Professional Documents
Culture Documents
Principles
of
carried on illegally are subject to tax if the purpose is primarily for revenue or if revenue is one of the real and substantial purposes, then the exaction is a tax (PAL vs. Edu, 1988) where a permit collected from alien job applicants is in excess of the cost of regulation, the exaction is a tax (Villegas vs. Hiu Chiong Tsai Pao Ho, 1978) however, in the case of license fees for nonuseful occupations, the exaction may be very large without necessarily being a tax (Physical Therapy vs. Municipal Board of Manila, 101 Phil 1142) three kinds of licenses licenses for regulation of useful occupations licenses for regulation or restriction of non-useful occupations or enterprises licenses for revenue only
OF THE
STATE
Taxation is the act of laying tax, i.e. the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government. It is merely a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and, therefore, must bear its burdens. (51 Am. Jur. 34) Taxation refers to the inherent power of the State to demand enforced contributions for public purposes. TAX DISTINGUISHED FROM OTHER TERMS License and Regulatory Fees Tax License Fee or for
Imposed on persons, Levied only on land property or services Personal taxpayer Based on benefit liability of the Liability is limited only to the land involved and Based wholly on benefits Exceptional both as to time and locality
necessity
Toll
Enforced contribution Legal compensation assessed by sovereign reward of an officer authority to defray public specific services expenses Levied in the exercise of Emanates from the taxing power power of the State Purpose revenue is to generate Purpose is to regulate
an exemption from taxation does not include exemption from special assessments but the power to tax carries with it the power to levy a special assessment
police
There is generally no limit The amount of exaction or on the amount of tax that charge must only be may be imposed sufficient to cover expenses of : 1. issuing the license 2. cost of necessary inspection or police surveillance Imposed also on persons Imposed on the right and property exercise a privilege to
Paid for the support of the Paid for the use of anothers government property There is generally no limit The amount of toll depends on amount of tax that may upon the cost of construction be imposed or maintenance of the public improvement used May be imposed only by the May be imposed by the government government or private individuals or entities Penalty Tax Civil liability Penalty Punishment for commission of a crime the
Failure to pay does not Failure to pay makes the act necessarily make the act or or business illegal business illegal could be a ground for criminal prosecution even businesses
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a person is criminally liable in taxation only because he fails to satisfy his civil obligation to pay taxes the violation of a tax law may give rise to imposition of penalty
Tariff / Custom Duties custom duties and fees are charged upon commodities on their being imported into or exported from a country these are taxes tax is a broader term that include not only custom duties but other taxes as well
TO
OBLIGATION
PAY TAX
VS.
OBLIGATION
TO
PAY DEBT
Art. 1279, CC In order that compensation may be proper, it is necessary: 1. That each of the obligors be bound principally and that he be at the same time a principal creditor of the other; 2. That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter ahs been stated; 3. That the two debts be due; 4. That they be liquidated and demandable; 5. That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (1196) Republic vs. Mambulao Lumber Company (1962) The general rule, based on grounds of public policy is well settled that no set off is admissible against demands for taxes levied for general or local governmental purposes. Taxes are not in the nature of contracts between the party and party but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of which, the personal consent of the individual taxpayers is not required. Philex Mining vs. CIR (1998) Taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and a debt. Debts are due to the government in its corporate capacity, while taxes are due to the government in its sovereign capacity xxx A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. xxx To be sure, we cannot allow Philex to refuse payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any taxpayer can defer the payment of taxes by raising the defense that
2.
3.
4.
5. 6.
D. THEORY AND BASIS OF TAXATION 1. NECESSITY THEORY Taxes proceed upon the theory that the existence of government is a necessity; that it cannot continue without the means to pay its expenses; and that for
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Taxation is a power that emanating from necessity. It is a necessary burden to preserve the States sovereignty (Philippine Guaranty vs. CIR, 1965)
Commissioner vs. Algue (1988) It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of ones hard-earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale for taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. NPC vs. City of Cabanatuan (2003) Taxes are the lifeblood of the government for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity, without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people. 2. BENEFIT RECEIVED PRINCIPLE The State demands and receives taxes from the subjects of taxation within its jurisdiction so that it may be enabled to carry its mandate into effect and perform the functions of government The citizen pays from his property the portion demanded in order that he may be secured in the enjoyment of the benefits of an organized society The benefits are enjoyed even by those who do not pay taxes because they are not able to
PAL vs. Edu (1988) Fees may properly be regarded as taxes even though they also serve as an instrument of regulation. Indeed, taxation may be made the implement of the states police power. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. xxx It is quite apparent that vehicle registration fees were originally simple exactions intended only for regulatory purposes in the exercise of the States police powers. Over the years, however, as vehicular traffic exploded in number and motor vehicles became absolute necessities without which modern life as we know it would stand still, Congress found the registration of vehicles a very convenient way of raising such revenues. Without changing the earlier denomination of registration payments as fees, their nature has become that of taxes. In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant to the Land Transportation and Traffic Code are actually taxes intended for additional revenues of government even if one fifth or less of the amount collected is set aside for the operating expenses of the agency administering the program. Tolentino vs. Secretary of Finance (1995) A license tax, unlike an ordinary tax, is mainly for regulation. Its imposition on the press is unconstitutional bcoz it lays a prior restraint on the exercise of its rt. Hence, although its application to others, such those selling goods, is valid, its application to the press or to religious groups, e.g. Jehovah's Witnesses, in the latter's sale of religious books & pamphlets, is unconstitutional. As the U.S. SC put it, "it is one thing to impose a tax on income or property of a preacher. It is quite another thing to exact a tax on him for delivering a sermon." The VAT is, however, diff. It is not a license tax. It is not a tax on the exercise of a privilege, much less a constitutional rt. It is imposed on the sale, barter, lease or exchange of goods or properties or the sale or exchange of services & the lease of properties purely for revenue purposes. To subj the press to its pmt is not to burden the exercise of its rt any more than to make the press pay income tax or subj it to gen regulation is not to violate its freedom under the Constitution. 2. NON-REVENUE / SPECIAL a. b.
OR
Lorenzo vs. Posadas (1937) The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to, a citizen by the government, but upon the necessity of money for the support of the state. For this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him can be pointed out. E. PURPOSE / OBJECTIVES OF TAXATION 1. GENERAL / FISCAL / REVENUE The purpose of taxation is to provide funds or property with which the State promotes the general welfare and protection of its citizens
REGULATORY
Commissioner vs. Algue (1988) It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of
Taxation also has a regulatory purpose Taxation may also be used to implement police power in order to promote the general welfare of the people
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Osmea vs. Orbos (1993) Hence, it seems clear that while the funds collected may be referred to as taxes, they are exacted in the exercise of the police power of the State. xxx Although the provision authorizing the ERB to impose additional amounts could be construed to refer to the power of taxation, it cannot be overlooked that the overriding consideration is to enable the delegate to act with expediency in carrying out the objectives of the law which are embraced by the police power of the State. Caltex vs. Commission on Audit (1992) We find no merit in the petitioners contention that the OPSF contributions are not for a public purpose because they go to a special fund of the government. Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the government; taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the State. Xxx Also, PD 1956, as amended by EO 137, explicitly provides that the source of OPSF is taxation. No amount of semantical juggleries could dim this fact. Esso Standard Eastern vs. Commissioner (1989) As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence should not form part of the exchange rate, suffice it to state that we have already held the contrary for the reason that a tax is levied to provide revenue for government operations, while the proceeds of the margin fee are applied to strengthen our countrys international reserves. F. CLASSIFICATION OF TAXES 1. AS TO SCOPE
(A)
(1)
a. b. a.
b.
National Government
tax
imposed
by
the
National
2. AS TO WHO SHOULDERS
BURDEN
OF THE
TAX
Direct Tax Tax which is demanded from the person who also shoulders the burden of the tax Indirect Tax Tax which is demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, falling finally upon the ultimate purchaser or consumer
Sec 105, NIRC Persons Liable Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to value-added tax (VAT) imposed in Sections 106 to 108 of this Code.
The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: (a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business (b) The right or the privilege to use patent, copyright, design or model, plan secret formula or process, goodwill, trademark, trade brand or other like property or right; (c) The right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment; (d) The right or the privilege to use motion picture films, films, tapes and discs; and (e) Radio, television, satellite transmission and cable television time. The term 'gross selling price' means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value- added tax. The excise
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(a) Export
Sales. - The term 'export sales' means: (1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas,(BSP); (2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): (3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production; (4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); (5) Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws; and (6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations.
(C)
Changes in or Cessation of Status of a VATregistered Person. The tax imposed in Subsection (A) of this Section shall also apply to goods disposed of or existing as of a certain date if under circumstances to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, the status of a person as a VAT-registered person changes or is terminated.
(D)
Sales Returns, Allowances and Sales Discounts. - The value of goods or properties sold and subsequently returned or for which allowances were granted by a VAT-registered person may be deducted from the gross sales or receipts for the quarter in which a refund is made or a credit memorandum or refund is issued. Sales discount granted and indicated in the invoice at the time of sale and the grant of which does not depend upon the happening of a future event may be excluded from the gross sales within the same quarter it was given.
(E)
Authority of the Commissioner to Determine the Appropriate Tax Base. - The Commissioner shall, by rules and regulations prescribed by the Secretary of Finance, determine the appropriate tax base incases where a transaction is deemed a sale, barter or exchange of goods or properties under Subsection (B) hereof, or where the gross selling price is unreasonably lower than the actual market value." SEC. 107 Value-Added Tax on Importation of Goods.
(A)
The phrase 'foreign currency denominated sale' means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.
