor of exemption When the exemption is in favor of the government itself, or its agencies, or of religious, charitable, and educational institutions Maceda vs. Macaraig (1991) It is a recognized principle that the rule on strict interpretation does not apply in the case of exemptions in favor or a government political subdivision or instrumentality. The basis for applying the rule of 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. The reason for the rule does not apply in case of exemptions running to the benefit of the government itself or its agencies. In such case, the practical effect of an exemption is merely to reduce the amount of money that has to be handled by government in the course of its operations. For these reasons, provisions granting exemptions to government agencies may be construed liberally, in favor of the non-tax liability of such agencies. exchange for greater benefits granted by or derived from a convention or pact. 7. SPECIAL LAWS 8. DECISIONS
OF

SC / CTA / CA

9. REVENUE RULES AND REGULATIONS / ADMINISTRATIVE / BIR RULINGS AND OPINIONS Sec 4, NIRC Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. Sec 244, NIRC Authority of Secretary of Finance to Promulgate Rules and Regulations. - The Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of this Code. Sec 245, NIRC Specific Provisions to be Contained in Rules and Regulations. - The rules and regulations of the Bureau of Internal Revenue shall, among other things, contain provisions specifying, prescribing or defining: (a) The time and manner in which Revenue Regional Director shall canvass their respective Revenue Regions for the purpose of discovering persons and property liable to national internal revenue taxes, and the manner in which their lists and records of taxable persons and taxable objects shall be made and kept; (b) The forms of labels, brands or marks to be required on goods subject to an excise tax, and the manner in which the labeling, branding or marking shall be effected; (c) The conditions under which and the manner in which goods intended for export, which if not exported would be subject to an excise tax, shall be labeled, branded or marked; (d) The conditions to be observed by revenue officers respecting the institutions and conduct of legal actions and proceedings; (e) The conditions under which goods intended for storage in bonded warehouses shall be conveyed thither, their manner of storage and the method of keeping the entries and records in connection therewith, also the books to be kept by Revenue Inspectors and the reports to be made by them in connection with their supervision of such houses; (f) The conditions under which denatured alcohol may be removed and dealt in, the character and quantity of the denaturing material to be used, the manner in which the process of denaturing shall be effected, so as to render the alcohol suitably denatured and unfit for oral intake, the bonds to be given, the books and records to be kept, the entries to be made therein, the reports to be made to the Commissioner, and the signs to be displayed in the business or by the person for whom such denaturing is done or by whom, such alcohol is dealt in; (g) The manner in which revenue shall be collected and paid, the instrument, document or object to which revenue stamps shall be affixed, the mode of cancellation of the same, the manner in which the proper books, records, invoices and other papers shall be kept and entries therein made by the person subject to the tax, as well as the

V.

Sources, Application, Interpretation Administration of Tax Laws

and

A. SOURCES OF TAX LAWS 1. PHILIPPINE CONSTITUTION 2. NIRC, AS 3. TARIFF


AND AMENDED

CUSTOMS CODE, AS

AMENDED

4. LOCAL GOVERNMENT CODE, BOOK II 5. LOCAL TAX ORDINANCE / CITY


OR

MUNICIPAL TAX CODES

6. TAX TREATIES / INTERNATIONAL AGREEMENTS Comprehend 2 objectives: a. To avoid double taxation especially in instances where income is taxed twice (country of residence and country of source)

b.

To eliminate / minimize tax evasion through the adoption of the exchange of information schemes, furnish each other on a mutual basis information on the taxable income or activities of any of their nationals or residents.

Tanada vs. Angara By their inherent nature, treaties really limit or restrict the absoluteness of sovereignty. By their voluntary act, nations may surrender some aspects of their state power in

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I. General Principles of Taxation Taxation I


manner in which licenses and stamps shall be gathered up and returned after serving their purposes; (h) The conditions to be observed by revenue officers respecting the enforcement of Title III imposing a tax on estate of a decedent, and other transfers mortis causa, as well as on gifts and such other rules and regulations which the Commissioner may consider suitable for the enforcement of the said Title III; (i) The manner in which tax returns, information and reports shall be prepared and reported and the tax collected and paid, as well as the conditions under which evidence of payment shall be furnished the taxpayer, and the preparation and publication of tax statistics; (j) The manner in which internal revenue taxes, such as income tax, including withholding tax, estate and donor's taxes, value-added tax, other percentage taxes, excise taxes and documentary stamp taxes shall be paid through the collection officers of the Bureau of Internal Revenue or through duly authorized agent banks which are hereby deputized to receive payments of such taxes and the returns, papers and statements that may be filed by the taxpayers in connection with the payment of the tax: Provided, however, That notwithstanding the other provisions of this Code prescribing the place of filing of returns and payment of taxes, the Commissioner may, by rules and regulations, require that the tax returns, papers and statements that may be filed by the taxpayers in connection with the payment of the tax. Provided, however, That notwithstanding the other provisions of this Code prescribing the place of filing of returns and payment of taxes, the Commissioner may, by rules and regulations require that the tax returns, papers and statements and taxes of large taxpayers be filed and paid, respectively, through collection officers or through duly authorized agent banks: Provided, further, That the Commissioner can exercise this power within six (6) years from the approval of Republic Act No. 7646 or the completion of its comprehensive computerization program, whichever comes earlier: Provided, finally, That separate venues for the Luzon, Visayas and Mindanao areas may be designated for the filing of tax returns and payment of taxes by said large taxpayers. For the purpose of this Section, "large taxpayer" means a taxpayer who satisfies any of the following criteria; (1) Value-Added Tax (VAT). - Business establishment with VAT paid or payable of at least One hundred thousand pesos (P100,000) for any quarter of the preceding taxable year; (2) Excise Tax. - Business establishment with excise tax paid or payable of at least One million pesos (P1,000,000) for the preceding taxable year; (3) Corporate Income Tax. - Business establishment with annual income tax paid or payable of at least One million pesos (P1,000,000) for the preceding taxable year; and (4) Withholding Tax. - Business establishment with withholding tax payment or remittance of at least One million pesos (P1,000,000) for the preceding taxable year. Provided, however, That the Secretary of Finance, upon recommendation of the Commissioner, may modify or add to the above criteria for determining a large taxpayer after considering such factors as inflation, volume of business, wage and employment levels, and similar economic factors. The penalties prescribed under Section 248 of this Code shall be imposed on any violation of the rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, prescribing the place of filing of returns and payments of taxes by large taxpayers. Sec 246, NIRC Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner 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 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. Commissioner vs. CA (1997) The deficiency tax assessment issued by petitioner against private respondent is without legal basis because of the prohibition against the retroactive application of the revocation of BIR rulings in the absence of bad faith on the part of private respondent. Private respondent did not question the correctness of the above BIR ruling. In fact, upon knowledge of the effectivity of BIR Ruling No. 017-91, private respondent immediately implemented the method of computation mandated therein by restoring the VAT in computing the tax base for purposes of the 15% ad valorem tax. However, well-entrenched is the rule that rulings and circulars, rules and regulations promulgated by the Commissioner of Internal Revenue would have no retroactive application if to so apply them would be prejudicial to the taxpayers. Without doubt, private respondent would be prejudiced by the retroactive application of the revocation as it would be assessed deficiency excise tax. BIR Ruling No. 018-05 The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. The Regional Director imposed upon himself this exclusive and original jurisdiction when he issued RRMC-2-2002 The Regional Director formalized his interpretation of Section 30 and 108 of the Tax Code through RRMC-2-2002 in view of the queries directed to him by revenue officers. Unfortunately, the law itself prohibits the Regional Director from doing so, the power to interpret tax laws having been vested solely in the Commissioner of Internal Revenue. A Regional Director does not have the authority to promulgate the subject revenue regional memorandum circular since the subject matter is not one of those delegated. As such, RRMC 2-2002 should be considered void, the same being considered ultra vires. It is well settled that while an administrative agency has rule making powers, the same must be confined to the limits of the law. Anything beyond that should be assailed as unlawful and therefore, void. Precisely, the courts have consistently held that:

