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2010 Taxation Review by Domondon

“BAR STAR NOTES” TAXATION VER. 2010.08.12 copyrighted 2010 Prepared by Prof. Abelardo T. Domondon (AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.). Lawyer-CPA-Customs Broker, Management Consultant, Professor of Law and Pre-Bar Reviewer) How to use the “BAR STAR NOTES.” The “BAR STAR NOTES” in the form of questions and answers as well as textual discussion were specially prepared by Prof. Domondon for the exclusive use of Bar Reviewees who attended the 2010 Wrap-Up Lectures on TAXATION conducted by Primus Information, Center, Inc., and the Bar Reviewees of various law schools and Review Centers where he was invited to lecture on Taxation. Included in the presentation are doctrines contained in Supreme Court decisions up to April 2010. The purpose of the ‘BAR STAR NOTES” is to provide the Bar Reviewee with a handy review material which serves as “memory-joggers” for the September 12, 2010 Bar Examinations in Taxation. The author tries to second guess what would be included in the Bar Exams using statistical analysis. The actual Bar questions may not be formulated in the same manner as the “BAR STAR NOTES”. However, the doctrines tested in the Bar would in all probability be included in these Notes. If pressed for time, the author suggests that the reader should focus his attention on the following: â ââ âââ Nice to know Should know Must know and master

It is further suggested that the reader should merely browse those without stars. The BAR STAR NOTES in TAXATION is the 4th in the series of Bar Star Notes the author has prepared for all the eight Bar subjects. The other Bar Star Notes may be availed of by enrolling in the 2010 Wrap-Up lectures conducted by PRIMUS INFORMATION CENTER, INC. Please feel free to call Baby, Tel. No. 816-07-68 or 817-84-49; Leon, Mobile No. 0917-793-6169; Atty. Celia, Mobile No. 0917-790-8406, or Venny, Mobile No. 0917-337-6479.

TAXATION GENERAL PRINCIPLES OF TAXATION TAXATION, IN GENERAL â 1. State briefly and concisely the nature of taxation. Alternatively, define taxation. SUGGESTED ANSWER: The inherent power of the sovereign exercised through the legislature to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. âââ 2. What is the nature of the State’s power to tax ? Explain briefly. SUGGESTED ANSWER: The nature of the state’s power to tax is two-fold. It is both an inherent power and a legislative power. It is inherent in nature being an attribute of sovereignty. This is so, because without the taxes, the state’s existence would be imperiled. There is thus, no need for a constitutional grant for the state to exercise this power. It is a legislative power because it involves the promulgation of rules. Taxation is a set of rules, how much is the tax to be paid, who pays the tax, to whom it should be paid, and when the tax should be paid. â 3. What is the underlying theory of taxation ? Explain briefly. SUGGESTED ANSWER: Taxes are the lifeblood of the nation. Without revenue raised from taxation, the government will not survive, resulting in detriment to society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. (Commissioner of Internal Revenue v. Algue, Inc. et al., 158 SCRA 8, 16-17) â 4. Marshall said that, “the power to tax involves the power to destroy.” On the other hand, Holmes stated that “the power to tax is not the power to destroy while the court sits.” Reconcile the statements. In the alternative, what are the implications that flow from the above statements? SUGGESTED ANSWERS: Marshall’s view refers to a valid tax while the Holmes’ view refers to an invalid tax. a) The imposition of a valid tax could not be judicially restrained merely because it would prejudice taxpayer’s property. b) An illegal tax could be judicially declared invalid and should not work to prejudice a taxpayer’s property. â 5. Discuss briefly the basis/bases, or rationale of taxation. SUGGESTED ANSWER: a) Reciprocal duties of protection and support between the state and its citizens and residents. called “symbiotic relation” between the state and its citizens. b) Jurisdiction by the state over persons and property within its territory. â 6. Discuss briefly but comprehensively the objectives or purposes of taxation. SUGGESTED ANSWER: The purposes or objectives of taxation are the following: a) The primary purpose: 1) Revenue purpose. b) The secondary purposes 1) Sumptuary or regulatory purpose. 2) Compensatory purpose. 3) To implement the power of eminent domain. â 7. Distinguish a tax from a license fee. SUGGESTED ANSWER: The following are the distinctions: a) Purpose: Tax imposed for revenue while license fee for regulation. Tax for general public purposes while license fee for regulatory purposes only.