(B)
following
In General. - There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any: Provided, further, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of valueadded tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or
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(B)
Transfer of Goods by Tax-exempt Persons. - In the case of tax free importation of goods into the Philippines by persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the Philippines to nonexempt persons or entities, the purchasers, transferees or recipients shall be considered the importers thereof, who shall be liable for any internal revenue tax on such importation. The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof. SEC. 108 Value-added Tax on Sale of Services and Use or Lease of Properties. Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of valueadded tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes; common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines; sales of electricity by generation companies, transmission, and distribution companies; services of franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The
(A)
(B)
Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
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CLASSIFICATION Progressive / Regressive System of Taxation Progressive system of taxation is when there are more direct taxes than indirect taxes
Regressive system of taxation is when there are more indirect taxes imposed than direct taxes
MANNER
OF
COMPUTING
THE
TAX
a.
Ad Valorem tax of a specific portion of the value of the property with respect to which the tax is assessed; it requires the intervention of assessors or appraisers to estimate the value of the property before the amount due to each taxpayer can be determined Literally means according to value Specific tax of a fixed amount imposed by the head or number or by some standard of weight or measurement. It requires no assessment other than a listing or classification of the object to be taxed
Progressive System vs. Progressive Rate of Tax Tolentino vs. Secretary of Finance (1995) The Constitution does not really prohibit the imposition of indirect taxes w/c, like the VAT, are regressive. What it simply provides is that Congress shall "evolve a progressive system of taxation." The constitutional provision has been interpreted to mean simply that "direct taxes are to be preferred [&] as much as possible, indirect taxes should be minimized." Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, w/c perhaps are the oldest form of indirect taxes, would have been prohibited Sales taxes are also regressive. Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of certain transactions, while granting exemptions to other transactions. BASIC PRINCIPLES TAX) 1.
OF A
b.
GRADUATION
OR
RATE
a. b. c.
Proportional / Flat Rate tax based on a fixed percentage of the amount of the property, receipts or other basis to be taxed Progressive tax the rate of which increases as the tax base or bracket increases Regressive tax the rate of which decreases as the tax base or bracket increases
OF
NEUTRAL
Fiscal adequacy Sources of government revenues must be adequate to meet government expenditures and their variations To avoid budget deficits and minimize local and foreign borrowings Theoretical justice A good tax system must be based on the taxpayers ability to pay Ability-to-pay principle Connotes that the contribution of each person towards the expense of the government should be so apportioned such that he would feel neither more or less inconvenienced from his share of the payment than every other person experiences from his Administrative feasibility Taxes should be capable of being effectively enforced The legislature can require that taxes be paid with sacks of rice. However, this will entail lots of problems with regard to enforcement
2.
LEGISLATIVE BODY 3.
2. COLLECTION / ADMINISTRATION Pay as you earn Income tax Pay as you are assessed Real property tax Pay as you file Business tax Pay as you transact VAT 3. PAYMENT H. TAX SYSTEMS
Chavez vs. Ongpin (1990) We agree with the observation of the OSG that without EO 73, the basis for collection of real property taxes will still be the 1978 revision of property values. Certainly, to continue collecting real property taxes based on valuations arrived at several years ago, in disregard of the increases in the value of real properties that have occurred since then, is not in consonance with a sound tax system. Fiscal adequacy, which is one of the characteristics
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Amount of Imposition
POLICE POWER
Eminent Domain May be exercised by the government or its political subdivisions or granted to public service companies or public utilities The property is taken for public use and must be compensated
Police Power May be exercised only by the government or its political subdivision
Generally, there is no limit on the amt of tax that may be imposed as long as it is not iniquitous and unconscionable Is subect to certain constitutional limits including the prohibition against impairment of the obligation of contracts
No amount imposed but rather the owner is paid the market value of the property taken
Relationship to Constitution
Purpose
The property (generally in the form of money) is taken for the support of the government
The use of the property is regulated for the purpose of promoting the general welfare; it is not compensable Operates upon a community or class of individuals There is no transfer of title. At most, there is restraint on the injurious use of property The person affected
Inferior to the impairment prohibition; government cannot expropriate private prop, whichc under contract it had previously bound itself to purchase from the other contracting party
Roxas vs. CTA (1968) The power to tax is sometimes called the power to destroy. Therefore, it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg. Tanada v. Angara (1997) The power to tax is sometimes called the power to destroy. Therefore, it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg. Land Transportation Office vs. City of Butuan (2000) Police power and taxation, along with eminent domain, are inherent powers of sovereignty which the State might share with local government units by delegation given under a constitutional or statutory fiat. All these inherent powers are for a public purpose and legislative in nature but the similarities just about end there. The basic aim of police power is public good and welfare. Taxation, in its case, focuses on the power of the government to raise revenue in order to support its
Persons affected
Operates on an individual as the owner of a particular prop There is transfer of the right to the property
Effect
Benefits Received
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petitioner must show he has sustained direct injury as a result of the action and that it is not sufficient for him to have a mere general interest common to all members of the public. The Court however agrees with the petitioner that as a taxpayer he may file the instant petition following the ruling in Lozada when it involves illegal expenditure of public money. The petition ?s the legality of the tax refund to NPC by way of tax credit certificates & the use of said assigned tax credits by respondent oil cos. to pay for their tax & duty liabilities to the BIR and Bureau of Customs. Chavez vs. PCGG (1998) In Albano vs. Reyes, we said that while expenditure of public funds may not have been involved under the questioned contract for the development, management and operation of the MICT, public interest was definitely involved considering the important role of the subject contract xxx in the economic development of the country & the magnitude of the financial consideration involved. We concluded that, as a consequence, the disclosure provision in the Constitution would constitute sufficient authority for upholding the petitioners standing. Gonzales vs. Narvasa (2000) A taxpayer is deemed to have the standing to raise a constitutional issue when it is established that public funds have been disbursed in contravention of the law or the Constitution. Thus, a taxpayers action is properly brought only when there is an exercise by Congress of its taxing or spending power. In Sanidad v. COMELEC, the petitioners therein were allowed to bring a taxpayers suit to question several president decrees promulgated by the Pres. Marcos in his legislative capacity calling for a national referendum, w/ the Ct explaining that xxx At the instance of taxpayers, laws providing for the disbursement of public funds may be enjoined, upon the theory that the expenditure of public funds by an officer of the State for the purpose of executing an unconstitutional act constitutes a misapplication of such funds. BAYAN vs. Executive Secretary (2000) As taxpayers, petitioners have not established that the VFA involves the exercise by Congress of its taxing or spending powers. On this point, it bears stressing that a taxpayers suit refers to a case where the act complained of directly involves the illegal disbursement of public funds derived from taxation. Thus, in Bugnay Const. & Development Corp. vs. Laron, we held: xxx it is exigent that the taxpayer-plaintiff sufficiently show that he would be benefited or injured by the judgment or entitled to the avails of the suit as a real party in interest. Before he can invoke the power of judicial review, he must specifically prove that he has sufficient interest in preventing the illegal expenditure of money raised by taxation and that he will sustain a direct injury as a result of the enforcement of the questioned statute or contract. It is not sufficient that he has merely a general interest common to all members of the public. Del Mar vs. PAGCOR (2001) Melo, Dissenting: Petitioners have brought this suit in their capacity as taxpayers & legislators. In order for a taxpayers suit to prosper, petitioners must have locus standi. In a dissenting opinion in Kilosbayan vs. Guingona, Jr., I stated that:
INHERENT
AND
CONSTITUTIONAL LIMITATIONS
A
TAX MEASURE
OR
Lozada vs. Commissioner (1983) As taxpayers, petitioners may not file the instant petition, for nowhere therein is it alleged that tax money is being illegally spent. The act complained of is the inaction of the COMELEC to call a special election, as is allegedly its ministerial duty under the constitution, & therefore, involves no expenditure of public funds. It is only when an act complained of, w/c may include a legislative enactment or statute, involves the illegal expenditure of public money that the so-called taxpayer suit may be allowed. Maceda vs. Macaraig (1991) In the petition it is alleged that petitioner is "instituting this suit in his capacity as a taxpayer and a duly-elected Senator of the Philippines." Public respondent argues that
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LTO vs. City of Butuan (2000) LGUs indubitably now have the power to regulate the operation of tricycles-for-hire & to grant franchises for the operation thereof. "To regulate" means to fix, establish, or control; to adjust by rule, method, or established mode; to direct by rule or restriction; or to subject to governing principles or laws. A franchise is defined to be a special privilege to do certain things conferred by government on an individual or corp., & w/c does not belong to citizens generally of common right. On the other hand, "to register" means to record formally & exactly, to enroll, or
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a.
b.
c.
d.
e.
f.
The President, upon investigation by the Commission and recommendation of the National Economic Council, is hereby empowered to reduce by not more than fifty per cent or to increase by not more than five times the rates of import duty expressly fixed by statute (including any necessary change in classification) when in his judgment such modification in the rates of import duty is necessary in the interest of national economy, general welfare and/or national defense. Before any recommendation is submitted to the President by the Council pursuant to the provisions of this section, the Commission shall conduct an investigation in the course of which it shall hold public hearings wherein interested parties shall be afforded reasonable opportunity to be present, to produce evidence and to be heard. The Commission may also request the views and recommendations of any government office, agency or instrumentality, and such office, agency or instrumentality shall cooperate fully with the Commission. The President shall have no authority to transfer articles from the duty-free list to the dutiable list nor from the dutiable list to the duty-free list of the tariff. The power of the President to increase or decrease rates of import duty within the limits fixed in subsection "a" shall include the authority to modify the form of duty. In modifying the form of duty the corresponding ad valorem or specific equivalents of the duty with respect to imports from the principal concerning foreign country for the most recent representation period shall be used as basis. The Commissioner of Customs shall regularly furnish to the Commission a copy each of all customs import entries containing every pertinent information appearing in the collectors' liquidated duplicates, including the consular invoice and/or the commercial invoice. The Commission or its duly authorized agents shall have access to and the right to copy all the customs import entries and other documents appended thereto as finally in the General Auditing Office. The Commission is authorized to adopt such reasonable procedure, rules and regulations as it may deem necessary to carry out the provisions of this section.