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An interpretative rule is promulgated by the administrative agency to interpret, clarify or explain statutory regulations under which the administrative body operates. The purpose or objective of an interpretative rule is merely to construe the statute being administered. It purports to do no more than interpret the statute. Simply, the rule tries to say what the statute means" "The rule-making power of a public administrative body is a delegated legislative power, which it may not use either to abridge the authority given it by Congress or the Constitution or to enlarge its power beyond the scope intended. Constitutional and statutory provisions control what rules and regulations may be promulgated by such a body, as well as with respect to what fields are subject to regulation by it. Indeed, where the legislature has delegated to an executive or administrative officers and boards authority to promulgate rules to carry out an express legislative purpose, the rules of administrative officers and boards, which have the effect of extending, or which conflict with the authority-granting statute, do not represent a valid exercise of the rule-making power but constitute an attempt by an administrative body to legislate." Thus, the RRMC, being issued outside the scope of the legal authority of the Regional Director, is ultra vires, and thus, null and void. "Ultra vires acts or acts which are clearly beyond the scope of one's authority are null and void and cannot be given any effect. The doctrine of estoppel cannot operate to give effect to an act which is otherwise null and void or ultra vires." Validity of Revenue Rules and Regulations Revenue Administrative Order 01-03 SUBJECT: Amending the Provisions of Revenue Administrative Order No. 2-2001 STATEMENT OF POLICY: It is the recognized policy under this Order that the power to interpret the provisions of the Tax Code of 1997 (Tax Code) and other tax laws is under the exclusive and original jurisdiction of the CIR, subject to review by the Secretary of Finance, as provided for in Section 4 of the Tax Code. SECTION 1 Scope. This Revenue Administrative Order (RAO) shall, in general, apply to all revenue rulings and issuances of the Bureau of Internal Revenue that pertain to the implementation of the provisions of the Tax Code and other tax laws, and shall include the following: (a) Rulings of first impressions; (b) Rulings with established precedents; (c) Revenue Memorandum Rulings (RMR) (d) Revenue Bulletins (RB) (e) Revenue Travel Assignment Order (RTAO) (f) Revenue Special Order (RSO) (g) Revenue Memorandum Circular (RMC) (h) Revenue Memorandum Order (RMO) (i) Revenue Audit Memorandum Order (RAMO) (j) Revenue Delegation of Authority Order (RDAO); and (k) Revenue Administrative Order (RAO) SECTION 2 Review Power of the Secretary of Finance. In accordance with Section 4 of the Tax Code, the Secretary of Finance shall have the power to affirm, revise, modify or set aside rulings and issuances of the Bureau of the Internal Revenue concerning the implementation and application of the provisions of the Tax Code and other tax laws. SECTION 3 Classification of BIR Rulings and Issuances. The following terms shall have the meaning described below:

a.

Rulings of first impression These refer to the rulings, opinions and interpretations of the Commissioner of Internal Revenue 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 ruling filed by a taxpayer with the Bureau of Internal Revenue. Provided, however, that the term shall include reversal, modification or revocation of any existing ruling. Rulings with established precedents These refer to mere reiteration of previous rulings, opinions and interpretations of the Commissioner, as delegated to duly authorized internal revenue officers (i.e., Deputy Commissioner, Legal and Inspection Group; Assistant Commissioner, Legal Service; Regional Directors) that are issued in response to a specific request for ruling filed by a taxpayer with the Bureau of Internal Revenue. Revenue Memorandum Rulings (RMR) These refer to the rulings, opinions and interpretations of the Commissioner of Internal Revenue with respect to the provisions of the Tax Code and other tax laws, as applied to a specific set of facts, with or without established precedents, and which the Commissioner may issue from time to time for the purpose of providing taxpayers guidance on the tax consequences in specific situations. Revenue Bulletins (RB) These refer to periodic issuances, notices and official announcements of the Commissioner of Internal Revenue that consolidate the Bureau of Internal Revenue's position on certain specific issues of law or administration in relation to the provisions of the Tax Code, relevant tax laws and other issuances for the guidance of the public. Revenue Travel Assignment Orders (RTAO) These orders assign revenue personnel to specific functions in specific units. Travel assignment orders specifically mention the names of revenue personnel concerned. Revenue Special Orders (RSO) Instructions or directives for the accomplishment of special assignments or missions of significance which are temporary in nature or for a definite period of time. These issuances specifically mention the personnel or units of organization concerned. Revenue Memorandum Circulars (RMC) These issuances shall disseminate and embody pertinent and applicable portions, as well as amplifications of the rules, precedents, laws, regulations, opinions and other orders and directives issued by or administered by the Commissioner of Internal Revenue, and by offices and agencies other than the Bureau of Internal Revenue, for the

b.

c.

d.

e.

f.

g.

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information, guidance or compliance of revenue personnel. Commissioner vs. Seagate Technology (2005) The BIR regulations additionally requiring an approved prior application for effective zero rating cannot prevail over the clear VAT nature of respondents transactions. The scope of such regulations is not within the statutory authority xxx granted by the legislature. First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot purport to do any more than interpret the latter. The courts will not countenance one that overrides the statute it seeks to apply and implement. Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under our VAT law requires an additional application to be made for such taxpayers transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not and cannot become exempt simply because an application therefore was not made or, if made, was denied. To allow the additional requirement is to give unfettered discretion to those officials or agents who, without fluid consideration, are bent on denying a valid application. Moreover, the State can never be estopped by the omissions, mistakes or errors of its officials or agents. Second, grantia argumenti that such an application is required by law, there is still the presumption of regularity in the performance of official duty. Respondents registration carries with it the presumption that, in the absence of contradictory evidence, an application for effective zero rating was also filed and approval thereof given. Besides, it is also presumed that the law has been obeyed by both the administrative officials and the applicant. Third, even though such an application was not made, all the special laws we have tackled exempt respondent not only from internal revenue laws but also from the regulations issued pursuant thereto. Leniency in the implementation of the VAT in ecozones is an imperative, precisely to spur economic growth in the country and attain global competitiveness as envisioned in those laws. A VAT-registered status, as well as compliance with the invoicing requirements, is sufficient for the effective zero rating of the transactions of a taxpayer. The nature of its business and transactions can easily be perused from, as already clearly indicated in, its VAT registration papers and photocopied documents attached thereto. Hence, its transactions cannot be exempted by its mere failure to apply for their effective zero rating. Otherwise, their VAT exemption would be determined, not by their nature, but by the taxpayers negligence -- a result not at all contemplated. Administrative convenience cannot thwart legislative mandate. Effectivity or Revenue Rules and Regulations Revenue Memo Circular 20-86 SUBJECT: Notice, publication and effectivity of internal revenue tax rules and regulations. It has been observed that one of the problem areas bearing on compliance with internal revenue tax rules and regulations is lack or insufficiency of due notice to the taxpaying public. Unless there is due notice, due compliance therewith may not be reasonably expected. And most importantly, their strict enforcement could possibly suffer from legal infirmity in the light of the Constitutional provision on "due process of law" and the essence of the Civil Code provision concerning effectivity of laws, whereby

h.

Revenue Memorandum Orders (RMO) These are directives or instructions outlining procedures, techniques, methods, processes, operations, activities, work flow, and the like, which are necessary to carry out programs or to achieve policy goals and objectives. These issuances may be of general or of limited scope yet in any case require definite compliance by those concerned. They are not addressed to any particular group of employees or offices because they are for general information, but those directly concerned with the compliance of these provisions are either definitely stated, or unmistakably implied thereat. Revenue Audit Memorandum Orders (RAMO) These refer to the uniform audit procedures to observed by revenue officers in the conduct audit of tax cases and in their submission reports of investigation. be of of

i.

j. k.

