LECTURE GUIDE NOTES

Atty. Lyndon A. Maceren, MBA CPA REB

Guide Notes: Taxation I

General Principles of Taxation

Taxation: An Inherent Power of the State

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

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

Power of Judicial Review in taxation – In the case of Commissioner v. Lingayen

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

The bottom line as far as judicial non-interference is concerned is this: As long as

the legislature, in imposing a tax, does not violate applicable constitutional
limitations or restrictions, the Courts have no concern with the wisdom or policy of
the exaction, the political or other collateral motives behind it, the amount to be
raised, or the persons, property, or other privileges to be taxed.

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

Taxation, Defined.

It is:

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

Nature of Taxation – Taxation is two-fold in nature:

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

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

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

2003 BAR Question: Why is the power to tax considered inherent in a

sovereign State?
It is considered inherent in a sovereign State because it is a necessary
attribute of sovereignty. Without this power, no sovereign State can exist nor
endure. The power to tax proceeds upon the theory that the existence of a
government is a necessity. The power to tax is an essential and inherent
attribute of sovereignty, belonging as a matter of right to every independent
State. No sovereign State can continue to exist without the means to pay its
expenses, and for those means, it has the right to compel all citizens and
property within its limits to contribute; hence, the emergence of the power to
tax.

It is legislative process and its scope may be the:

 discretion as to the purpose for which taxes shall be levied;
discretion as to the subject of taxation and the situs of taxation
discretion as to the amount or rate of tax; and
discretion as to the mode, method (classification) kind of tax.

The power of taxation is essentially a legislative function. The power to tax

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

CONSEQUENTLY: It is generally not delegated to executive or judicial

department

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

EXCEPT:

To local governments in respect of matters of local concern to be exercised by the local

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

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

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

Scope of the powers of the Legislature in Taxation

The legislative body has to power to choose:

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

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

Theory or Underlying Basis of Taxation

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

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

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

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

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

STATED OTHERWISE:

“Necessity theory” – taxes proceed upon the theory that the existence of
government is a necessity; that it cannot continue without the means to pay its
expenses and that for those means, it has the right to compel all citizens and
property within its limits to contribute.
“Ability to pay” theory – ability to pay the contribution or tax in proportion to
the revenue or income one is enjoying under the protection of the state.

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

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

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

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

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

Phases / Aspects of Taxation

Levying or Imposition – which is legitimate act; to levy, being an aspect of taxation

mean “an imposition or for collection of an assessment, tax, tribute or fine; Levy as a
remedial measure is the power of the BIR to attached real properties for taxpayers
who does not want to pay tax
 Collection – which is essentially administrative in nature and includes criminal
prosecution, forfeiture, etc.

Taxes, defined:

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

Elements/requisites/characteristic of valid tax

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

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

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

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

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

Basis for situs of taxation – it is based on the principle of symbiotic relationship,

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

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

Levied or collected for public purpose

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

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

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

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

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

DIFFERENTIATE Taxation from Eminent Domain and Police Power

Taxation Eminent Domain Police Power

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

Taxes distinguished from other impositions

1. Tax vs. Debt

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

2. Tax vs. Toll

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

3. Tax vs. License Fee

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

4. Tax vs. Special Assessment

Tax Special Assessment

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

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

Classification of Taxes: according to:

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

Taxes according to purpose:

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

Taxes according to subject matter:

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

Taxes According to persons burdened:

Direct tax which levied upon the very person bound to pay such as the individual income
tax;
Indirect tax which is levied upon goods before they reach the consumers and are paid
by those upon whom they ultimately fall, not as taxes but as part of the purchase price
(i.e., import dues, percentage tax, contractor’s tax, etc.)
 Taxes according to scope or authority imposing the tax
National tax which is levied upon the national government
Local tax which is imposed by the local government units.

Taxes according to determination of the amount to be paid.