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i.
Garcia vs. Executive Secretary (1993) Under Sec. 24, Art. VI of the Constitution, the enactment of appropriation, revenue & tariff bills, like all other bills is, of course, w/in the province of the Legislative rather than the Exec Dept. It does not follow, however, that therefore EOs 475 & 478, assuming they may be characterized as revenue measures, are prohibited to the Pres., that they must be enacted instead by the Congress of the Philippines. Sect. 28(2) of Art. VI of the Constitution provides: "(2) The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government." There is thus explicit constitutional permission to Congress to authorize the President "subject to such limitations and restrictions as [Congress] may impose" to fix "within specific limits" "tariff rates and other duties or imposts ..." The relevant congressional statute is the Tariff and Customs Code of the Philippines, and Sections 104 and 401, the pertinent provisions thereof. These are the provisions which the President explicitly invoked in promulgating Executive Orders Nos. 475 and 478. 3. Delegation to Administrative Agencies Powers which may be vested to administrative bodies a. Power to value property for purposes of taxation pursuant to fixed rules b. Power to assess and collect the taxes c. Power to perform any of the innumerable details of computation, appraisement, and adjustment, and delegation of such details Powers which cannot be delegated a. Determination of the subject to be taxed b. The purpose of the tax c. The amount or rate of tax d. The manner, means and agencies of collection e. Prescribing of the necessary rules with respect thereto Osmena vs. Orbos (1993) Hence, it seems clear that while the funds collected may be referred to as taxes; they are exacted in the exercise of the police power of the State. Moreover, that the OPSF is a special fund is plain from the special treatment given it by E.O. 137. It is segregated from the general fund; and while it is placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the COA. The Court is satisfied that these measures comply with the constitutional description of a "special fund." Commissioner vs. CA (1996)
GOVERNMENT
ENTITIES,
AGENCIES,
AND
Sec 27 (C), NIRC Rates of Income Tax on Domestic Corporations (C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in s similar business, industry, or activity. Executive Order 93
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Tanada vs. Angara (1997) Unquestionably, the Constitution did not envision a hermit-type isolation of the country from the rest of the world. In its Declaration of Principles & State Policies, the Constitution "adopts the generally accepted principles of international law as part of the law of the land, & adheres to the policy of peace, equality, justice, freedom, cooperation & amity, w/ all nations." By the doctrine of incorporation, the country is bound by generally accepted principles of international law, which are considered to be automatically part of our own laws. Mitsubishi Corp. vs. Commissioner (CTA, 2003) Dissent: While international comity is invoked in this case on the nebulous representation that the funds involved in the loans are those of a foreign govt, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax laws. Otherwise, the mere expedient of having a Phil. corp. enter into a contract for loans or other domestic securities w/ private foreign entities, w/c in turn will negotiate independently w/ their governments, could be availed of to take advantage of the tax exemption law. 5. LIMITATION OF TERRITORIAL JURISDICTION A state may not tax property lying outside its borders or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege derived from the laws of another state and therein exercised and enjoyed.
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Iloilo Bottlers vs. City of Iloilo (1988) The tax imposed under Ordinance No. 5 is an excise tax. It is a tax on the privilege of distributing, mfg. or bottling soft drinks. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges or businesses are done or performed w/in the jurisdiction of said authority. Specifically, the situs of the act of distributing, bottling or mfg. soft drinks must be w/in city limits, before an entity engaged in any of the activities may be taxed in Iloilo City. Commissioner vs. BOAC (1987) The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here & pmts for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, & occurred w/in, Phil. territory, enjoying the protection accorded by the Phil. government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. Hopewell Power vs. Commissioner (CTA, 1998) The power to levy an excise upon the performance of an act or the engaging in an occupation does not depend upon the domicile of the person subject to the excise, or the physical location of the prop & in connection w/ the act or occupation taxed, but depends upon the place in w/c the act was performed or occupation engaged in. Thus, the gauge of taxability does not depend on the location of the office, but attaches upon the place where the respective transaction(s) is perfected & consummated. Smith vs. Commissioner (1984) Individual aliens employed w/in the Subic Special Economic Zone (SSEZ) are not exempt from the awesome power of Phil. taxation especially so that they sourced out their earnings from w/in the Philippines To buttress the point that SSEZ is indeed w/in the Phil. jurisdiction, Sec. 12 (h) of RA 7227, actually placed the fenced-off area of SSEZ under the responsibility of the Philippine National Government, thus: The defense of the zone and the security of its perimeters shall be the responsibility of the National Government in coordination with the Subic Bay Metropolitan Authority. The Subic Bay Metropolitan Authority shall provide and establish its own internal security and fire-fighting forces. Such being the case, all subjects over w/c the Philippines. can exercise dominion are necessarily objects of taxation. As such, all subjects of taxation w/in its jurisdiction are required to pay tax in exchange of the protection that the state gives. Thus, the SSEZ, being w/in the territorial boundaries of the Philippines, the aliens
LAW
Sec 1, Art III, 1987 Constitution No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws. Sison vs. Ancheta (1984) It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amt to the confiscation of prop. That would be a clear abuse of power. It then becomes the duty of this Ct to say that such an arbitrary act amounted to the exercise of an authority not conferred. That properly calls for the application of the Holmes dictum. It has also been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh & unreasonable, it is subject to attack on due process grounds. 2. EQUAL PROTECTION
OF THE
LAWS
Sec 1, Art III, 1987 Constitution No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws. Tan vs. Del Rosario (1994) Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities. Uniformity does not prohibit classification as long as: (1) the standards that are used therefore are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class. Phil. Rural Electric vs. Secretary (2003) The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the same protection of laws w/c is enjoyed by other persons or other classes in the same place & in like circumstances. Thus, the guaranty of the equal protection of the laws is not violated by a law based on reasonable classification. Classification, to be reasonable, must (1) rest on substantial distinctions; (2) be germane to the purposes of the law; (3) not be limited to existing conditions only; & (4) apply equally to all members of the same class. 3. UNIFORMITY
AND
EQUITY
IN
TAXATION
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Sison vs. Ancheta (1984) Equality & uniformity in taxation means that all taxable articles or kinds of prop of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable & natural classifications for purposes of taxation As clarified by J. Tuason: where "the differentiation" complained of "conforms to the practical dictates of justice & equity" it "is not discriminatory w/in the meaning of this clause & is therefore uniform." There is quite a similarity then to the standard of equal protection for all that is required is that the tax "applies equally to all persons, firms & corporations placed in similar situation. Tolentino vs. Secretary of Finance (1995) Equality & uniformity of taxation means that all taxable articles or kinds of prop of the same class must be taxed at the same rate. The taxing power has the authority to make reasonable & natural classification for purposes of taxation. To satisfy this requirement it is enough that the statute or ordinance applies equally to all persons, firms & corporations placed in similar situation. 4. PROHIBITION AGAINST IMPRISONMENT TAX
FOR
RELIGIOUS FREEDOM
Sec 5, Art III, 1987 Constitution No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. No religious test shall be required for the exercise of civil or political rights. American Bible Society vs. City of Manila (1957) We do not mean to say that religious groups & the press are free from all financial burdens of government. We have here something quite diff, for example, from a tax on the income of one who engages in religious activities or a tax on property used or employed in connection w/ those activities. It is one thing to impose a tax on the income or property of a preacher. It is quite another thing to exact a tax from him for the privilege of delivering a sermon Those who can tax the exercise of this religious practice can make its exercise so costly as to deprive it of the resources necessary for its maintenance. Those who can tax the privilege of engaging in this form of missionary evangelism can close all its doors to all those who do not have a full purse. Spreading religious beliefs in this ancient & honorable manner would thus be denied the needy. 7. PROHIBITION TAXATION REGARDING APPROPRIATION
OF
NONPAYMENT
OF
POLL
Sec 20, Art III, 1987 Constitution No person shall be imprisoned for debt or nonpayment of a poll tax 5. PROHIBITION AGAINST IMPAIRMENT
OF
OBLIGATION
OF
CONTRACTS
Sec 10, Art III, 1987 Constitution No law impairing the obligation of contracts shall be passed. Sec 11, Art XII, 1987 Constitution No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines. Phil. Rural Electric vs. Secretary (2003) It is ingrained in jurisprudence that the constitutional prohibition on the impairment of the obligation of contracts does not prohibit every change in existing laws. To fall within the prohibition, the change must not only impair the
PROCEEDS
OF
Sec 29, Art VI, 1987 Constitution (1) No money shall be paid out of the Treasury except in pursuance of an appropriation made by law. (2) No public money or property shall be appropriated, applied, paid, or employed, directly or indirectly, for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister, or dignitary as such, except when such priest, preacher, minister, or dignitary is assigned to the armed forces, or to any penal institution, or government orphanage or leprosarium. (3) All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purposes only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government. Osmena vs. Orbos (1993) Hence, it seems clear that while the funds collected may be referred to as taxes, they are exacted in the exercise of the police power of the State. Moreover, that the OPSF is a special fund is plain from the special
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taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law including restrictions on dividends and provisions for reinvestment. (4) Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax. Sec 28 (3), Art VI, 1987 Constitution (3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, nonprofit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable or educational purposes shall be exempt from taxation. Sec 27 (B), NIRC Rates Of Income Tax on Domestic Corporations (B) Proprietary Educational Institutions and Hospitals. Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A "Proprietary educational institution" is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. Sec 30 (H), NIRC Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such: xxx (H) A nonstock and nonprofit educational institution; xxx Department of Finance Order 137-87 An educational institution means a non-stock, non-profit corporation or association duly registered under Philippine law, and operated exclusively for educational purposes, maintained and administered by a private individual or group offering formal education, and with an issued permit to operate from the DECS. Revenues derived from and assets used in the operation of cafeteria/canteens, dormitories, and bookstores are exempt from taxation provided they are owned and operated by the educational institution as ancillary activities and the same are located within the school premises.