Revenue Delegation of Authority Orders (RDAO) These refer to the functions delegated by the Commissioner to revenue officers in accordance with law. Revenue Administrative Orders (RAO) These refer to matters that deal strictly with more or less permanent administrative set-up of the Bureau. Delineation of organizational structures, statements of functions and/or responsibilities, definitions and delegations of authority, staffing and personnel requirements, standards of performance, establishment of Bureau-wide programs, installation of systems, and the like, are most likely subject matter of Revenue Administrative Orders. These issuances are for general guidance, compliance and/or information.

SECTION 4 Validity of Rulings and Issuances. All rulings and issuances of the Commissioner of Internal Revenue that pertain to the implementation and interpretation of the Tax Code and other tax laws are valid, unless revoked, reversed, modified, or superseded by the Secretary of Finance pursuant to Department Order No. 23-01. Tan vs. Del Rosario (1994) Sec 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now so modified by RA 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their non-compensation income. Commissioner vs. CA (1995) The authority of the Minister of Finance, in conjunction with the Commissioner of Internal Revenue, to promulgate all needful rules and regulations for the effective enforcement of internal revenue laws cannot be controverted. xxx Much more fundamental than either of the above, however, is that all such issuances must not override, but must remain consistent and in harmony with, the law they seek to apply and implement. Administrative rules and regulations are intended to carry out, neither to supplant nor modify, the law.

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due notice is a basic requirement (Sec. 1, ART. IV, Constitution; ART. 2, New Civil Code). In order that there shall be a just enforcement of rules and regulations, in conformity with the said basic element of due process, the following procedures are hereby prescribed for the drafting, issuance and implementation of the said Revenue Tax Issuances: 1. This circular shall apply only to (a) Revenue Regulations; (b) Revenue Audit Memorandum Orders; and (c) Revenue Memorandum Circulars and Revenue Memorandum Orders bearing on internal revenue tax rules and regulations. 2. Except when the law otherwise expressly provides, the aforesaid internal revenue tax issuances shall not begin to be operative until after due notice thereof may be fairly presumed. Due notice of the said issuances may be fairly presumed only after the following procedures have been taken: 2.1 The Records Division of the National Office shall furnish, thru registered mail, all of the following business and professional organizations with the corresponding revenue tax issuance: a. Philippine Institute of Certified Public Accountants; b. Integrated Bar of the Philippines; c. Philippine Chamber of Commerce and Industry; d. American Chamber of Commerce; e. Federation of Filipino-Chinese Chamber of Commerce and Industry; and f. The Japanese Chamber of Commerce & Industry of the Philippines, Inc. 2.2 The provisions of paragraph 2.1 shall not be deemed an exclusion of other person or persons who may request for a copy of the corresponding revenue issuance from the Bureau of Internal Revenue. 2.3 The Bureau shall issue a press release about the new revenue issuance in any newspaper or newspapers of general circulation. The press release shall cover the highlights or features thereof. 2.4 Effectivity date for enforcement of the new revenue issuance shall take place thirty (30) days from the date the revenue issuance has been sent thru registered mail to the organizations enumerated under paragraph 2.1 hereof. 3. Procedures for dating of revenue tax issuances. - Per ANNEX "A" hereof, the revenue issuance shall be dated as follows: 3.1 The following information shall be shown at the upper left hand portion, first page, of the revenue issuance: a. Date drafted b. Date signed by Commissioner 3.2 The Records Division shall indicate in the upper right hand portion, first page, or the revenue issuance the effectivity date thereof which shall be thirty (30) days from the date copies of the issuance have been sent to the organizations enumerated under paragraph 2.1 hereof. Before sending copies of the revenue issuance, the Records Division shall already indicate its effectivity date in the manner and form as shown in ANNEX "A" hereof. 4. Proof of (a) mailing of the revenue issuance to the organizations enumerated under paragraph 2.1 hereof, and (b) copy of the required press release, shall be attached to the original copy of the revenue issuance, which shall be filed by the Records Division for future reference. Strict compliance with the foregoing procedures is enjoined.

5.

Effectivity and Validity of Tax Ordinance Sec 187, LGC Procedure for Approval and Effectivity of Tax Ordinances and Revenue Measures; Mandatory Public Hearings - The procedure for approval of local tax ordinances and revenue measures shall be in accordance with the provisions of this Code: Provided, That public hearings shall be conducted for the purpose prior to the enactment thereof: Provided further, That any question on the constitutionality or legality of tax ordinances or revenue measures may be raised on appeal within thirty (30) days from the effectivity thereof to the Secretary of Justice who shall render a decision within sixty (60) days from the date of receipt of the appeal: Provided, however, That such appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of the tax, fee, or charge levied therein: Provided, finally, That within thirty (30) days after receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction. Sec 188, LGC Publication of Tax Ordinance and Revenue Measures Within 10 days after their approval, certified true copies of all provincial, city, and municipal tax ordinances or revenue measures shall be published in full for 3 consecutive days in a newspaper of local circulation; Provided, however, That in provinces, cities and municipalities where there are no newspapers of local circulation, the same may be posted in at least 2 conspicuous and publicly accessible places. Tuzon vs. CA (1992) If it is to be considered a tax ordinance, then it must be shown to be enacted in accordance with the requirements of the Local Tax Code. These would include the holding of a public hearing on the measure and its subsequent approval by the Secretary of Finance, in addition to the usual requisites for publication of ordinances in general. Hagonoy Market Vendor Association vs. Municipality of Hagonoy (2002)

c.
d.

Date signed by Minister of Finance (for Revenue Regulations only) Date sent to organizations enumerated under par. 2.1 of RMC No. 20-86.

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An appeal of a tax ordinance or revenue measure should be made to the Secretary of Justice within 30 days from the effectivity of the ordinance and even during its pendency, the effectivity of the assailed ordinance shall not be suspended. Public hearings are conducted by legislative bodies to allow interested parties to ventilate their views on a proposed law or ordinance. These views, however, are not binding on the legislative body and it is not compelled by law to adopt the same. Sanggunian members are elected by the people to make laws that will promote the general interests of their constituents. They are mandated to use their discretion and best judgments in serving the people. Parties who participate in public hearings too give their opinions on proposed ordinance should not expect that their views would be patronized by their lawmakers. Jardine Davies Insurance vs. Aliposa (2003) The Court agrees with petitioner that as a general precept, a taxpayer may file a complaint assailing the validity of the ordinance and praying for a refund of its perceived overpayments without first filing a protest to the payment of taxes due under the ordinance. xxx Hence, if a taxpayer disputes the reasonableness of an increase in a real estate tax assessment, he is required to first pay the tax under protest. Otherwise, the city or municipal treasurer will not act on his protest. In the case at bench, however, the petitioners are questioning the very authority and power of the assessor, acting solely and independently, to impose the assessment and of the treasurer to collect the tax. These are not questions merely of amounts of the increase in the tax but attacks on the very validity of any increase. However, the Court agrees with the contention of respondents that petitioner was proscribed from filing its complaint with the RTC of Makati for the reason that petitioner failed to appeal to the Secretary of Justice within 30 days from the effectivity date of the ordinance as mandated by Section 187 of the Local Government Code. In Reyes v. Court of Appeals, we ruled that failure of a taxpayer to interpose the requisite appeal to the Secretary of Justice is fatal to its complaint for a refund. B. INTERPRETATION / APPLICATION OF TAX LAWS 1. NATURE
OF