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

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

Taxes as to rates of taxes to be paid

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

DOUBLE TAXATION

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

In order to constitute double taxation in the objectionable or prohibited sense, the

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

In the broad sense, double taxation means indirect duplicate taxation. It extends
to all cases in which there are two or more pecuniary impositions.
Double taxation is not specifically prohibited in the Philippine Constitution. – There
is no constitutional prohibition against double taxation in the Philippines. It is something
not favored but permissible (Pepsi Cola Bottling Co. v. City of Butuan, L-22814, 1968)
However, where there is direct duplicate taxation then there may be violation of the
constitutional precepts of equal protection and uniformity in taxation

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

Kinds of Double Taxation

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

property is taxed twice when it should be taxed only once.

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

Indirect double taxation – not legally objectionable

Example: The taxpayer’s warehousing business although carried on in relation to the

operation of its sugar central is a distinct and separate taxable business.

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

Tax deductions: vanishing deductions

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

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

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

Compania General de Tabacos de Filipinas vs. City of Manila: That Tabacalera is being
subjected to double taxation is more apparent than real. What is collected under
Ordinance No. 3358 is a license fee, while the three other ordinances impose a tax on
sales of the merchandise. Both a license fee and a tax may be imposed on the same
business or occupation, or for selling the same article. This is not being in violation of
the rule against double taxation.
San Miguel Brewery vs. City of Cebu: The tax on the sale or disposal of every bottle or
container of liquor or intoxicating beverages is a revenue measure, whereas the sum of
P600 San Miguel pays annual is for a second-class wholesale liquor license, which is a
license to engage in the business of wholesale liquor in Cebu City, and constitutes a
regulatory measure, in the exercise of police power.

TAX EXEMPTIONS

Tax Exemptions: a grant of immunity, express or implied, to particular persons or

corporations from the obligation to pay taxes. It is a freedom from a charge or burden to
which others are subject (Greenfield vs. Meer)

Kinds of Tax Exemptions

As to source

Constitutional- immunities from taxation which originate from the constitution

Statutory- those which emanate from legislation.

As to consent

Express- expressly granted by organic or statute law

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

As to extent

Total- connotes absolute immunity

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

Principles governing tax exemptions

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

Cases:

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

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

Atty. Lyndon A. Maceren, CPA

LIMITATIONS ON THE TAXING POWER

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

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

Public Purpose of taxes;

Test in Determining Public Purpose

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

Citizens Savings and Loan Association of Cleveland, Ohio v. Topeka City:

A statute which authorizes towns to issue bonds in aid of manufacturing
enterprises of individuals is void, because the taxes necessary to pay bonds
would, if collated, be a transfer of the property of individuals to aid the
projects of gain and profit of others, and not for public use

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

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

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

Art. X. Section 5, 1987 Constitution

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

Non-delegable legislative power

selection of property to be taxed

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

Territoriality or Situs of taxation: means place of taxation

Power of taxation is necessarily limited only to persons, property

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

The maxim of “mobilia sequuntur personam”: means “movables follow the person”

According to this maxim, the situs of personal property is the

domicile of the owner.

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

Intangible properties deemed with a situs in the Philippines:

Franchise which must be exercised in the Philippines

Shares, obligations or bonds issued by a corporation or sociedad anonima organized and
constituted in the Philippines in accordance with its laws;
Shares, obligations or bonds issued by a foreign corporation 85% of its business is
located in the Philippines;
Share, obligations or bonds issued by a foreign corporation if such shares, obligations
or bonds have acquired a business situs in the Philippines;
Shares or rights in any partnership, business or industry established in the Philippines
(Section 104, R.A. 8424 or the CTRP)
Tax exemption of government: as a matter of public policy, property of the State or any
of its political subdivisions devoted to government uses and purposes are generally
exempt from taxation.

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

International comity

Constitutional Limitations:

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

Requires that:

The tax must be for public purpose

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

However, it does not require:

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

When there is a clear contravention of inherent or constitutional limitations in the

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

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

Villegas vs. Hsiu Chiong Chai Po – there is a denial of due process on

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

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

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

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

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

Uniformity, Equitability, and Progressivity of Taxation: Art. VI, Section 28 (1) of the
Constitution – “The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation.”