RELIGIOUS, CHARITABLE
Sec 28 (3), Art VI, 1987 Constitution (3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, nonprofit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable or educational purposes shall be exempt from taxation. Abra Valley College vs. Aquino (1988) The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. It must be stressed however, that while this Ct allows a more liberal & non-restrictive interpretation of the phrase "exclusively used for educational purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935 Philippine Constitution, reasonable emphasis has always been made that exemption extends to facilities w/c are incidental to & reasonably necessary for the accomplishment of the main purposes. Otherwise stated, the use of the school building or lot for commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the use of the second floor of the main building in the case at bar for residential purposes of the Director and his family, may find justification under the concept of incidental use, which is complimentary to the main or primary purpose educational, the lease of the first floor thereof to the Northern Marketing Corporation cannot by any stretch of the imagination be considered incidental to the purpose of education. 9. PROHIBITION AGAINST TAXATION EDUCATIONAL INSTITUTIONS
OF
NON-STOCK, NON-PROFIT
Sec 4 (3,4), Art XIV, 1987 Constitution (3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from
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B. SITUS OF SUBJECTS OF TAXATION Sec 42, NIRC Income from Sources Within the Philippines.(A) Gross Income From Sources Within the Philippines. - The following items of gross income shall be treated as gross income from sources within the Philippines: (1) Interests. - Interests derived from sources within the Philippines, and interests on bonds, notes or other interestbearing obligation of residents, corporate or otherwise; (2) Dividends. - The amount received as dividends: (a) from a domestic corporation; and (b) from a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of this Section; but only in an amount which bears the same ration to such dividends as the gross income of the
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Situs: 1. Persons Poll tax may be levied upon inhabitants or residents of the state, whether citizens or not 2. Real property subject to taxation in the state where it is located Lex rei sitae
3.
4.
5. 6. 7.
Tangible personal property Taxable in the state where it has actual situs (lex rei sitae) Intangible personal property situs is at the domicile of the owner Mobilia sequuntur personam Not controlling when inconsistent with statute or justice Shares of stock of a domestic corporation of a non-resident foreigner are taxable in the Philippines. The shares of stock receive the benefit and protection of our laws Income taxed by state where income is derived Business, occupation, transaction place where transaction took place gratuitous transfer of property subject to taxation where the transferor was a citizen or resident or where the property is located
Collector of Internal Revenue vs. Lara (1958) The decedent, being a non-resident of the Philippines, the only properties of his estate subject to estate and inheritance taxes are those shares of stock issued by Philippine corporations. Considering, however, the State of California, of which he was a resident, as a foreign country in relation to Sec 122, NIRC, the decedent is entitled to exemption from inheritance tax on the intangible property found in the Philippines. Incidentally, this exemption granted to nonresidents was to reduce multiple taxation. D. DOUBLE TAXATION 1. STRICT SENSE direct double taxation or direct duplicate taxation elements: a. taxing twice b. same taxing authority c. within same taxing jurisdiction d. for the same purpose e. in the same year f. same property or subject matter Commissioner vs. Solidbank Corp. (2003) Double taxation means taxing the same property twice when it should be taxed only once; that is, taxing the same person twice by the same jurisdiction for the same thing. Otherwise described as direct duplicate taxation, the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character. 2. BROAD SENSE indirect double taxation or indirect duplicate taxation double taxation other than direct duplicate Villanueva vs. City of Iloilo (1968) In order to constitute double taxation in the objectionable or prohibited sense the same property must be taxed twice when it should be taxed but once; both taxes must be imposed on the same property or subject matter, for the same purpose, by the same state, Government or taxing authority, within the same jurisdiction during the same taxing period, and they must be of the same kind or character of tax. It has been shown that a real estate tax and the tenement tax imposed by the ordinance, although imposed by the same taxing authority, are not of the same kind or character. 3. CONSTITUTIONALITY
OF
Metro Alliance Holdings vs. Commissioner (CA, 2003) The source of the income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. Commissioner vs. BOAC (1987) In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was engaged in business in the Philippines through a local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines. Wells Fargo vs. Collector (1940) Originally, the settled law in the US is that intangibles have only one situs for the purpose of inheritance tax, and such situs is in the domicile of the decedent at the time of his death. But this rule, as of late, has been relaxed. The maxim Mobilia sequuntur personam, upon which the rule rests, has been decried as a mere fiction of law having its origin in considerations of general convenience and public policy, and cannot be applied to limit or control the right of the state to tax property within its jurisdiction and must yield to established fact of legal ownership, actual presence and control elsewhere, and cannot be applied if to do so would result in inescapable and patent injustice. xxx But when the taxpayer extends his activities with respect to his intangibles, so as to avail himself of the protection and benefit of the laws of another state, in such a way as to bring his person or property within the reach of the tax gatherer there, the reason for the single place of taxation no longer obtains, and the rule is not even
DOUBLE TAXATION
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B. TAX EVASION Sec 254, NIRC Attempt to Evade or Defeat Tax. - Any person who willfully attempts in any manner to evade or defeat any tax imposed under this Code or the payment thereof shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine not less than Thirty thousand (P30,000) but not more than One hundred Thousand pesos (P100, 000) and suffer imprisonment of not less than two (2) years but not more than four (4) years: Provided, That the conviction or acquittal obtained under this Section shall not be a bar to the filing of a civil suit for the collection of taxes. Tax evasion is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the tax Factors:
City of Baguio vs. De Leon (1968) As to why double taxation is not violative of due process, Justice Holmes made clear in this language: The objection to the taxation as double may be laid down on one side The 14th amendment no more forbids double taxation than it does doubling the amount of tax, short of confiscation or proceedings unconstitutional on other grounds. Pepsi Cola Bottling Co. vs. Butuan (1968) Double taxation in general is not forbidden by our fundamental law. We have not adopted, as part thereof, the injunction against double taxation found in the Constitution of the US and of some States of the Union. China Banking vs. CA The rule, however, is well-settled that there is no constitutional prohibition against double taxation.
a.
b. c.
Nonpayment of tax or payment of tax which is less than due Bad faith A course of action which is unlawful
IV.
or
Minimizing
the
A. SHIFTING OF TAX BURDEN Shifting is the transfer of the burden of tax by the original payer or the one on whom the tax was assessed or imposed to someone else. 1. WAYS
OF
SHIFTING
THE
TAX BURDEN
Republic vs. Gonzales (1965) Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances of the case. The failure of the defendant (Gonzales) to declare for taxation purposes his true and actual income derived from his furniture business at the Clark Field Air Base for 2 consecutive years is an indication of his fraudulent intent to cheat the Government of its due taxes. C. TAX AVOIDANCE Tax avoidance is the use by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable properties or income in order to avoid or reduce tax liability. Tax minimization Tax evader breaks the law; tax avoider sidesteps it Classic distinction given by a US Senator: A man approaches a river which can be crossed by two bridges, one a toll bridge and the other a free bridge. If he passes on the toll bridge and fails to pay the toll, this is tax evasion. If, however, he crosses by way of the free bridge, this is tax avoidance. Delpher Trades Corp. vs. IAC (1988) The records do not point to anything wrong or objectionable about this estate planning scheme resorted to by the Pachecos. The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted. Commissioner vs. Lincoln Philippine Life Insurance (2002) It should be emphasized that while tax avoidance schemes and arrangements are not prohibited, tax laws cannot be circumvented in order to evade payment of just
Forward Shifting Burden of tax is transferred from one a factor of production through the factors of distribution until it finally settles on the ultimate purchaser Backward Shifting Burden of tax is transferred from the purchaser through the factors of distribution to the factor of production Onward Shifting
2. TAXES THAT CAN BE SHIFTED Indirect taxes Taxes that are purely personal cannot be shifted 3. MEANING
OF
IMPACT
AND
INCIDENCE
OF
TAXATION
Impact of Taxation That point on which tax is originally imposed In so far as the law is concerned, the statutory taxpayer is the one who must pay the tax Impact = Liability Incidence of Taxation
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Greenfield vs. Meer The phrase in the nature of a deduction was inserted in the old law as a means of extreme caution because even without it the exemption the amount would still be deducted. Because exemption is an immunity and privilege; it is freedom from a charge or burden to which others are subjected. Compared with Other Terms Tax Remission / Tax Condonation It is in the nature of a tax exemption but it presupposes an existing liability
Surigao Consolidated Mining vs. Collector (1963) The condonation of a tax liability is equivalent and in the nature of tax exemption. Being so, it should be sustained only when expressed in explicit terms, and it cannot be extended beyond the plain meaning of those terms. Where the law clearly refers to the condonation of unpaid taxes, it is held that it cannot be extended to authorize the refund of paid taxes. Tax Amnesty EO 399 INCREASING THE RATE OF CASH DIVIDENDS TO BE DECLARED BY GOVERNMENT OWNED OR CONTROLLED CORPORATIONS SUBJECT TO CERTAIN EXCEPTIONS WHEREAS, Executive Order No. 518, S. of 1979, Section 17, provides that: "Sec. 17 Cash Dividends. Each corporation shall declare at least five per cent of net earnings of each year as cash dividends: Provided, That cash dividends accruing to the National Government shall be received by the Treasury and recorded as income of the General Fund: Provided, Further, That the fraction of net earnings that shall be declared by a corporation as cash dividends may be changed by the President/Prime Minister upon recommendation of the Minister of Finance: Provided, Finally, That this Section shall not apply to the Government Service Insurance System, the Social Security System, and those government-owned or controlled corporations whose profit
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2005
AS
TAX