But the law-making authority has spoken and the Court cannot refuse to apply the law-makers words. Whether or not the government can afford the drop in tax revenues resulting from such increased exemptions was for Congress (not for this Court) to decide. Commissioner vs. Solidbank Corp. (2003) While courts will not enlarge by construction the governments power of taxation, neither will they place upon tax laws so loose a construction as to permit evasions, merely on the basis of fanciful and insubstantial distinctions. When the legislature imposes a tax on income and another on business, the imposition must be respected. The Tax Code should be so construed, if need be, as to avoid empty declarations or possibilities of crafty tax evasion schemes. A taxing act will be construed, and the intent and meaning of the legislature ascertained, from its language. Its clarity and implied intent must exist to uphold the taxes as against a taxpayer in whose favor doubts will be resolved. No such doubts exist with respect to the Tax Code, because the income and percentage taxes we have cited earlier have been imposed in clear and express language for that purpose. This Court has steadfastly adhered to the doctrine that its first and fundamental duty is the application of the law according to its express terms -- construction and interpretation being called for only when such literal application is impossible or inadequate without them A literal application of any part of a statute is to be rejected if it will operate unjustly, lead to absurd results, or contradict the evident meaning of the statute taken as a whole. [S]tatutes should receive a sensible construction, such as will give effect to the legislative intention and so as to avoid an unjust or an absurd conclusion. While it is true that the contemporaneous construction placed upon a statute by executive officers whose duty is to enforce it should be given great weight by the courts, still if such construction is so erroneous, x x x the same must be declared as null and void. Rule When There Is Doubt Taxes, being burdens, are not to be presumed beyond what the statute expressly and clearly declares. Collector vs. La Tondena (1962) In every case of doubt, tax statutes are construed most strongly against the government and in favor of the citizens, because burdens are not to be imposed beyond what the statutes expressly and clearly import. Provisions Granting Tax Exemptions Strictly construed against the exemption 3. APPLICATION AND THE EFFECTS
OF OF

INTERNAL REVENUE LAWS

Hilado vs. Collector (1956) It is well-known that our internal revenue laws are not political in nature and as such were continued in force during the period of enemy occupation and in effect were actually enforced by the occupation government. Such tax laws are deemed to be the laws of the occupied territory and not of the occupying enemy. 2. CONSTRUCTION
OF

taxpayer

seeking

TAX LAWS

Rule When Legislative Intent is Clear Lorenzo vs. Posadas (1937) Retroactive effect of tax statute is allowed if the intent is perfectly clear generally, revenue laws which imposes taxes collected by the means ordinarily resorted to for the collection of taxes are not classed as penal laws (in this jurisdiction) Umali vs. Estanislao

TAX LAWS / REVENUE REGULATIONS / RULINGS REPEAL

Application of Tax Laws Art 2, CC Laws shall take effect after fifteen days following the completion of their publication in the Official Gazette, unless it is otherwise provided. This Code shall take effect one year after such publication.

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Umali vs. Estanislao Accordingly, the Court rules that RA 7167 took effect on 30 January 1992, which is after 15 days following its publication on 14 January 1992 in the Malaya. Application of Revenue Regulations / Rulings Sec 246, NIRC Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner 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 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. Commissioner vs. CA (1996) When an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance for it gives no real consequence more than what the law itself has already prescribed. When, on the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law. Commissioner vs. Telefunken (1995) Under Sec 246, NIRC, rulings of the BIR may not be given retroactive effect, if the same is prejudicial to the taxpayer. Commissioner vs. Michel Lhuillier Pawnshop (2003) RMO No. 15-91 and RMC No. 43-91 were issued in accordance with the power of the CIR to make rulings and opinions in connection with the implementation of internal revenue laws, which was bestowed by then Section 245 of the NIRC of 1977, as amended by E.O. No. 273. Such power of the CIR cannot be controverted. However, the CIR cannot, in the exercise of such power, issue administrative rulings or circulars not consistent with the law sought to be applied. Indeed, administrative issuances must not override, supplant or modify the law, but must remain consistent with the law they intend to carry out. Only Congress can repeal or amend the law. Commissioner vs. Benguet Corporation The retroactive application of VAT Ruling No. 008-92 unilaterally forfeited or withdrew this option (of passing the VAT liability to the CB) of respondent. The adverse effect is that respondent became the unexpected and unwilling debtor to the BIR of the amount equivalent to the total VAT cost of its product, a liability it previously could have recovered from the BIR in a zerorated scenario or at least passed on to the Central Bank had it known it would have been taxed at a 10% rate. Before, it was entitled to tax refunds or credits based on BIRs own issuances. Then suddenly, it found itself instead being made to pay deficiency taxes with petitioners retroactive change in the VAT categorization of respondents transactions with the Central Bank. This is the sort of unjust treatment of a taxpayer which the law in Sec. 246 of the NIRC abhors and forbids. 4. MANDATORY
AND

DIRECTORY PROVISIONS

OF

TAX LAWS

Roxas vs. Rafferty GENERAL RULE: that those provisions of a statute relating to the assessment of taxes, which are intended for the security of the citizen, or to insure the equality of taxation, or for certainty as to the nature and amount of each person's tax, are MANDATORY; EXCEPTIONS: those designed merely for the information or direction of officers or to secure methodical and systematic modes of proceedings are merely directory. When the regulations prescribed are intended for the protection of the citizen and to prevent a sacrifice of his property, and by a disregard of which his right might be, and generally would be, injuriously affected, they are not directory but mandatory." Sometimes statutes requiring the assessor to notify the taxpayer have been held merely directory. In the majority of jurisdictions this requirement is held to be mandatory, so that the assessor cannot make a valid assessment unless he has given proper notice. Pecson vs. CA For this misfortune that befell petitioner, he has nobody to blame but himself. As a property owner and a school teacher at that, he should know that if an owner fails to pay the real estate taxes on property, the said property shall be sold at public auction to recover the delinquent taxes. When petitioner's property was sold at a public auction in December 1980, the tax delinquency must have accumulated for several years. It was only on July 12, 1982 that the order for consolidation of title in the name of respondent Nepomuceno was issued and it was only on December 8, 1983 that the title over the property was transferred to respondents Tan and Nuguid. All throughout these years, petitioner never displayed an interest in paying the real estate taxes on the property. Worse, he introduced improvements thereon without reporting the same for tax purposes. BIR Ruling DA-121-01 July 18, 2001 ATTENTION : Mr. Vicente G. Ramos President & Gen. Manager Gentlemen: This refers to your letter dated November 15, 2000 (Ref. # 264/00/OP) requesting for a ruling on whether or not the examination of your 1997 books of accounts may still be pursued after the lapse of 120 days from its receipt by the revenue officer assigned and failure of revalidation within the same period. It is stated in your letter that last October 30, 1998, Revenue Region No. 8 issued Letter of Authority No. 000015124 authorizing Revenue Officers Emerita Tan and Socrates Regala to examine your books of accounts for the verification of your internal revenue taxes for the year ended December 31, 1997; that you have submitted to RO Tan the schedules she requested on January 15, 1999; that from that date up to September 15, 2000, ROs Tan &