Uniformity: means that all taxable articles or kinds of property of the same class shall
be taxed at the same rate. (Tan Kim v. CTA, L-18080, April 22, 1963) Different articles or other
subjects like transactions, business, rights, etc. may be taxed at different rates provided
that the rate (not necessarily the amount) is uniform in the same class everywhere.
A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found.
Requires that there should be no direct duplicate taxation

Requisites: for valid classification

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

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

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

Non-impairment of Contracts: Art. III, Section 10 of the Constitution 0- “No law

impairing the obligations of contracts shall be passed.”

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

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

Non-infringement of religious freedom and worship: Art. III, Section 24 of the

Constitution. – “No law shall be made respecting an establishment of religion or
prohibiting the free exercise thereof. The free exercise and enjoyment of religious
profession and worship without discrimination or preference shall forever be allowed.
No religious test shall be required for the exercise of civil or political rights.

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

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

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

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

Rev. LLado vs. Commissioner: the SC ruled that the constitutional exemption applies
only to property tax. Gifts are subject to donor’s tax
Under the CTRP, gifts made in favor of religious, charitable or educational organizations
would nevertheless qualify for donor’s gift tax exemption.
 Is proof of actual use for the tax-exempt purpose necessary?: In the case of Prov. Of
Abra vs. Hernando & Roman Catholic Archbishop of Bangued, Abra, the SC ruled that
actual use is necessary. To be exempt, the lands, buildings, and improvements must not
only be exclusively but also actually and directly used for religious and charitable
purposes. This is the difference between the present (1973) constitution and the 1935
charter which requires only that the property be exclusively used for the purposes
indicated.
“Use” overrides “Ownership” in that if property although actually owned by a religious,
charitable, or educational institution is actually used for a non-exempt purpose, the
exemption from tax of said property vanishes. HOWEVER, total or absolute use is not
required, incidental use is enough.

Voting Requirement in connection with the legislative grant of tax exemptions: Art.
VI, Section 28 (4) of the Constitution provides, “No law granting any tax exemption shall
be passed without the concurrence of a majority of all members of Congress.”

Non-impairment of the Supreme Court’s Jurisdiction in Tax Cases: The pertinent

provisions of the Constitution are: Art. VIII, Section 2(1) – The Congress shall have the
power to define, prescribed, and apportion the jurisdiction of the various court but may
not deprive the SC of its jurisdiction over cases enumerated in Sec. 5 hereof.

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

Tax exemption of revenues and assets, including grants, endowments, donations, or

contributions to educational institutions: Art. XIV, Secs. 4 (3) and (4) of the
Constitution provides: Section 4 (3): “All revenues and assets of non-stock, non-profit
educational institutions used actually directly, and exclusively for educational purposes
shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate
existence of such institutions, their assets shall be disposed of in the matter provided by
law.

“Proprietary educational institution, including those cooperatively owned

may likewise be entitled to such exemptions, subject to the limitations
provided by law, including restrictions on dividends and provisions for
reinvestments.”

Section 4(4): “Subject to the conditions prescribed by law; all grants,

endowments, donations or contributions was actually, directly, and
exclusively used for educational purposes shall be exempt from tax.”
Suppose income from tuition is invested from an unrelated purpose like placements in the
money market, is the invested income taxable? The invested income is not taxable but
the earnings realized thereon like interest on the placement is the one that is taxable.

Other provisions of the constitution which are related to taxation

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

LECTURE GUIDE NOTES – PART 2

Atty. Lyndon A. Maceren, CPA

TAX LAWS AND ADMINISTRATION

Nature of Tax Laws

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

Tax laws are not penal. Hence, the rule on the retroactive effect of penal laws under
Art. 22 of the Revised Penal Code which reads, as follows: “Penal laws shall have a
retroactive effect insofar as they favor the person guilty of a felony, who is not a habitual
criminal as defined in rule 5 of Article 62 of this Code, although at the time of the
publication of such laws a final sentence has been pronounced and the convict is serving
the same,” find no application in tax cases. As stated in Lorenzo v. Posadas, 64 Phil. 353,
revenue laws which impose taxes collected by means which are ordinarily resorted to for
the collection of taxes are not classed as penal laws and therefore cannot be given
retroactive effects.
Tax laws not being penal, the rule in the Constitution against the passage of ex post
facto laws cannot be invoked. The constitutional prohibition against the passage of ex
post facto legislation according to the Supreme Court applies only to criminal or penal
matters and not to laws which concern civil matters or proceedings generally or which
affect or regulate civil or private rights (Republic v. Oasan Vda. De Fernandez, L-9131,
1956)