WHEREAS, the observance of Tax Awareness Month will be a step towards promoting, enhancing and instilling nationwide awareness and appreciation of the importance and value of taxes to our society, while at the same time, obtaining the support and commitment of the taxpaying public to help improve the tax collection of the country; NOW, THEREFORE, I, GLORIA MACAPAGAL-ARROYO, President of the Philippines, by virtue of the powers vested in me by law, do hereby declare the month of April 2005 as Tax Awareness Month under the auspices of the Bureau of Internal Revenue. Revenue Regulations No. 7-2006 SUBJECT: Publishing the Full text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent SUBJECT: RECOMMENDATION TO INCREASE THE VALUE ADDED TAX RATE FROM 10 PERCENT TO 12 PERCENT EFFECTIVE FEBRUARY 1, 2006 Pursuant to your recommendation contained in your Memorandum for the President dated January 30. 2006, copy hereto attached, please be informed that the same has been approved by the President, pursuant to Section 4 of Republic Act (RA) No. 9337. Revenue Regulations No. 18-06 SUBJECT: Improved Voluntary Assessment Program (IVAP) for Taxable Year 2005 and Prior Years under Certain Conditions Pursuant to Section 244, in relation to Sections 6, 204, 254, 255, 256, and other pertinent provisions of the National Internal Revenue Code (NIRC), these Regulations are hereby promulgated to provide for the policies, procedures and guidelines in the implementation of IVAP for the collection of additional tax revenue, which could otherwise be collected through audit and enforcement effort. The program covers all types of taxes including taxes for one-time transactions, and may be availed of by qualified taxpayers on a per taxable year/period and on a per taxtype basis. POLICY STATEMENT
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(d) Taxpayers who filed their balance sheet/SALN, together with their income tax returns for 2005, and who desire to avail of the tax amnesty under this Act shall amend such previously filed statements by including still undeclared assets and/or liabilities and pay an amnesty tax equal to five percent (5%) based on the resulting increase in net worth: Provided, That such taxpayers shall likewise be categorized in accordance with, and subjected to the minimum amounts of amnesty tax prescribed under the provisions of this Section. SECTION 6 Immunities and Privileges.Those who availed themselves of the tax amnesty under Section 5 hereof, and have fully complied with all its conditions shall be entitled to the following immunities and privileges: a. The taxpayer shall be immune from the payment of taxes, as well as addition thereto, and the appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code of 1997, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years. b. The taxpayer's Tax Amnesty Returns and the SALN as of December 31, 2005 shall not be admissible as evidence in all proceedings that pertain to taxable year 2005 and prior years, insofar as such proceedings relate to internal revenue taxes, before judicial, quasi-judicial or administrative bodies in which he is a defendant or respondent, and except for the purpose of ascertaining the net worth beginning January 1, 2006, the same shall not be examined, inquired or looked into by any person or government office. However, the taxpayer may use this as a defense, whenever appropriate, in cases brought against him. The books of accounts and other records of the taxpayer for the years covered by the tax amnesty availed of shall not be examined: Provided, That the Commissioner of Internal Revenue may authorize in writing the examination of the said books of accounts and other records to verify the validity or correctness of a claim for any tax refund, tax credit (other than refund or credit of taxes withheld on wages), tax incentives, and/or exemptions under existing laws. All these immunities and privileges shall not apply where the person failed to file a SALN and the Tax Amnesty Return, or where the amount of net worth as of December 31, 2005 is proven to be understated to the extent of thirty percent (30%) or more, in accordance with the provisions of Section 3 hereof. SECTION 7
c.
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Implied occurs when a tax is levied on certain classes of persons, properties or transactions and the other classes are not mentioned. Those not mentioned are deemed exempted
Total vs. Partial (as to scope) Total exemption when certain persons, properties or transactions are exempted from all taxes Partial exemption when certain persons, properties or transactions are exempted from certain taxes, either entirely or in part Exemption from Direct Tax vs. Indirect Tax Nature of Power to Grant Tax Exemption It is an attribute of sovereignty
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Basco vs. PAGCOR PD 1869 created PAGCOR to enable the Government to regulate and centralize all games of chance authorized by existing franchise or permitted by law. Sec 13(2) exempts PAGCOR from paying any tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever nature, whether National or local. Petitioners contend that PD 1869 constitutes a waiver of the right of City of Manila to impose taxes and legal fees. WON the contention is correct? No, they are without merit. 1. The City of Manila, being a mere Municipal corporation has no inherent right to impose taxes. Its power to tax must always yield to a legislative act which is superior having been passed upon by the State itself which has the inherent power to tax 2. The Charter of the City of Manila is subject to control by Congress. And if Congress can grant the City of Manila the power to tax certain matters, it can also provide for exemptions or even take back the power 3. Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a GOCC with an original charter. It has a dual role, to operate and to regulate gambling casinos. The latter role is governmental, which places it in the category of an agency or instrumentality of the government. The power to tax cannot be allowed to defeat an instrumentality or creation of the very entity which has the power to wield it Rationale / Grounds for Tax Exemption Grounds: a. Based on contract in which case the public, represented by the government is supposed to receive a full equivalent therefore As in the case of legislative franchise
PLDT vs. City of Davao (2001) The tax code provision withdrawing the tax exemption was not construed as prohibiting future grants of exemptions from all taxes. Tax exemptions are highly disfavored. The tax exemption must be expressed in the statute in clear language that leaves no doubt of the intention of the legislature to grant such exemption. And even if granted, the exemption must be interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Philippine Acetylene vs. Commissioner (1967) A tax exemption must be strictly construed. An exemption will not be considered unless the terms under which it is granted clearly and distinctly show that such was the intention of the parties. Tolentino vs. Secretary of Finance (1994) The Contract Clause has never been thought as a limitation on the exercise of the States power of taxation save only where a tax exemption has been granted for a valid consideration. Construction of Statutes Granting Tax Exemption General Rule Exemptions are not favored and are construed strictly against the taxpayer
b.
Based on some ground of public policy Encourage new industries, charitable institutions, etc c. Created on a treaty based on grounds or reciprocity or to lessen the rigors of international double or multiple taxation Equity is not a ground for tax exemption
Commissioner vs. CA (1998) Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict interpretation in construing tax exemptions. Misamis Oriental Association of Coco Traders, Inc. vs. Department of Finance Secretary (1994) In interpreting Sec 103 (a) and (b) of the NIRC, the CIR gave it strict construction consistent with the rule that tax exemptions must be strictly construed against the taxpayer and liberally in favor of the state.\ Nestle Philippines, Inc. vs. CA (2001) Any claim for refund of custom duties take the nature of tax exemptions that must be construed strictissimi juris against the claimants and liberally in favor of the taxing authority. The power of taxation being a high prerogative of sovereignty, its relinquishment is never presumed. Any reduction or diminution thereof with respect to its mode or its rate must be strictly construed, and the same must be couched in clear and unmistakable terms in order that it may be applied.
Maceda vs. Macaraig (1993) One common theme in all these laws is that NPC must be enabled to pay its indebtedness which, as of PD 938, was P12B in domestic indebtedness, at any one time, and US$4B in total foreign loans at any one time. The NPC must be and has to be exempt from all forms of taxes if this goal is to be achieved Davao Gulf Lumber Corporation vs. CIR (1998) Petitioner asserts that equity and justice demand that the computation of the tax refunds be based on actual amounts paid under Secs. 153 and 156, NIRC. The Court disagrees. According to an eminent authority on taxation (Vitug), there is no tax exemption solely on the ground of equity. Nature of Tax Exemption
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SC / CTA / CA
9. REVENUE RULES AND REGULATIONS / ADMINISTRATIVE / BIR RULINGS AND OPINIONS Sec 4, NIRC Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. Sec 244, NIRC Authority of Secretary of Finance to Promulgate Rules and Regulations. - The Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of this Code. Sec 245, NIRC Specific Provisions to be Contained in Rules and Regulations. - The rules and regulations of the Bureau of Internal Revenue shall, among other things, contain provisions specifying, prescribing or defining: (a) The time and manner in which Revenue Regional Director shall canvass their respective Revenue Regions for the purpose of discovering persons and property liable to national internal revenue taxes, and the manner in which their lists and records of taxable persons and taxable objects shall be made and kept; (b) The forms of labels, brands or marks to be required on goods subject to an excise tax, and the manner in which the labeling, branding or marking shall be effected; (c) The conditions under which and the manner in which goods intended for export, which if not exported would be subject to an excise tax, shall be labeled, branded or marked; (d) The conditions to be observed by revenue officers respecting the institutions and conduct of legal actions and proceedings; (e) The conditions under which goods intended for storage in bonded warehouses shall be conveyed thither, their manner of storage and the method of keeping the entries and records in connection therewith, also the books to be kept by Revenue Inspectors and the reports to be made by them in connection with their supervision of such houses; (f) The conditions under which denatured alcohol may be removed and dealt in, the character and quantity of the denaturing material to be used, the manner in which the process of denaturing shall be effected, so as to render the alcohol suitably denatured and unfit for oral intake, the bonds to be given, the books and records to be kept, the entries to be made therein, the reports to be made to the Commissioner, and the signs to be displayed in the business or by the person for whom such denaturing is done or by whom, such alcohol is dealt in; (g) The manner in which revenue shall be collected and paid, the instrument, document or object to which revenue stamps shall be affixed, the mode of cancellation of the same, the manner in which the proper books, records, invoices and other papers shall be kept and entries therein made by the person subject to the tax, as well as the
V.
and
CUSTOMS CODE, AS
AMENDED
6. TAX TREATIES / INTERNATIONAL AGREEMENTS Comprehend 2 objectives: a. To avoid double taxation especially in instances where income is taxed twice (country of residence and country of source)
b.