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Regala have not done any examination nor have they presented to you a revalidated LOA (within 120 days); that last September 15, 2000 you received a Second Request for the Presentation of Records; that you immediately replied by sending a letter to the Office of the Regional Director on September 25, 2000 informing that office that you have already sent to RO Tan all the requested schedules; that on September 26, 2000, RO Tan called up to say that the letter that should have been sent was the Notice of Start of Examination and not the Second Request for Presentation of Records and, thus, she asked you if she could start her audit on October 2, 2000; that you requested her to reschedule her visit to October 10, 2000; that in the meantime last October 5, 2000 your Finance Manager attended a tax seminar wherein he learned that an examiner is given 120 days within which to complete the examination and if it cannot be completed within the said period, a revalidated LOA should be served; that when RO Tan came to your office on October 13, 2000 you told her that the LOA is no longer valid because she failed to complete her examination within 120 days and failed to present a revalidated LOA; that RO Tan told you that she has a revalidated LOA which you did not receive on the ground that the 120 days have lapsed; that on November 10, 2000, RO Tan came and presented a Final Notice and informed you that according to RDO Rosemarie RamosRagasa, the LOA is still valid; that you in turn asked her to present a written instruction that the LOA is still valid. Hence, this request. In reply, please be informed that Revenue Memorandum Order No. 12-98, implementing the Audit Work Plan for the taxable years 1996 and 1997, provides that the reports of investigation shall be submitted within 120 days from the date of receipt of the LOA by the examiner (Sec. III [B] 3). No LOA shall be revalidated without an attached progress report from the Revenue Officer/s conducting the audit duly noted by the Group Supervisors. Only one time revalidation of LOAs shall be allowed (Sec. III [B] 4). It will be noted that nowhere from said RMO, or other internal revenue issuances on audit programs and policies, is it mentioned that the lapse of 120 days from the date the revenue examiner received the LOA and the failure of the said examiner to secure a revalidation within the said 120day period will give rise to taxpayer's immunity from audit for that particular period. The requirement is merely directory and is intended to enhance efficiency while at the same time ensure quality audit. It does not in any way affect the right of the government to issue assessment notices for deficiency taxes within the period/s set by law. Thus, at any time within the regular three-year prescriptive period for issuing assessment notices under Section 203 of the Tax Code, the Commissioner or his duly authorized representative, in this case the Regional Director, may still issue an order revalidating LOA No. 000015124. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue

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Part II. Income Taxation


b.

I. What Is Income Tax


A. NATURE OF INCOME TAX / OBJECT / SUBJECT OF THE TAX c.

Income tax is a DIRECT TAX because the tax burden is borne by the income recipient upon whom the tax is imposed. It is a tax demanded from the very person who, it is intended or desired, should pay it, while indirect tax is a tax demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else. Income tax is a PROGRESSIVE TAX since the tax base increases as the tax rate increases. It is founded on the ability to pay principle and is consistent with the Constitutional provision that Congress shall evolve a progressive tax system. Income tax is generally regarded as an EXCISE TAX (privilege tax) and not a tax on persons, property, funds or profits. It is really a tax on the right to earn income by an individual or entity for government needs

accounts receivable, property exhaustion, and accounts payable for expenses incurred. Gross income, meaning income (in the broad sense) less income which is by statutory provision or otherwise exempt from tax imposed by law. Net income, meaning gross income less statutory deductions. The statutory deductions are, in general, though not exclusively, expenditures other than capital expenditures, other than a corporation as defined in Sec 84(b) (now Sec 20(b) of the Tax Code, net income less exemptions). Ordinarily the net income is to be computed in accordance with the method of accounting regularly employed in keeping the books of the taxpayer.

Conwi vs. CTA Income may be 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. Income can also be thought of as a flow of the fruits of ones labor. Commissioner vs. BOAC The definition of income is broad and comprehensive to include proceeds from sales of transport documents. The words income from any source whatsoever discloses a legislative policy to include all income not expressly exempted within a class of taxable income under our laws. Income means cash received or its equivalent. It is the amount of money coming from a person within a specified time. It means something distinct from principal or capital. For, while capital is a fund, income is the flow. As used in our income tax law, income refers to the flow of wealth Magdrigal vs. Rafferty 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 income. Capital is wealth, while income is the service of wealth. The Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains." B. SOURCES OF INCOME 1. CAPITAL / LABOR / EXCHANGE
OF

B. PURPOSES OF INCOME TAX: FISCAL / NON-FISCAL The imposition of income tax is intended to:

1. 2. 3.

Raise revenue government;

to

defray

the

expenses

of

the

Offset regressive sales and consumption taxes; and together with estate tax Mitigate the evils arising from the inequalities of wealth by a progressive scheme of taxation which places the burden on those best able to pay.

II. Meaning of Income / Sources / Kinds


A. DEFINITION OF INCOME / DIFFERENTIATED FROM CAPITAL Income Tax defined as a tax on all yearly profits arising from property, professions, trades or offices, or as tax on a persons income, emoluments, profits and the like. Income tax is a tax on the net income or the entire income realized in one taxable year. It is levied upon corporate or individual incomes in excess of specified amounts, less certain deductions and/or specified exceptions in cases permitted by law. RR 2 Sec 36 MEANING OF NET INCOME The tax imposed by law is upon income. In the computation of the tax, various classes of income must be considered: a. Income, in the broad sense, meaning all wealth which flows into the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains and profits, including gains derived from the sale or other disposition of capital assets. Income cannot be determined merely by reckoning cash receipts, for the statute recognizes as income determining factor other items, among which are inventories,

CAPITAL

Capital for tax purposes, there are 3 general types of capital 1. Shares of stock of a domestic corporation 2. Real property of individuals or land/buildings of corporations 3. Other types of assets including shares of stock of foreign corporations Labor in general means all remuneration for services performed by an employee for his employer under an employer-employee relationship

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Exchange of capital income of a taxpayer which generally comes from the sales of goods, properties or services or capital assets practically an invitation to an investigation and Javier had literally laid his cards on the table. C. TAXABLE INCOME 1. REQUISITES FOR TAXABILITY Income, gain or profit is subject to income tax, when the following requisites are present: 1. there is income, gain or profit 2. the income, gain or profit is received or realized during the taxable year 3. the income gain or profit is not exempt from income tax 2. RECOGNITION OF INCOME FOR TAX PURPOSES NIRC Sec 43 - GENERAL RULE The taxable income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer, but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year. NIRC Sec 44 - PERIOD IN WHICH ITEMS OF GROSS INCOME INCLUDED The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under Section 43, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period. RR2 Sec 51 WHEN INCOME IS TO BE REPORTED Gains, profits, and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, and money or property is recovered on a judgment thereof in a later year, income is realized in that year, assuming that the money or property would have been income in the earliest year if then received. This is true of a recovery for patent infringement. Bad debts or accounts charged off subsequent to March 1, 1913, because of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when amounts are charged off RR2 Sec 52 INCOME CONSTRUCTIVELY RECEIVED

Commissioner vs. BOAC The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here & pmts for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, & occurred w/in, Phil. territory, enjoying the protection accorded by the Phil. government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. 2. INCOME DERIVED FROM WHATEVER SOURCE All income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income and regardless of the source of income

NIRC Sec 32 GROSS INCOME

A.

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

Eisner vs. Macomber Stock dividends are generally not subject to tax as long as there are no options in lieu of the shares of stock. On the other hand, a stock dividend constitutes income if it gives the shareholder an interest different from that which his former stockholdings represented. Helvering vs. Bruun While it is true that economic gain is not always taxable, it is settled that the realization of gain need not be in cash derived from the sale of an asset. Gain may occur as a result of exchange of property, payment of taxpayers indebtedness, relief from liability or other profit realized from a completion of a transaction. The fact that the gain is a portion of the value of property received by the taxpayer in the transaction does not negative its realization. Here, as a result of a business transaction, Bruun receives back his land with a new building on it, which added an ascertainable amount to its value. It is not necessary to the recognition of taxable gain that ha should be able to sever the improvement begetting the gain from his original capital. If that were necessary, no income could arise from the exchange of property, whereas such gain has always been recognized as realized taxable gain CIR vs. Javier We are persuaded by Javiers contention that there is no fraud in the filing of the return and agree fully with the CTAs interpretation of Javiers notation on his ITR: Taxpayer is a recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation, that it was an error or mistake of fact or law not constituting fraud. Such a notation was

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Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced in possession. To constitute receipt in such case, the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. A book entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date the mere crediting on the books of the corporation does not constitute receipt. RR2 Sec 53 EXAMPLES OF CONSTRUCTIVE RECEIPT When interest coupons have matured and are payable, but have not been cashed, such interest payment, though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year during which the coupons matured. This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted coupons are income for the year in which paid. The distributive share of the profits of a partner in a general copartnership duly registered is regarded as received by him, although not distributed. Interest credited on savings bank deposits, even though the bank nominally has a rule, seldom or never enforced, that it may require so many days notice in advance of cashing depositors checks, is income to the depositor when credited. An amount credited to the shareholders of a building and loan association, when such credit passes without restriction to the shareholder, has a taxable status as income for the year of the credit. Where the amount of such accumulations has not become available to the shareholder until the maturity of the share, the amount of any share in excess of the aggregate amount paid in by the shareholder is income for the year of the maturity of the share. Limpan vs. Commissioner There is no taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income. Substantial Alteration Of Interest Test

Flow Of Wealth Test Any economic benefit to the employee that increases his net worth, whatever may have been the mode by which it is effected, is taxable. (Economic benefit test)

3. KINDS / CLASSIFICATION OF TAXABLE INCOME OR GAIN Capital Gain NIRC Sec 39 - CAPITAL GAINS AND LOSSES

A.