Sources of Tax Laws

Statutes
Presidential Decrees
Executive Orders
Constitution
Court Decisions
Tax Codes
Revenue Regulations
Administrative issuances
BIR Rulings
Local Tax Ordinances
Tax Treaties and conventions with foreign countries

Requisites of Validity Tax Regulations

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

Publication Requirement

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

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

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

When an administrative agency renders an opinion by means of a memorandum

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

Interpretation/construction of Tax Laws

Statutes levying taxes are construed against the government

It is a well-settled rule in taxation that a statute will not be construed as imposing

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

It is a general rule in the interpretation of statutes levying taxes or duties, that in

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

Construction by statute by predecessors is not binding on the successors

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

Retroactive Application

As a rule, taxing statutes must be applied prospectively, except by express

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

The commissioner’s contention that Burroughs Ltd. Is no longer entitled to refund

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

Exceptions to Non-Retroactivity of Rulings

Revocation, modification or reversal of any rules and regulations promulgated by

the Secretary of Finance or CIR shall not have retroactive effect if it will be
prejudicial to the taxpayer, except:

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

Special Laws prevail over general laws

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

Tax laws are special laws. The Tax Code is an example of a tax law and
according to one decided case, the Tax Code is a special law and prevails over a general
law (Republic v. Santiago Gancayco, L18307, June 30, 1964)

Tax laws treat of a special subject, i.e., taxes.

 TAX ADMINISTRATION AND ENFORCEMENT

ORGANIZATION AND FUNCTION OF THE BUREAU OF INTERNAL

REVENUE

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

BIR Organizational Structure

The BIR is headed by a CIR and 4 Deputy Commissioners (Section 3, NIRC),

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

Agents in the Collection of Taxes

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

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

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

Powers and Duties of BIR

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

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

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

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

Power to interpret tax laws and to decide tax cases

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

The power to decide disputed assessments, refunds of taxes, fees or other

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

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

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

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

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

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

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

BAR:

ABC Corporation, is a big manufacturer of consumer goods and has several

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

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

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

Power to inquire into bank deposits of taxpayers

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

Section 6(F) provides that notwithstanding any contrary provisions of RA 1405

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

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

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

BAR:

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

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

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

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

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

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

X dies in year 2000 leaving a bank deposit of P2,000,000 under joint account with his
associates in a law firm. Learning of X’s death from the newspapers, the CIR wrote to
every bank in the country asking them to disclose to him the amount of deposits that
might be outstanding in his name or jointly with others at the date of his death. May the
bank holding the deposit refuse to comply on the ground of the Secrecy of Bank Deposit
Law? Explain.

No. The CIR has the authority to inquire into bank deposit accounts of a
decedent to determine his gross estate notwithstanding the provisions of the
Bank Secrecy Law. Hence, the banks holding deposits in question may not
refuse to disclose the amount of deposits on the ground of secrecy of bank
deposits (Section 6(F), NIRC). That fact that the deposit is a joint account
will not preclude the CIR from inquiring thereon because the law mandates
that if a bank has knowledge of the death of a person, who maintained a bank
deposit account alone or jointly with another, it shall not allow any
withdrawal from the said deposit account, unless the CIR has certified that the
taxes imposed thereon have been paid (Section 92, NIRC). Hence, to be able
to give the required certification, the inclusion of the deposit is imperative.

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

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

Power to assess and collect the correct amount of tax

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

Means Employed in the Assessment of Taxes

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

Atty. Lyndon A. Maceren, CPA

TAX ON INCOME

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

It is also defined as an amount of money coming to a person or corporation within

a specified time, whether as payment for services, interest or profit from investment.
Unless otherwise specified, it means cash or its equivalent. (Conwi, et al. v. CTA, 213
SCRA 83, G.R. No. 48532, August 31, 199)

For purposes of solving income taxation problems which require the

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

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

For income to be taxable, the requisites are:

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

Realization Principle. (Doctrine of Actual Receipt) Under this principle, revenue is

generally recognized when both of the following conditions are met:
the earning process is complete or actually complete
an exchange has taken place.