To eliminate / minimize tax evasion through the adoption of the exchange of information schemes, furnish each other on a mutual basis information on the taxable income or activities of any of their nationals or residents.
Tanada vs. Angara By their inherent nature, treaties really limit or restrict the absoluteness of sovereignty. By their voluntary act, nations may surrender some aspects of their state power in
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a.
Rulings of first impression These refer to the rulings, opinions and interpretations of the Commissioner of Internal Revenue with respect to the provisions of the Tax Code and other tax laws without established precedent, and which are issued in response to a specific request for ruling filed by a taxpayer with the Bureau of Internal Revenue. Provided, however, that the term shall include reversal, modification or revocation of any existing ruling. Rulings with established precedents These refer to mere reiteration of previous rulings, opinions and interpretations of the Commissioner, as delegated to duly authorized internal revenue officers (i.e., Deputy Commissioner, Legal and Inspection Group; Assistant Commissioner, Legal Service; Regional Directors) that are issued in response to a specific request for ruling filed by a taxpayer with the Bureau of Internal Revenue. Revenue Memorandum Rulings (RMR) These refer to the rulings, opinions and interpretations of the Commissioner of Internal Revenue with respect to the provisions of the Tax Code and other tax laws, as applied to a specific set of facts, with or without established precedents, and which the Commissioner may issue from time to time for the purpose of providing taxpayers guidance on the tax consequences in specific situations. Revenue Bulletins (RB) These refer to periodic issuances, notices and official announcements of the Commissioner of Internal Revenue that consolidate the Bureau of Internal Revenue's position on certain specific issues of law or administration in relation to the provisions of the Tax Code, relevant tax laws and other issuances for the guidance of the public. Revenue Travel Assignment Orders (RTAO) These orders assign revenue personnel to specific functions in specific units. Travel assignment orders specifically mention the names of revenue personnel concerned. Revenue Special Orders (RSO) Instructions or directives for the accomplishment of special assignments or missions of significance which are temporary in nature or for a definite period of time. These issuances specifically mention the personnel or units of organization concerned. Revenue Memorandum Circulars (RMC) These issuances shall disseminate and embody pertinent and applicable portions, as well as amplifications of the rules, precedents, laws, regulations, opinions and other orders and directives issued by or administered by the Commissioner of Internal Revenue, and by offices and agencies other than the Bureau of Internal Revenue, for the
b.
c.
d.
e.
f.
g.
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h.
Revenue Memorandum Orders (RMO) These are directives or instructions outlining procedures, techniques, methods, processes, operations, activities, work flow, and the like, which are necessary to carry out programs or to achieve policy goals and objectives. These issuances may be of general or of limited scope yet in any case require definite compliance by those concerned. They are not addressed to any particular group of employees or offices because they are for general information, but those directly concerned with the compliance of these provisions are either definitely stated, or unmistakably implied thereat. Revenue Audit Memorandum Orders (RAMO) These refer to the uniform audit procedures to observed by revenue officers in the conduct audit of tax cases and in their submission reports of investigation. be of of
i.
j. k.
Revenue Delegation of Authority Orders (RDAO) These refer to the functions delegated by the Commissioner to revenue officers in accordance with law. Revenue Administrative Orders (RAO) These refer to matters that deal strictly with more or less permanent administrative set-up of the Bureau. Delineation of organizational structures, statements of functions and/or responsibilities, definitions and delegations of authority, staffing and personnel requirements, standards of performance, establishment of Bureau-wide programs, installation of systems, and the like, are most likely subject matter of Revenue Administrative Orders. These issuances are for general guidance, compliance and/or information.
SECTION 4 Validity of Rulings and Issuances. All rulings and issuances of the Commissioner of Internal Revenue that pertain to the implementation and interpretation of the Tax Code and other tax laws are valid, unless revoked, reversed, modified, or superseded by the Secretary of Finance pursuant to Department Order No. 23-01. Tan vs. Del Rosario (1994) Sec 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now so modified by RA 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their non-compensation income. Commissioner vs. CA (1995) The authority of the Minister of Finance, in conjunction with the Commissioner of Internal Revenue, to promulgate all needful rules and regulations for the effective enforcement of internal revenue laws cannot be controverted. xxx Much more fundamental than either of the above, however, is that all such issuances must not override, but must remain consistent and in harmony with, the law they seek to apply and implement. Administrative rules and regulations are intended to carry out, neither to supplant nor modify, the law.
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5.
Effectivity and Validity of Tax Ordinance Sec 187, LGC Procedure for Approval and Effectivity of Tax Ordinances and Revenue Measures; Mandatory Public Hearings - The procedure for approval of local tax ordinances and revenue measures shall be in accordance with the provisions of this Code: Provided, That public hearings shall be conducted for the purpose prior to the enactment thereof: Provided further, That any question on the constitutionality or legality of tax ordinances or revenue measures may be raised on appeal within thirty (30) days from the effectivity thereof to the Secretary of Justice who shall render a decision within sixty (60) days from the date of receipt of the appeal: Provided, however, That such appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of the tax, fee, or charge levied therein: Provided, finally, That within thirty (30) days after receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction. Sec 188, LGC Publication of Tax Ordinance and Revenue Measures Within 10 days after their approval, certified true copies of all provincial, city, and municipal tax ordinances or revenue measures shall be published in full for 3 consecutive days in a newspaper of local circulation; Provided, however, That in provinces, cities and municipalities where there are no newspapers of local circulation, the same may be posted in at least 2 conspicuous and publicly accessible places. Tuzon vs. CA (1992) If it is to be considered a tax ordinance, then it must be shown to be enacted in accordance with the requirements of the Local Tax Code. These would include the holding of a public hearing on the measure and its subsequent approval by the Secretary of Finance, in addition to the usual requisites for publication of ordinances in general. Hagonoy Market Vendor Association vs. Municipality of Hagonoy (2002)
c.
d.
Date signed by Minister of Finance (for Revenue Regulations only) Date sent to organizations enumerated under par. 2.1 of RMC No. 20-86.
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But the law-making authority has spoken and the Court cannot refuse to apply the law-makers words. Whether or not the government can afford the drop in tax revenues resulting from such increased exemptions was for Congress (not for this Court) to decide. Commissioner vs. Solidbank Corp. (2003) While courts will not enlarge by construction the governments power of taxation, neither will they place upon tax laws so loose a construction as to permit evasions, merely on the basis of fanciful and insubstantial distinctions. When the legislature imposes a tax on income and another on business, the imposition must be respected. The Tax Code should be so construed, if need be, as to avoid empty declarations or possibilities of crafty tax evasion schemes. A taxing act will be construed, and the intent and meaning of the legislature ascertained, from its language. Its clarity and implied intent must exist to uphold the taxes as against a taxpayer in whose favor doubts will be resolved. No such doubts exist with respect to the Tax Code, because the income and percentage taxes we have cited earlier have been imposed in clear and express language for that purpose. This Court has steadfastly adhered to the doctrine that its first and fundamental duty is the application of the law according to its express terms -- construction and interpretation being called for only when such literal application is impossible or inadequate without them A literal application of any part of a statute is to be rejected if it will operate unjustly, lead to absurd results, or contradict the evident meaning of the statute taken as a whole. [S]tatutes should receive a sensible construction, such as will give effect to the legislative intention and so as to avoid an unjust or an absurd conclusion. While it is true that the contemporaneous construction placed upon a statute by executive officers whose duty is to enforce it should be given great weight by the courts, still if such construction is so erroneous, x x x the same must be declared as null and void. Rule When There Is Doubt Taxes, being burdens, are not to be presumed beyond what the statute expressly and clearly declares. Collector vs. La Tondena (1962) In every case of doubt, tax statutes are construed most strongly against the government and in favor of the citizens, because burdens are not to be imposed beyond what the statutes expressly and clearly import. Provisions Granting Tax Exemptions Strictly construed against the exemption 3. APPLICATION AND THE EFFECTS
OF OF
Hilado vs. Collector (1956) It is well-known that our internal revenue laws are not political in nature and as such were continued in force during the period of enemy occupation and in effect were actually enforced by the occupation government. Such tax laws are deemed to be the laws of the occupied territory and not of the occupying enemy. 2. CONSTRUCTION
OF
taxpayer
seeking
TAX LAWS
Rule When Legislative Intent is Clear Lorenzo vs. Posadas (1937) Retroactive effect of tax statute is allowed if the intent is perfectly clear generally, revenue laws which imposes taxes collected by the means ordinarily resorted to for the collection of taxes are not classed as penal laws (in this jurisdiction) Umali vs. Estanislao
Application of Tax Laws Art 2, CC Laws shall take effect after fifteen days following the completion of their publication in the Official Gazette, unless it is otherwise provided. This Code shall take effect one year after such publication.