Definitions. - As used in this Title -

1.

Capital Assets. - The term "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 provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer. xxx

Gain from dealing in capital assets The NIRC defines a capital asset in a negative way. The law enumerates four categories of ordinary assets; hence, all assets (even if used in trade or business) other than ordinary assets are capital assets.

Ordinary Gain Includes any income or gain from the sale or exchange of property which is not a capital asset Business Income Gains or profits derived from rendering services, selling merchandise, manufacturing products, farming and longterm construction contracts. Income From Trade / Practice Of Profession Fees derived from engaging in an endeavor requiring special training as professional as a means of livelihood, which includes, but is not limited to, the fees of CPAs, doctors, lawyers, engineers and the like, provided that there is no employer-employee relationship between him and his clients Existence of employer-employee relationship: material in determining whether the income shall be treated as compensation income or professional income

Republic vs. Dela Rama

When Is Income Realized Income is realized from the sale, exchange or other disposition of property. As a general rule, a mere increase in the value of the property is not income but merely unrealized increase in capital. For the same reason, a decrease in the value of a property is not normally allowed as a deductible loss. No income is derived nor a loss incurred by the owner until after the actual sale or other disposition of the property in the excess of its cost or adjusted basis. Tests To Determine Realization Of Income Severance Test

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No deduction income is allowed against compensation income, profits and income derived from any source whatever (whether legal or not), unless exempt under the Constitution, tax treaty or statute. For purposes of computing the MCIT, it shall include all items of income, gain or profit except income subject to final tax Net Income It means gross income less statutory deductions and exemptions Presumed Gain Where an individual or corporation sold real property in the Philippines held as a capital asset, the law presumes that there is a capital gain realized and the CGT is computed at 6% of the selling price or FMV at the time of sale, whichever is higher. Any gain or loss on the sale is immaterial because there is a conclusive presumption by law that the sale resulted in a gain (the so-called presumptive gain).

Passive Income Income in which the taxpayer merely waits for the amount to come in. It includes, but is not limited to, interest income, royalty income, dividend income, winnings and prizes. Other Forms Of Gain Example: found treasure Income Tax Base / Meaning / Kind Approaches In Income Recognition Schedular tax system different types of income are subject to different seta of graduated or flat income rates. The applicable tax rates will depend on the classification of the taxable income and the basis could be gross income or net income Separate regular ITR or CGTR, whichever is applicable is filed by the recipient of income for appropriate types of income received No ITR is filed by the recipient of passive income subject to FWT Global tax system the allowable deductions, as well as personal and additional exemptions (in case of individuals) or the total allowable deductions only (in case of corporations), are deducted from the gross income to arrive at the net taxable income subject to the graduated income tax rates (in case of individuals) or to the 2-tiered income tax rates (in case of corporations) It does not matter what type of income the taxpayer received. All items are reported in one ITR and one set of rates are applied on the tax base Semi-global or semi-schedular tax system the compensation income, business or professional income, capital gain and passive income not subject to final tax, and other income are added together to arrive at a gross income, and after deducting the sum of allowable deductions, as well as exemptions, the taxable income is subjected to one set of graduated tax rates (if individual) or normal corporate income tax rates (if corporation). With respect to the above incomes, the computation is global. However, passive investment income subject to final tax and capital gains from sale or transfer of shares of stock of a domestic corporation and real properties remain subject to different sets of tax rates and covered by different tax returns. The scheduler approach thus applies to capital gains and passive income subject to final tax at preferential tax rates Tan vs. Del Rosario What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly shift the income tax system towards schedular approach in the income taxation of individual taxpayers and to maintain, by and large, the present global treatment on taxable corporations. We certainly do not view this classification as arbitrary or inappropriate. Bases Of Income Tax Gross Income / Receipts It means income, gain, or profit subject to tax. It includes compensation for personal services, business

NIRC Sec 24 INCOME TAX RATES xxx

D.

Capital Gains from Sale of Real Property.

1.

In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer. Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned:

2.

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Provided, still further, That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon. 4. CLASSIFICATION
OF

Domestic Depositary Bank (Foreign Currency Deposit Units) Resident carriers international

Offshore Banking Units Resident Depositary Bank (Foreign Currency Deposit Units) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies Non-resident cinematographic film owners, lessors or distributors Non-resident owners or lessors of vessels chartered by Philippine nationals Non-resident lessors of aircraft, machinery and other equipment

TAXPAYERS

NIRC Sec 22 DEFINITIONS When used in this Title: xxx

N.

The term "taxpayer" means any person subject to tax imposed by this Title.

Primary Classificatio n Citizens of the Philippines

Sub-Classification(s) Residents of the Philippines (net/worldwide) Not Residents of the Philippines (net/within) Residents of the Philippines (net/within) Engaged in Trade or Business in the Philippines Not (net/within) Residents of the Not Engaged in Trade Philippines or Business in the Philippines (gross/within) Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies Individual Employed by Offshore Banking Units Individual Employed by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines

Individual Citizens 1. Resident (Net / Worldwide) A citizen is deemed a resident of the Philippines and thus subject to income tax on his worldwide income unless he qualifies as a non-resident under NIRC Sec 22 (E) Non Resident (Net / Within) NIRC Sec 22 DEFINITIONS When used in this Title:

Aliens

Individuals

2.

Special Classes of Individuals

E.

The term "nonresident citizen" means:

1. A

citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein.

Estates and Trusts Corporations

Treated as individual taxpayer Domestic Corporations (net/worldwide) Foreign Corporations Special Classes of Corporations Resident Corporations (net/within) Non-resident Corporations (gross/within) Proprietary educational institutions and non-profit hospitals

2. A 3. A

citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.

4. A

citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time

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during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.

C.

The term "domestic", when applied to a corporation, means created or organized in the Philippines or under its laws.

Foreign NIRC Sec 22 DEFINITIONS When used in this Title:

5. The

taxpayer shall submit proof to the Commissioner 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 for purpose of this Section. 3. OFW (Net / Within) Taxed only on income from sources within the Philippines

D.
1.

The term "foreign", when applied to a corporation, means a corporation which is not domestic. Resident Doing Business (Net / Within) NIRC Sec 22 DEFINITIONS When used in this Title:

H.
2.

The term "resident foreign corporation" applies to a foreign corporation engaged in trade or business within the Philippines. Non - Resident NIRC Sec 22 DEFINITIONS When used in this Title:

Alien 1. Resident (Net / Within) NIRC Sec 22 DEFINITIONS When used in this Title:

F.
2.

I.The

The term "resident alien" means an individual whose residence is within the Philippines and who is not a citizen thereof. Non Resident Engaged In Trade Or Business (Net / Within) NIRC Sec 22 DEFINITIONS When used in this Title: The term "nonresident alien" means an individual whose residence is not within the Philippines and who is not a citizen thereof. Non Resident Not Engaged In Trade Or Business (Gross / Within)

term nonresident foreign corporation applies to a foreign corporation not engaged in trade or business within the Philippines. Estates and Trusts Treated as individual taxpayer 5. ACCOUNTING PERIODS AND METHODS INCOME AND DEDUCTIBLE EXPENSES Calendar Year / Fiscal Year NIRC Sec 22 DEFINITIONS When used in this Title:
OF

ACCOUNTING FOR TAXABLE

G.