Also

b) c) d) e) f)

Basis: Tax imposed under power of taxation while license fee under police power. Amount: In taxation, no limit as to amount while license fee limited to cost of the license and the expenses of police surveillance and regulation. Time of payment: Taxes normally paid after commencement of business while license fee before. Effect of payment: Failure to pay a tax does not make the business illegal while failure to pay license fee makes business illegal. Surrender: Taxes, being the lifeblood of the state, cannot be surrendered except for lawful consideration while a license fee may be surrendered with or without consideration. (Cooley on Taxation, pp. 1137-1138; Pacific Commercial Company v. Romualdez, et al., 49 Phil. 924)

â 8. How may the power to tax be utilized to carry out the social justice program of our government? SUGGESTED ANSWER: The compensatory purpose of taxation is to implement the social justice provisions of the constitution through the progressive system of taxation, which would result to equal distribution of wealth, etc. Progressive income taxes alleviate the margin between rich and poor. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) In recent years, the increasing social challenges of the times expanded the scope of the state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives. (Batangas Power Corporation v. Batangas City, et al., G. R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003) 9. Explain the sumptuary purpose of taxation. SUGGESTED ANSWER: The sumptuary purpose of taxation is to promote the general welfare and to protect the health, safety or morals of the inhabitants. It is in the joint exercise of the power of taxation and police power where regulatory taxes are collected. Taxation may be made the implement of the state’s police power. The motivation behind many taxation measures is the implementation of police power goals. [Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) The reader should note that the August 3, 2005 Southern Cross case is the decision on the motion for reconsideration of the July 8, 2004 Southern Cross decision. The so-called “sin taxes” on alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of these potentially harmful products. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) 10. Taxation distinguished from police power. Taxation is distinguishable from police power as to the means employed to implement these public goals. Those doctrines that are unique to taxation arose from peculiar considerations such as those especially punitive effects (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) as the power to tax involves the power to destroy and the belief that taxes are lifeblood of the state. (Ibid.) taxes being the lifeblood of the government, their prompt and certain availability is of the essence.” These considerations necessitated the evolution of taxation as a distinct legal concept from police power. (Ibid.) 11. How the power of taxation may be used to implement power of eminent domain. Tax measures are but ”enforced contributions exacted on pain of penal sanctions” and “clearly imposed for public purpose.” In most recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005) Establishments granting the 20% senior citizens discount may claim the discounts granted to senior citizens as tax deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted. Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended. [M.E. Holding Corporation v. Court of Appeals, et al., G.R. No. 160193, March 3, 2008 citing Expanded Senior Citizens Act of 2003, Sec. 4 (a)]

â12. What are the three basic principles of a sound tax system? Explain each briefly. SUGGESTED ANSWER: The canons of a sound tax system, also known as the characteristics or, principles of a sound tax system, are used as criteria in order to determine whether a tax system is able to meet the purposes or objectives of taxation. They are: a) Fiscal adequacy. b) Administrative feasibility. c) Theoretical justice. â 13. What are the elements or characteristics of a tax? SUGGESTED ANSWER: a) Enforced contribution. b) Generally payable in money. c) Proportionate in character. d) Levied on persons, property or exercise of a right or privilege. e) Levied by the state having jurisdiction. f) Levied by the legislature. g) Levied for a public purpose. h) Paid at regular periods or intervals. 14. State the requisites of a valid tax. SUGGESTED ANSWER: a) A valid tax should be within the jurisdiction of the taxing authority. b) That the assessment and collection of certain kinds (The same as the inherent limitations of the power of taxation) should be for a public purpose. c) The rule of taxation should be uniform. d) That either the person or property of taxes guarantees against injustice to individuals, especially by way or notice and opportunity for hearing be provided. e) The tax must not impinge on the inherent and Constitutional limitations on the power of taxation. â15. What are the classes or kinds of taxes according to the subject matter or object? SUGGESTED ANSWER: a) Personal, poll or capitalization – imposed on all residents, whether citizen or not. Example – Community Tax. b) Property - Imposed on property. Example – Real property tax. c) Excise – imposed upon the performance of an act, the enjoyment of a privilege or the engaging in an occupation. Example – income tax, estate tax. ââ16. What are the kinds of taxes classified as to who bears the burden? Explain each briefly. SUGGESTED ANSWER: Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden of taxation, taxes may be classified into: a) Direct taxes. Those that are extracted from the very person who, it is intended or desired, should pay them (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G. R. No. 140230, December 15, 2005); they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in, (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, supra) which liability cannot be shifted or transferred to another. Example – income tax, estate tax, donor’s tax, etc. b) Indirect taxes are those that are demanded in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, supra) to someone else not as a tax but as part of the purchase price. (Commissioner, of Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005 citing various cases and authorities) Example – value added tax (VAT), documentary stamp tax, excise tax, percentage tax, etc.