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DIRECTORY PROVISIONS
OF
TAX LAWS
Roxas vs. Rafferty GENERAL RULE: that those provisions of a statute relating to the assessment of taxes, which are intended for the security of the citizen, or to insure the equality of taxation, or for certainty as to the nature and amount of each person's tax, are MANDATORY; EXCEPTIONS: those designed merely for the information or direction of officers or to secure methodical and systematic modes of proceedings are merely directory. When the regulations prescribed are intended for the protection of the citizen and to prevent a sacrifice of his property, and by a disregard of which his right might be, and generally would be, injuriously affected, they are not directory but mandatory." Sometimes statutes requiring the assessor to notify the taxpayer have been held merely directory. In the majority of jurisdictions this requirement is held to be mandatory, so that the assessor cannot make a valid assessment unless he has given proper notice. Pecson vs. CA For this misfortune that befell petitioner, he has nobody to blame but himself. As a property owner and a school teacher at that, he should know that if an owner fails to pay the real estate taxes on property, the said property shall be sold at public auction to recover the delinquent taxes. When petitioner's property was sold at a public auction in December 1980, the tax delinquency must have accumulated for several years. It was only on July 12, 1982 that the order for consolidation of title in the name of respondent Nepomuceno was issued and it was only on December 8, 1983 that the title over the property was transferred to respondents Tan and Nuguid. All throughout these years, petitioner never displayed an interest in paying the real estate taxes on the property. Worse, he introduced improvements thereon without reporting the same for tax purposes. BIR Ruling DA-121-01 July 18, 2001 ATTENTION : Mr. Vicente G. Ramos President & Gen. Manager Gentlemen: This refers to your letter dated November 15, 2000 (Ref. # 264/00/OP) requesting for a ruling on whether or not the examination of your 1997 books of accounts may still be pursued after the lapse of 120 days from its receipt by the revenue officer assigned and failure of revalidation within the same period. It is stated in your letter that last October 30, 1998, Revenue Region No. 8 issued Letter of Authority No. 000015124 authorizing Revenue Officers Emerita Tan and Socrates Regala to examine your books of accounts for the verification of your internal revenue taxes for the year ended December 31, 1997; that you have submitted to RO Tan the schedules she requested on January 15, 1999; that from that date up to September 15, 2000, ROs Tan &
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Income tax is a DIRECT TAX because the tax burden is borne by the income recipient upon whom the tax is imposed. It is a tax demanded from the very person who, it is intended or desired, should pay it, while indirect tax is a tax demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else. Income tax is a PROGRESSIVE TAX since the tax base increases as the tax rate increases. It is founded on the ability to pay principle and is consistent with the Constitutional provision that Congress shall evolve a progressive tax system. Income tax is generally regarded as an EXCISE TAX (privilege tax) and not a tax on persons, property, funds or profits. It is really a tax on the right to earn income by an individual or entity for government needs
accounts receivable, property exhaustion, and accounts payable for expenses incurred. Gross income, meaning income (in the broad sense) less income which is by statutory provision or otherwise exempt from tax imposed by law. Net income, meaning gross income less statutory deductions. The statutory deductions are, in general, though not exclusively, expenditures other than capital expenditures, other than a corporation as defined in Sec 84(b) (now Sec 20(b) of the Tax Code, net income less exemptions). Ordinarily the net income is to be computed in accordance with the method of accounting regularly employed in keeping the books of the taxpayer.
Conwi vs. CTA Income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest, or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as a flow of the fruits of ones labor. Commissioner vs. BOAC The definition of income is broad and comprehensive to include proceeds from sales of transport documents. The words income from any source whatsoever discloses a legislative policy to include all income not expressly exempted within a class of taxable income under our laws. Income means cash received or its equivalent. It is the amount of money coming from a person within a specified time. It means something distinct from principal or capital. For, while capital is a fund, income is the flow. As used in our income tax law, income refers to the flow of wealth Magdrigal vs. Rafferty The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the service of wealth. The Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains." B. SOURCES OF INCOME 1. CAPITAL / LABOR / EXCHANGE
OF
B. PURPOSES OF INCOME TAX: FISCAL / NON-FISCAL The imposition of income tax is intended to:
1. 2. 3.
to
defray
the
expenses
of
the
Offset regressive sales and consumption taxes; and together with estate tax Mitigate the evils arising from the inequalities of wealth by a progressive scheme of taxation which places the burden on those best able to pay.
CAPITAL
Capital for tax purposes, there are 3 general types of capital 1. Shares of stock of a domestic corporation 2. Real property of individuals or land/buildings of corporations 3. Other types of assets including shares of stock of foreign corporations Labor in general means all remuneration for services performed by an employee for his employer under an employer-employee relationship
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Commissioner vs. BOAC The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here & pmts for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, & occurred w/in, Phil. territory, enjoying the protection accorded by the Phil. government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. 2. INCOME DERIVED FROM WHATEVER SOURCE All income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income and regardless of the source of income
A.
General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: xxx
Eisner vs. Macomber Stock dividends are generally not subject to tax as long as there are no options in lieu of the shares of stock. On the other hand, a stock dividend constitutes income if it gives the shareholder an interest different from that which his former stockholdings represented. Helvering vs. Bruun While it is true that economic gain is not always taxable, it is settled that the realization of gain need not be in cash derived from the sale of an asset. Gain may occur as a result of exchange of property, payment of taxpayers indebtedness, relief from liability or other profit realized from a completion of a transaction. The fact that the gain is a portion of the value of property received by the taxpayer in the transaction does not negative its realization. Here, as a result of a business transaction, Bruun receives back his land with a new building on it, which added an ascertainable amount to its value. It is not necessary to the recognition of taxable gain that ha should be able to sever the improvement begetting the gain from his original capital. If that were necessary, no income could arise from the exchange of property, whereas such gain has always been recognized as realized taxable gain CIR vs. Javier We are persuaded by Javiers contention that there is no fraud in the filing of the return and agree fully with the CTAs interpretation of Javiers notation on his ITR: Taxpayer is a recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation, that it was an error or mistake of fact or law not constituting fraud. Such a notation was
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Flow Of Wealth Test Any economic benefit to the employee that increases his net worth, whatever may have been the mode by which it is effected, is taxable. (Economic benefit test)
3. KINDS / CLASSIFICATION OF TAXABLE INCOME OR GAIN Capital Gain NIRC Sec 39 - CAPITAL GAINS AND LOSSES
A.
1.
Capital Assets. - The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer. xxx
Gain from dealing in capital assets The NIRC defines a capital asset in a negative way. The law enumerates four categories of ordinary assets; hence, all assets (even if used in trade or business) other than ordinary assets are capital assets.
Ordinary Gain Includes any income or gain from the sale or exchange of property which is not a capital asset Business Income Gains or profits derived from rendering services, selling merchandise, manufacturing products, farming and longterm construction contracts. Income From Trade / Practice Of Profession Fees derived from engaging in an endeavor requiring special training as professional as a means of livelihood, which includes, but is not limited to, the fees of CPAs, doctors, lawyers, engineers and the like, provided that there is no employer-employee relationship between him and his clients Existence of employer-employee relationship: material in determining whether the income shall be treated as compensation income or professional income
When Is Income Realized Income is realized from the sale, exchange or other disposition of property. As a general rule, a mere increase in the value of the property is not income but merely unrealized increase in capital. For the same reason, a decrease in the value of a property is not normally allowed as a deductible loss. No income is derived nor a loss incurred by the owner until after the actual sale or other disposition of the property in the excess of its cost or adjusted basis. Tests To Determine Realization Of Income Severance Test
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Passive Income Income in which the taxpayer merely waits for the amount to come in. It includes, but is not limited to, interest income, royalty income, dividend income, winnings and prizes. Other Forms Of Gain Example: found treasure Income Tax Base / Meaning / Kind Approaches In Income Recognition Schedular tax system different types of income are subject to different seta of graduated or flat income rates. The applicable tax rates will depend on the classification of the taxable income and the basis could be gross income or net income Separate regular ITR or CGTR, whichever is applicable is filed by the recipient of income for appropriate types of income received No ITR is filed by the recipient of passive income subject to FWT Global tax system the allowable deductions, as well as personal and additional exemptions (in case of individuals) or the total allowable deductions only (in case of corporations), are deducted from the gross income to arrive at the net taxable income subject to the graduated income tax rates (in case of individuals) or to the 2-tiered income tax rates (in case of corporations) It does not matter what type of income the taxpayer received. All items are reported in one ITR and one set of rates are applied on the tax base Semi-global or semi-schedular tax system the compensation income, business or professional income, capital gain and passive income not subject to final tax, and other income are added together to arrive at a gross income, and after deducting the sum of allowable deductions, as well as exemptions, the taxable income is subjected to one set of graduated tax rates (if individual) or normal corporate income tax rates (if corporation). With respect to the above incomes, the computation is global. However, passive investment income subject to final tax and capital gains from sale or transfer of shares of stock of a domestic corporation and real properties remain subject to different sets of tax rates and covered by different tax returns. The scheduler approach thus applies to capital gains and passive income subject to final tax at preferential tax rates Tan vs. Del Rosario What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly shift the income tax system towards schedular approach in the income taxation of individual taxpayers and to maintain, by and large, the present global treatment on taxable corporations. We certainly do not view this classification as arbitrary or inappropriate. Bases Of Income Tax Gross Income / Receipts It means income, gain, or profit subject to tax. It includes compensation for personal services, business
D.
1.
In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer. Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned:
2.
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Domestic Depositary Bank (Foreign Currency Deposit Units) Resident carriers international
Offshore Banking Units Resident Depositary Bank (Foreign Currency Deposit Units) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies Non-resident cinematographic film owners, lessors or distributors Non-resident owners or lessors of vessels chartered by Philippine nationals Non-resident lessors of aircraft, machinery and other equipment
TAXPAYERS
N.
The term "taxpayer" means any person subject to tax imposed by this Title.
Sub-Classification(s) Residents of the Philippines (net/worldwide) Not Residents of the Philippines (net/within) Residents of the Philippines (net/within) Engaged in Trade or Business in the Philippines Not (net/within) Residents of the Not Engaged in Trade Philippines or Business in the Philippines (gross/within) Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies Individual Employed by Offshore Banking Units Individual Employed by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines
Individual Citizens 1. Resident (Net / Worldwide) A citizen is deemed a resident of the Philippines and thus subject to income tax on his worldwide income unless he qualifies as a non-resident under NIRC Sec 22 (E) Non Resident (Net / Within) NIRC Sec 22 DEFINITIONS When used in this Title:
Aliens
Individuals
2.
E.
1. A
citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein.
Treated as individual taxpayer Domestic Corporations (net/worldwide) Foreign Corporations Special Classes of Corporations Resident Corporations (net/within) Non-resident Corporations (gross/within) Proprietary educational institutions and non-profit hospitals
2. A 3. A
citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.