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

Doctrine of Constructive Receipt of Income. Income is considered constructively

received where the taxpayer has an unjustified right to receive the same but by his
own choice the income is not reduced to possession. Examples:

Then undistributed share in the profits of a partner in a general professional partnership

of a partner.
Uncollected matured interest coupons which are due and payable is income for the year
during which the coupons matured.
Credited interest collected on savings bank deposits
Dividends applied by the corporation against the indebtedness of a stockholder
Rental payments refused by the lessor, when the lessee tendered payment and the latter
made a v judicial deposit of the rental due

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

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

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

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

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

Classes of sources of income

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

Classification of income from sources within

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

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

Taxability of income

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

As regards individuals, the taxability of income depends upon:

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

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

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

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

For income to be taxable, the requisites are:

There must be gain or profit
The gain must be realized or received, actually or constructively; and
The gain must not be excluded by law or treaty from taxation
 Types of Income Taxes
Presumptive income tax where a scale of income taxes is imposed in relation to a group
of persons’ actual expenditures and the presumed income
Composite Income tax where a tax consisting of a series of separate quasi-personal
taxes, assessed on the particular source of income with a superimposed personal tax on
the income as a whole.
Unitary income tax where incomes are arranged according to source. The separate
items are added together and the rate applied to the resulting total income.

Systems of income taxation

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

Under this system, there is a unitary or single tax rate. There is no need for
classification as all taxpayers are subject to a single rate and this system is usually
applied to corporations.

Schedular system is where the income tax treatment varies and is made to depend on the
kind or category of taxable income of the taxpayer. It is a system which itemizes the
different incomes and provides for varied percentages of taxes, to be supplied thereto.

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

Basic Features of the present income tax system

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

Income taxes under the NIRC

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

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

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

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

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

Foreign Corporation – taxable only on income derived from sources WITHIN the
Philippines
Engaged in trade or business; and
Not engaged in trade or business.

Kinds of individual taxpayers as to their personal exemptions: Section 35, NIRC

Single, unmarried or
legally separated taxpayer P50,000
Head of a family P50,000
Married individuals P50,000

It is important to know the different groups of taxpayers on the kinds of individual

taxpayers in order to determine and to know the applicable tax rates, exemptions and
allowable deductions.

Kinds of Filipino Citizens for taxation purposes

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

Kinds of Aliens for taxation purposes

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

The right of a government to tax income emanates from its partnership in the
production of income, by providing the protection, resources, incentives and proper
climate for such production.

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

Statutory definition of gross income

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

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

Classes or kinds of taxable gross income

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

Advantages of gross income taxation

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

Disadvantages of gross income taxation

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

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

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

dividends
ex. Corporation A Corp B Tax Deferment rule Subj
to tax
-if domestic -domestic applies
NO
- if domestic -Res. Foreign applies
NO
-if domestic -Non-res. FC tax 35%/15%
Tax sparing
-if any combination subject to spcl rate
 interest on currency deposits
deposit substitutes,
trust funds
royalties (20%) except literary work of arts
prizes and winnings (except lotto and sweepstakes); (20% or 10% for less than 10t)

Various names of income that may be considered as compensation income. Names by

which remuneration for services are called are immaterial; however, these names are
considered compensation income:
salaries
wages
emoluments and honoraria
bonuses
allowances
commissions (e.g. transportation, representation entertainment and the like
fees, including director’s fees, if the director is at the same time an employee of the
employer/corporation
taxable bonus and fringe benefits except those which are subject to the fringe benefits
tax;
taxable pensions and retirement pay, and
other income of a similar nature

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

Kinds of tax rates

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

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

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

Taxpayers covered by taxable compensation income

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

Formula for computing taxable compensation income

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

Tax due Pxxx

Less: Withholding tax xxx

Tax Payable/ Pxxx

(Refundable) (xxx)
 What is Taxable Income?

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

What is Gross Income?

Gross income means all income derived from whatever source.