conventions. 1991. 380. Inc.D. Jr. Commissioner of Internal Revenue. 938 [NPC’s amended charter] amended the tax exemption by simplifying the same law in general terms. The amendment under Republic Act No. Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority.. The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore cannot. Macaraig. Presidential Decree No. not Silkair. G. 461. with the exception of charges corresponding to the service performed. Jr.R. SUGGESTED ANSWER: Silkair is not entitled to tax refund or credit for the following reasons: a) The excise tax on aviation fuel is an indirect tax. No.. inspection fees and other duties or taxes imposed in the territory of the first Contracting Party. entities or agencies” Silkair further anchors its claim on Article 4(2) of the Air Transport Agreement between the Government of the Republic of the Philippines and the Government of the Republic of Singapore (Air Transport Agreement between RP and Singapore) which reads: “Fuel.. No. Macaraig. be exempt from the same customs duties. G. be construed as including indirect taxes. 6395 enumerated the details covered by NPC’s exemption. Inc. Philippine Long Distance Telephone Company. Thus. lubricants. In Commissioner of Internal Revenue v. P. unless the exempting statute.. Jr. among others.. 88291. Macaraig. and if an exemption is found to exist. Ltd. the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser. viz: It may be so that in Maceda vs. or taken on board aircraft in the territory of one Contracting party by.which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect taxes. the Court held that an exemption from “all taxes” granted to the National Power Corporation (NPC) under its charter includes both direct and indirect taxes. regular equipment and aircraft stores introduced into. like NPC’s charter. is so couched as to include indirect tax from the exemption. it must not be . 88291. without a clear showing of legislative intent. No.R. December 15. v.R. An exemption from “all taxes” excludes indirect taxes. a designated airline of the other Contracting Party and intended solely for use in the operation of the agreed services shall. Commissioner of Internal Revenue. v. Jr. 317-318) The NIRC provides that the excise tax should be paid by the manufacturer or producer before removal of domestic products from place of production. The proper party to question. 478 SCRA 61 the Supreme Court clarified the ruling in Maceda v. however. 154028. Is Silkair entitled to the tax refund or credit it seeks? Reason out your answer. 2005. That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers. or on behalf of. which it uses for its operations.which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect taxes. 140230. July 29. Even if Petron Corporation passed on to Silkair the burden of the tax. is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore. 1991. (Philippine Geothermal. purchased aviation gas from Petron Corporation. It succinctly exempts NPC from “all forms of taxes.ââ17. made even more specific the details of the exemption of NPC to cover. duties. Macaraig. inspection fees and other duties or taxes imposed in the territories of the first Contracting Party . or seek a refund of. both direct and indirect taxes on all petroleum products used in its operation. No. 135 of the NIRC of 1997 which provides that petroleum products are exempt from excise taxes when sold to “Exempt entities or agencies covered by tax treaties.. 470 (1967)] b) Silkair could not seek refuge under Maceda v.R. an indirect tax is the statutory taxpayer. spare parts. 197 SCRA 771. May 31. even when these supplies are to be used on the parts of the journey performed over the territory of the Contracting Party in which they are introduced into or taken on board. It now claims for refund or tax credit for the excise taxes it paid claiming that it is exempt from the payment of excise taxes under the provisions of Sec.” Silkair likewise argues that it is exempt from indirect taxes because the Air Transport Agreement between RP and Singapore grants exemption “from the same customs duties. [Philippine Acetylene Co. May 31. 127 Phil. the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. Petron Corporation. fees…” The use of the phrase “all forms” of taxes demonstrates the intention of the law to give NPC all the tax exemptions it has been enjoying before. G. Subsequently. 2005. an international carrier. 465 SCRA 308. G. It invokes Maceda v. The materials referred to above may be required to be kept under customs supervision and control. 197 SCRA 771. and other international agreements for their use and consumption: Provided. Silkair (Singapore) PTE.