4. A
citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time
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C.
The term "domestic", when applied to a corporation, means created or organized in the Philippines or under its laws.
5. The
taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section. 3. OFW (Net / Within) Taxed only on income from sources within the Philippines
D.
1.
The term "foreign", when applied to a corporation, means a corporation which is not domestic. Resident Doing Business (Net / Within) NIRC Sec 22 DEFINITIONS When used in this Title:
H.
2.
The term "resident foreign corporation" applies to a foreign corporation engaged in trade or business within the Philippines. Non - Resident NIRC Sec 22 DEFINITIONS When used in this Title:
Alien 1. Resident (Net / Within) NIRC Sec 22 DEFINITIONS When used in this Title:
F.
2.
I.The
The term "resident alien" means an individual whose residence is within the Philippines and who is not a citizen thereof. Non Resident Engaged In Trade Or Business (Net / Within) NIRC Sec 22 DEFINITIONS When used in this Title: The term "nonresident alien" means an individual whose residence is not within the Philippines and who is not a citizen thereof. Non Resident Not Engaged In Trade Or Business (Gross / Within)
term nonresident foreign corporation applies to a foreign corporation not engaged in trade or business within the Philippines. Estates and Trusts Treated as individual taxpayer 5. ACCOUNTING PERIODS AND METHODS INCOME AND DEDUCTIBLE EXPENSES Calendar Year / Fiscal Year NIRC Sec 22 DEFINITIONS When used in this Title:
OF
G.
3.
P.
B.
The term "corporation" shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. "General professional partnerships" are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.
The term "taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this Title. 'Taxable year' includes, in the case of a return made for a fractional part of a year under the provisions of this Title or under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the commissioner, the period for which such return is made. The term "fiscal year" means an accounting period of twelve (12) months ending on the last day of any month other than December.
Q.
Domestic (Net / Worldwide) NIRC Sec 22 DEFINITIONS When used in this Title:
NIRC Sec 43 - GENERAL RULE The taxable income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer, but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no
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RR2 Sec 51 WHEN INCOME IS TO BE REPORTED Gains, profits, and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, and money or property is recovered on a judgment thereof in a later year, income is realized in that year, assuming that the money or property would have been income in the earliest year if then received. This is true of a recovery for patent infringement. Bad debts or accounts charged off subsequent to March 1, 1913, because of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when amounts are charged off RR2 Sec 52 INCOME CONSTRUCTIVELY RECEIVED Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced in possession. To constitute receipt in such case, the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. A book entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date the mere crediting on the books of the corporation does not constitute receipt. RR2 Sec 53 EXAMPLES OF CONSTRUCTIVE RECEIPT When interest coupons have matured and are payable, but have not been cashed, such interest payment, though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year during which the coupons matured. This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted coupons are
A.
Returns for Short Period Resulting from Change of Accounting Period. - If a taxpayer, other than an individual, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year, a separate final or adjustment return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate final or adjustment return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final or adjustment return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year. Income Computed on Basis of Short Period. Where a separate final or adjustment return is made under Subsection (A) on account of a change in the accounting period, and in all other cases
B.
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A.
Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed, bears to the total contract price. Sales of Realty and Casual Sales of Personality. In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding One thousand pesos (P1,000), or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed twenty-five percent (25%) of the selling price, the income may, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be returned on the basis and in the manner above prescribed in this Section. As used in this Section, the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. Sales of Real Property Considered as Capital Asset by Individuals. - An individual who sells or disposes of real property, considered as capital asset, and is otherwise qualified to report the gain therefrom under Subsection (B) may pay the capital gains tax in installments under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of Subsection (A) elects for any taxable year to report his taxable income on the installment basis, then in computing his income for the year of change or any subsequent year, amounts actually received during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded.
B.
Long term contracts NIRC Sec 48 - ACCOUNTING FOR LONG-TERM CONTRACTS Income from long-term contracts shall be reported for tax purposes in the manner as provided in this Section. As used herein, the term 'long-term contracts' means building, installation or construction contracts covering a period in excess of one (1) year. Persons whose gross income is derived in whole or in part from such contracts shall report such income upon the basis of percentage of completion. The return should be accompanied by a return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or require an amended return. Methods in determining the percentage of completion period 1. The costs incurred under the contract as of the end of the tax year are compared with the estimated total cost to be performed 2. The work performed on the contract as of the end of the tax year is compared with the estimated work to be performed Return should be accompanied by the certificate of the architect or engineer showing the percentage completion during the taxable year of the entire work performed under the contract All expenditures should be deducted from the gross income
C.
D.
Installment Sales
NIRC Sec 50 - ALLOCATION OF INCOME AND DEDUCTIONS In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determined that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade
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Sales of Dealers in Personal Property A person who regularly sell or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received that year, which gross profit realized or to be realized when payment is complete of the total contract price.
A casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year) for a price exceeding One thousand pesos (P1000); or a sale or other disposition of real property In either case the initial payments muse NOT exceed 25% of the selling price
'Initial payments' means the payment received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. Income Tax Treatment: Income may be return on the same basis as sales of dealers in personal property (see section A)
Sales of Real Property Considered as Capital Asset by Individuals An individual who sells or disposes of real property considered as capital asset; and is otherwise qualified to report the gain therefrom under Subsection (B) may pay the capital gains tax in installments.
Termination of Leasehold RR2 Sec 49 IMPROVEMENTS BY LESSEES When buildings are erected or improvements made by a lessee in pursuance of an agreement with the lessor, and such buildings or improvements are not subject to removal by the lessee, the lessor may at his option report the income therefrom upon either of the following bases: a. The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or improvements subject to the lease b. The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease and report as income for each of the lease an adequate part thereof If for any other reason than a bona fide purchase from the lessee by the lessor the lease is terminated, so that the lessor comes into possession or control of the property prior to the time originally fixed for the
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A.
General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items:
1.
Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; 2. Gross income derived from the conduct of trade or business or the exercise of a profession; 3. Gains derived from dealings in property; 4. Interests; 5. Rents; 6. Royalties; 7. Dividends; 8. Annuities; 9. Prizes and winnings; 10. Pensions; and
11. Partner's
distributive share from the net income of the general professional partnership. xxx
RR2-98 Sec 2.78.1 (A) WITHHOLDING OF INCOME ON COMPENSATION INCOME Compensation means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code Designation is immaterial can be salaries, wages, etc Basis upon which the remuneration is paid is immaterial can be hourly, daily, etc Remuneration for services constitutes compensation even if er-ee relationship no longer exists at the time when payment is made Additional rules: 1. Compensation paid in kind paid in medium other than money FMV of the thing used as payment subject to withholding Services rendered at a stipulated price price is presumed to be the FMV of the services Stocks FMV of the stocks at the time service was rendered 2. Living quarters or meals value of the living quarters or meals to the person shall be added to the remuneration to determine the amount of compensation subject to withholding If for the convenience of the employer, not part of compensation
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RAMO 1-87 GUIDELINES IN THE VERIFICATION OF HOUSING, TRAVEL, REPRESENTATION, ENTERTAINMENT AND ADVERTISING EXPENSES AND OTHER DEDUCTIONS FROM TAXABLE INCOME Housing and meals - value of the living quarters or meals to the person shall be added to the remuneration to determine the amount of compensation subject to withholding Housing excluded if: Employee is required to accept such lodging as a condition of his employment and Furnished in the employers business premises If outside business premises and employee, by reason of his position, uses the place for the benefit of the employer (entertaining guests, etc), only 50% of the allowance shall be added to compensation of employee Meals excluded if: Furnished in the employers business premises and Furnished for the convenience of the employer Furnished to the employee during his work day to have his employee available for work during his meal period Business premises of the employer place where the employee performs a significant portion of his duties or where the employer conducts a significant portion of his business Courtesy discounts not added to compensation if the value does not exceed basic monthly salary
Must be substantiated to be excluded from compensation and deductible by the employer as business expense 2 foreign conventions a year shall constitute a deductible expense and shall not constitute compensation Home leave of an expatriate deductible expense and excluded form compensation Family expenses paid by the employer may not be deducted by employer or may be deducted, in which case, will constitute compensation of the employee Maintenance and operation of company vehicle deductible not compensation But only one vehicle can be assigned to the use of any company officer or employee Representation and entertainment expenses Deductible by the employer if: Used primarily for the furtherance of employers trade or business Only to the extent allowable Substantiated Dues paid to social, athletic, etc club per officer not considered as compensation and deductible as business expense Does not include purchase of proprietary shares and expenses in the said club unless complies with the rules on substantiation Dues paid to professional or business organizations (Rotary, Lions, etc) not taxable to the employee and deductible to the employer Reimbursement for groceries, market, drugstore, department store, etc compensation subject to withholding Unless fully substantiated and incurred exclusively in the pursuit of trade or business
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RR 1-82 Sec 7 DEFINITION OF GROSS COMPENSATION INCOME Gross compensation income is defined as income arising out of the employer-employee relationship. Generally, an employer-employee exists when the person from whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished 2. TREATMENT
OF
FRINGE BENEFITS
RR 3-98 IMPLEMENTING NIRC SEC 33 RELATIVE TO SPECIAL TREATMENT OF FRINGE BENEFITS Final withholding tax imposed on the grossed up monetary value (GMV) of the fringe benefit (FB) paid by employer to employee Except: 1. Paid to rank and file employee All employees holding neither managerial or supervisory position 2. FB is required by nature of or necessary to the business or profession of employer 3. FB is for the convenience or advantage of the employer 4. GMV of the FB whole amount of income realized by the employee
Determined by dividing the actual monetary value of the fringe benefit by 68% Valuation of FB: 1. FB granted in money value of the amount paid 2. FB granted or furnished in property -
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