3.

P.

Corporations NIRC Sec 22 DEFINITIONS When used in this Title:

B.

The term "corporation" shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. "General professional partnerships" are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.

The term "taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this Title. 'Taxable year' includes, in the case of a return made for a fractional part of a year under the provisions of this Title or under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the commissioner, the period for which such return is made. The term "fiscal year" means an accounting period of twelve (12) months ending on the last day of any month other than December.

Q.

Domestic (Net / Worldwide) NIRC Sec 22 DEFINITIONS When used in this Title:

NIRC Sec 43 - GENERAL RULE The taxable income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer, but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no

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annual accounting period, or does not keep books, or if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year. NIRC Sec 44 - PERIOD IN WHICH ITEMS OF GROSS INCOME INCLUDED The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under Section 43, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period. NIRC Sec 45 - PERIOD FOR WHICH DEDUCTIONS AND CREDITS TAKEN The deductions provided for in this Title shall be taken for the taxable year in which "paid or accrued" or "paid or incurred", dependent upon the method of accounting the basis of which the net income is computed, unless in order to clearly reflect the income, the deductions should be taken as of a different period. In the case of the death of a taxpayer, there shall be allowed as deductions for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly allowable in respect of such period or a prior period. NIRC Sec 46 - CHANGE OF ACCOUNTING PERIOD If a taxpayer, other than an individual, changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of Section 47. NIRC Sec 47 - FINAL OR ADJUSTMENT RETURNS FOR A PERIOD OF LESS THAN TWELVE (12) MONTHS where a separate final or adjustment return is required or permitted by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, to be made for a fractional part of a year, then the income shall be computed on the basis of the period for which separate final or adjustment return is made. Taxable income of taxpayer is figured on the basis of his annual accounting period. An annual accounting period or taxable year consists of 12 months which could be a calendar year or a fiscal year ITRs, whether for individuals or corporations, are required to be made and their income computed for each calendar year ending on December 31 of every year Corporations, associations and partnerships may, with the approval of CIR, secure, file and compute their income on the basis of a fiscal year

RR2 Sec 51 WHEN INCOME IS TO BE REPORTED Gains, profits, and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, and money or property is recovered on a judgment thereof in a later year, income is realized in that year, assuming that the money or property would have been income in the earliest year if then received. This is true of a recovery for patent infringement. Bad debts or accounts charged off subsequent to March 1, 1913, because of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when amounts are charged off RR2 Sec 52 INCOME CONSTRUCTIVELY RECEIVED Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced in possession. To constitute receipt in such case, the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. A book entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date the mere crediting on the books of the corporation does not constitute receipt. RR2 Sec 53 EXAMPLES OF CONSTRUCTIVE RECEIPT When interest coupons have matured and are payable, but have not been cashed, such interest payment, though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year during which the coupons matured. This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted coupons are

A.

Returns for Short Period Resulting from Change of Accounting Period. - If a taxpayer, other than an individual, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year, a separate final or adjustment return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate final or adjustment return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final or adjustment return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year. Income Computed on Basis of Short Period. Where a separate final or adjustment return is made under Subsection (A) on account of a change in the accounting period, and in all other cases

B.

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income for the year in which paid. The distributive share of the profits of a partner in a general copartnership duly registered is regarded as received by him, although not distributed. Interest credited on savings bank deposits, even though the bank nominally has a rule, seldom or never enforced, that it may require so many days notice in advance of cashing depositors checks, is income to the depositor when credited. An amount credited to the shareholders of a building and loan association, when such credit passes without restriction to the shareholder, has a taxable status as income for the year of the credit. Where the amount of such accumulations has not become available to the shareholder until the maturity of the share, the amount of any share in excess of the aggregate amount paid in by the shareholder is income for the year of the maturity of the share. RR2 166 - 172 How income situations: is recognized under the following NIRC Sec 49 - INSTALLMENT BASIS

A.

Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed, bears to the total contract price. Sales of Realty and Casual Sales of Personality. In the case (1) of a casual sale or other casual disposition of personal property (other than 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), for a price exceeding One thousand pesos (P1,000), or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed twenty-five percent (25%) of the selling price, the income may, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be returned on the basis and in the manner above prescribed in this Section. As used in this Section, the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. Sales of Real Property Considered as Capital Asset by Individuals. - An individual who sells or disposes of real property, considered as capital asset, and is otherwise qualified to report the gain therefrom under Subsection (B) may pay the capital gains tax in installments under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of Subsection (A) elects for any taxable year to report his taxable income on the installment basis, then in computing his income for the year of change or any subsequent year, amounts actually received during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded.

B.

Long term contracts NIRC Sec 48 - ACCOUNTING FOR LONG-TERM CONTRACTS Income from long-term contracts shall be reported for tax purposes in the manner as provided in this Section. As used herein, the term 'long-term contracts' means building, installation or construction contracts covering a period in excess of one (1) year. Persons whose gross income is derived in whole or in part from such contracts shall report such income upon the basis of percentage of completion. The return should be accompanied by a return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or require an amended return. Methods in determining the percentage of completion period 1. The costs incurred under the contract as of the end of the tax year are compared with the estimated total cost to be performed 2. The work performed on the contract as of the end of the tax year is compared with the estimated work to be performed Return should be accompanied by the certificate of the architect or engineer showing the percentage completion during the taxable year of the entire work performed under the contract All expenditures should be deducted from the gross income

C.

D.

Installment Sales

NIRC Sec 50 - ALLOCATION OF INCOME AND DEDUCTIONS In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determined that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade

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or business. termination of the lease, the lessor receives additional income for the year in which the lease is so terminated to the extent that the value of such buildings or improvements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. No appreciation of value due to causes other than the premature termination of the lease shall be included. Conversely, if the building or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place the amount previously reported as an income because of the erection of such buildings or improvements, less any salvage value subject to the lease to the extent that such loss was not compensated by insurance. If the buildings or improvements destroyed were acquired prior to March 1, 1913, the deduction shall be based on the cost or the value subject to the lease to the extent that such loss was not compensated for by insurance Recording of income and expense / keeping of books RR2 175 179 Computing gross/net income Allocating income and expense Matching principle / cash method / accrual / mixed Accounting method which clearly reflects income Differences between tax accounting and financial accounting Mirant Pagbilao Corporation vs. CIR Consolidated Mines vs. CTA

Sales of Dealers in Personal Property A person who regularly sell or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received that year, which gross profit realized or to be realized when payment is complete of the total contract price.

Formula: Gross Profit Contract Price

Installment payments actually received

Income to be = reported for the year

Sales of Realty and Casual Sales of Personalty

A casual sale or other casual disposition of personal property (other than 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) for a price exceeding One thousand pesos (P1000); or a sale or other disposition of real property In either case the initial payments muse NOT exceed 25% of the selling price

'Initial payments' means the payment received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. Income Tax Treatment: Income may be return on the same basis as sales of dealers in personal property (see section A)

Sales of Real Property Considered as Capital Asset by Individuals An individual who sells or disposes of real property considered as capital asset; and is otherwise qualified to report the gain therefrom under Subsection (B) may pay the capital gains tax in installments.