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

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

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

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

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

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

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

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

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

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

Additional Exemptions

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

The maximum amount of P 2,400 premium payments on health and/or hospitalization

insurance can be claimed if:

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

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

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

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

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

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

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

FORMULA:

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

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

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

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

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

20% discount to senior citizens treated as tax credit, not as deductible

cost. (RA 7432)

Losses

Actually sustained during the taxable year

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

EXCEPT: if claimed as a deduction for estate tax purposes

Need for proof of loss

NET OPERATING LOSS CARRY-OVER

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

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

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

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

Depletion of Oil and Gas Wells and Mines

Charitable and Other Contributions
Research and Development
Pension Trusts

Special Treatment of Fringe Benefit: Section 33, NIRC

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

Fringe Benefit, defined.

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

Optional standard deduction [Section 34 (L)]

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

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

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

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

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

“Head of a Family”

An unmarried or legally separated man or woman

With one or both parents living with and dependent upon him or her for their chief
support; and

With one or more brothers or sisters,

With one or more legitimate or illegitimate, recognized natural or legally adopted
children
Where such brothers or sisters of children are
not more than 21 years of age,
unmarried, and
not gainfully employed or
regardless of age, are incapable of support because of mental or physical defect [Last
paragraph, Section 35 (A)]

with a “senior citizen” living with him

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

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

Personal, living, or family expenses

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

LECTURE GUIDE NOTES – PART 3

Atty. Lyndon A. Maceren, CPA

 CAPITAL GAINS TAXATION

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

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

Stock in trade of the taxpayer; or

Other property of a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year; or
Property held by the taxpayer primarily for sale to customers in the ordinary course of his
trade or business; or
Property used in the trade or business, of a character which is subject to the allowance for
depreciation; or
Real property used in the trade or business of the taxpayer. [Section 39 (A.l)]

There are two (2) kinds capital gains under the NIRC
Capital gains subject to final tax
Capital gains included in the gross income for income tax purposes.

TRANSFER TAXES

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

Kinds of Transfer Taxes under the NIRC:

Estate Tax; and

Donor’s Tax

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

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

Elements of donations subject to donor’s tax

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

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

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

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

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

PROBLEMS

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

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

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

D, who is singe, maintains Z, a common-law wife. Z is legally married to W. D and Z

have four (4) children and they are living and dependent upon D for their chief support,
and the children are minors, unmarried and not gainfully employed.

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

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

E, single, resident in and citizen of the Philippines is a law practitioner. He supports

wholly his grandfather, mother, an unmarried brother 23 years old but mentally defective,
and an orphaned nephew 10 years old. Not one of these dependents is gainfully
employed.

Discuss briefly the personal and additional exemptions available to him.

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

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

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

Salary and living allowance from Alta P120,000.00

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

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

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

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

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

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

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

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

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

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

What are the requisites:

Before deductions are allowed?

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

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

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

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

Enumerate the non-deductible items from gross income

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

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

A doctor has the following items of expenditure for the taxable year:

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

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

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

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

Ricardo borrowed money from a private bank at 18% interest per annum. Ricardo used
that money to purchase government bonds earning 14% interest per annum, which
interest is exempt from taxation. Is the 18% interest paid by Ricardo deductible?
 Mr. Reynes, a gravel and sand dealer, bought the following items in 2004, for his
business:

1 Mitsubishi dump truck (directly imported)

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

1 locally assembled Nissan pick-up

Landed Cost P 350,000.00
VAT 35,000.00
Total P 385,000.00

In determining his taxable net income for 2004, Mr. Reynes deducted from his gross
income the amount of P185,000 representing the taxes indicated above. Was the
deduction proper under the National Internal Revenue Code? Explain.

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

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

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

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

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

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

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

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

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

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

In 1995, Mr. Gaviola bought a lot for P1,000,000 in a subdivision with the intention of
building his residence on it. In 2004, he abandoned his plan to build his residence on it
because the surrounding area became a depressed area and land values in the subdivision
went down; instead he sold it for P800,000.00. At the time of the sale, the zonal value
was P500,000.00.
 Is the land a capital asset or an ordinary asset? Explain.
Is there any income tax due on the sale? Explain.

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

Differentiate capital gains from ordinary gains.

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

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

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

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

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

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