Termination of Leasehold RR2 Sec 49 IMPROVEMENTS BY LESSEES When buildings are erected or improvements made by a lessee in pursuance of an agreement with the lessor, and such buildings or improvements are not subject to removal by the lessee, the lessor may at his option report the income therefrom upon either of the following bases: a. The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or improvements subject to the lease b. The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease and report as income for each of the lease an adequate part thereof If for any other reason than a bona fide purchase from the lessee by the lessor the lease is terminated, so that the lessor comes into possession or control of the property prior to the time originally fixed for the

III. Items of Gross Income and Exclusions


NIRC Sec 31 - 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. NIRC Sec 32 GROSS INCOME RR2 Sec 61 EXCLUSIONS FROM GROSS INCOME The term gross income as used in the Act does not include those items of income exempted by statute or by fundamental law. Such tax-free income should not be included in the ITR unless information regarding it is specifically called for. The exclusion of such income should not be confused with the reduction of gross income by the application of allowable deductions

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Income from whatever source derived Income tax is source blind Items of gross income not an exclusive list A. COMPENSATION FOR PERSONAL SERVICE (SALARY, WAGES, COMMISSION) 1. TAXABLE COMPENSATION INCOME Pursuant to an employer-employee relationship 3. Facilities and privileges of a relatively small value not considered as compensation subject to withholding Relatively small value Furnished as a means of promoting health, goodwill, contentment or efficiency of employees Examples: medical services, courtesy discounts on purchases De minimis benefits not subject to income as well as withholding tax, given to both rank and file and managerial employees 1. Monetized, unused vacation leave credits of private employees not exceeding 10 days during the year and the monetized value of leave credits paid to government officials and employees 2. medical cash allowance to dependents of employees not exceeding P750 per employee per semester 3. Rice subsidy of P1,000 or 1 sack of 50-kg rice per month 4. uniform and clothing allowance not exceeding P3,000 per year 5. actual yearly benefits not exceeding P10,000 per year 6. Laundry allowance not exceeding P300 per month 7. Employees achievement award which must be in the form of tangible personal property other than cash or gift certificate with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees 8. Gifts given during Christmas and major anniversary not exceeding P5,000 per employee per annum 9. Flowers, fruits, books or similar items given to employees under special circumstances, e.g. on account of illness, marriage, birth of a baby, etc. 10. Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage Amount of de minimis benefits conforming to the ceiling prescribed shall not be considered in determining the P30,000 ceiling of other benefits If employer pays in excess of the ceiling for de minimis, taxable only if in excess of P30,000 Deductible expense to employer 4. Tips and gratuities paid directly to the employee by the customer Taxable income but not subject to withholding 5. Pensions, retirement and separation pay constitute compensation 6. Fixed or variable transportation, representation and other allowances General rule: compensation subject to withholding Except if the following conditions are satisfied: For ordinary and necessary expenses paid or incurred in the pursuit of trade or business

NIRC Sec 32 - GROSS INCOME

A.

General Definition. - 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. xxx

RR2-98 Sec 2.78.1 (A) WITHHOLDING OF INCOME ON COMPENSATION INCOME Compensation means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code Designation is immaterial can be salaries, wages, etc Basis upon which the remuneration is paid is immaterial can be hourly, daily, etc Remuneration for services constitutes compensation even if er-ee relationship no longer exists at the time when payment is made Additional rules: 1. Compensation paid in kind paid in medium other than money FMV of the thing used as payment subject to withholding Services rendered at a stipulated price price is presumed to be the FMV of the services Stocks FMV of the stocks at the time service was rendered 2. Living quarters or meals value of the living quarters or meals to the person shall be added to the remuneration to determine the amount of compensation subject to withholding If for the convenience of the employer, not part of compensation

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II. Income Taxation Taxation I


Employee is required to account or liquidate the expenses in accordance with specific requirements for substantiation Excess of actual expenses over advances taxable income if amount is not returned to the employer No need to substantiate reasonable amounts of reimbursements/advances which are pre-computed on a daily basis and paid to the employee while he is on assignment RATA and ACA of government officials not taxable 7. Vacation and sick leave allowances constitutes compensation But, monetized value of utilized vacation leave credits of 10 days or less which were paid to the employee during the year is not subject to income or withholding tax the monetized value of leave credits paid to government officials and employees not subject to income tax and withholding tax Deductions made by employer from compensation of employee considered part of the employees compensation Deemed to be paid by the employee at the time deduction was made Remuneration for services as employee of a nonresident alien individual or foreign entity Included as compensation, WON alien is engaged in trade or business within the Philippines Compensation for services performed outside the Philippines treated as compensation subject to tax Gifts to company officers and employees not a deductible expense Except: for Christmas and major anniversary celebrations, sports tournaments, company picnics not to exceed one a year Provided the value shall not exceed of the basic monthly salary of the employee receiving the gift Transportation, Representation, and other allowances Compensation subject to withholding tax Excluded if: For ordinary and necessary expenses paid or incurred in the pursuit of trade or business Employee is required to account or liquidate the expenses in accordance with specific requirements for substantiation Excess of actual expenses over advances taxable income if amount is not returned to the employer Foreign traveling expenses Not included in compensation to the extent that it does not exceed the cost of a business class plane ticket or its equivalent Excess not deductible by the employer from its taxable income Foreign destination not in excess $150 per day

RAMO 1-87 GUIDELINES IN THE VERIFICATION OF HOUSING, TRAVEL, REPRESENTATION, ENTERTAINMENT AND ADVERTISING EXPENSES AND OTHER DEDUCTIONS FROM TAXABLE INCOME Housing and meals - value of the living quarters or meals to the person shall be added to the remuneration to determine the amount of compensation subject to withholding Housing excluded if: Employee is required to accept such lodging as a condition of his employment and Furnished in the employers business premises If outside business premises and employee, by reason of his position, uses the place for the benefit of the employer (entertaining guests, etc), only 50% of the allowance shall be added to compensation of employee Meals excluded if: Furnished in the employers business premises and Furnished for the convenience of the employer Furnished to the employee during his work day to have his employee available for work during his meal period Business premises of the employer place where the employee performs a significant portion of his duties or where the employer conducts a significant portion of his business Courtesy discounts not added to compensation if the value does not exceed basic monthly salary

Must be substantiated to be excluded from compensation and deductible by the employer as business expense 2 foreign conventions a year shall constitute a deductible expense and shall not constitute compensation Home leave of an expatriate deductible expense and excluded form compensation Family expenses paid by the employer may not be deducted by employer or may be deducted, in which case, will constitute compensation of the employee Maintenance and operation of company vehicle deductible not compensation But only one vehicle can be assigned to the use of any company officer or employee Representation and entertainment expenses Deductible by the employer if: Used primarily for the furtherance of employers trade or business Only to the extent allowable Substantiated Dues paid to social, athletic, etc club per officer not considered as compensation and deductible as business expense Does not include purchase of proprietary shares and expenses in the said club unless complies with the rules on substantiation Dues paid to professional or business organizations (Rotary, Lions, etc) not taxable to the employee and deductible to the employer Reimbursement for groceries, market, drugstore, department store, etc compensation subject to withholding Unless fully substantiated and incurred exclusively in the pursuit of trade or business

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II. Income Taxation Taxation I


Advertising and promotional expenses General rule: company shall decide the size and extent of ad expense To be deductible: Must be substantiated Payments for the purchase of promotional giveaways, etc must have receipts All payments for services such as radio and TV time, etc, must be subject to withholding tax

RR 1-82 Sec 7 DEFINITION OF GROSS COMPENSATION INCOME Gross compensation income is defined as income arising out of the employer-employee relationship. Generally, an employer-employee exists when the person from whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished 2. TREATMENT
OF

FRINGE BENEFITS

RR 3-98 IMPLEMENTING NIRC SEC 33 RELATIVE TO SPECIAL TREATMENT OF FRINGE BENEFITS Final withholding tax imposed on the grossed up monetary value (GMV) of the fringe benefit (FB) paid by employer to employee Except: 1. Paid to rank and file employee All employees holding neither managerial or supervisory position 2. FB is required by nature of or necessary to the business or profession of employer 3. FB is for the convenience or advantage of the employer 4. GMV of the FB whole amount of income realized by the employee

Determined by dividing the actual monetary value of the fringe benefit by 68% Valuation of FB: 1. FB granted in money value of the amount paid 2. FB granted or furnished in property -

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