This would still be for a public purpose. b) Inequalities resulting from the singling out of one particular class for taxation or exemption infringe no constitutional limitation. g) Private persons may be benefited but such benefit should be merely incidental as its main object is the benefit of the community in general. not so much for revenue purposes. e) Public purpose continually expanding. A violation of the limitations serves to invalidate a tax law or act in the exercise of the power to tax. No. but under police power for the general welfare of the community. An alternative meaning is that tax proceeds should be utilized only to attain the objectives of government. c) An individual taxpayer need not derive direct benefits from the tax. Purpose for the limitations on the power of taxation. What are the inherent limitations on the power of taxation? SUGGESTED ANSWERS: a) Public purpose. 173594. REASON: The paramount consideration is the welfare of the greater portion of the population.. G. BASIS: The lifeblood theory. fiscal or revenue – imposed for the purpose of raising public funds for the service of the government. Thus. The revenues collected from taxation should be devoted to a public purpose. (Silkair (Singapore) PTE.. i) There is a presumption of public purpose even if the tax law does not specifically provide for its purpose. f) Tax revenue must not be used for purely private purposes or for the exclusive benefit of private persons. 1047) . Only the legislature can exercise the power of taxes unless the same is delegated to some other governmental body by the constitution or through a law which does not violate any provision of the constitution. d) A tax may be imposed. b) No improper delegation of legislative authority to tax. 2008) â 18.R. The inherent and constitutional limitations to the power of taxation are safeguards which would prevent abuse in the exercise of this otherwise unlimited and plenary power. The limitations also serve as a standard to measure the validity of a tax law or the act of a taxing authority. and e) Observance of the principle of comity. The taxing power should be exercised only within territorial boundaries of the taxing authority. February 6.. 94 Phil. What are the principles to consider in the determination of whether tax revenues are devoted for a public purpose? SUGGESTED ANSWER: a) The tax revenues are for a public purpose if utilized for the benefit of the community in general. Comity is the respect accorded by nations to each other because they are equals.enlarged by construction. What are the different kinds of taxes classified as to purpose? SUGGESTED ANSWER: a) General. et al. Areas formerly left to private initiative now lose their boundaries and may be undertaken by the government if it is to meet the increasing social challenges of the times. Commissioner of Internal Revenue. Ltd. the power should be imposed upon equals out of respect. v. h) Determined at the time of enactment of tax law and not at the time of implementation. REASON: It is inherent in the power to tax that the legislature is free to select the subjects of taxation. b) Special or regulatory – imposed primarily for the regulation of useful or non-useful occupation or enterprises and secondarily only for the raising of public funds. Some authorities include no double taxation. LIMITATIONS OR RESTRICTIONS ON THE POWER 1. On the other hand taxation is an act of sovereign. (Santos & Co. ââ 2. v. INHERENT LIMITATIONS ââ 1. Municipality of Meycauayan. d) Recognition of government exemptions. c) Territoriality.

Jr. No. v. 2007. v. public welfare. Inc. or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law. No. G.. b) Moreover. etc. G. 337 SCRA 733. 2005) or employees who are going to be demoted. (David.. No. 2005 citing Gonzales v. there must be a showing: 1. SUGGESTED ANSWER: a) In general. 167919. the case should involve constitutional issues. 741) .S.et al. to improve the working conditions in coconut mills and to conduct research on the use of coconut oil for motor fuel. Only those directly affected have locus standi to impugn the alleged encroachment by the executive department into the legislative domain of Congress. R. G. therefore. 1993. 110 Phil. supra) 3. Decide with reason. citing Gonzales v. et al. (David. there must be a showing of obvious interest in the validity of the election law in question. (Abaya v. Presidential Commission on Good Government.etc. and if at all. 157509. G. January 18.R. 112655 December 9. Secretary of Public Works. supra. transferred or otherwise affected by any personnel action subject o the rule on exhaustion of administrative remedies. No. 171396. et al. R. It cannot be denied that the coconut industry is one of the major industries supporting the national economy. Minute Resolution) A taxpayer’s suit is properly brought only when there is an exercise of the spending or taxing power of Congress. .” (Flast v.etc. 83) 2. but also of export earnings. No.. 2006) b) For taxpayers..et al. 392 U. Narvasa. May 3. G. G. President Gloria Macapagal-Arroyo. Central Luzon Drug Corporation. public benefit. Garcia v. 252) ââ 4. such as for example employees who would find themselves subject to disciplinary powers that may be imposed under the questioned Executive Order as they have a direct and specific interest in raising the substantive issue therein (Automotive Industry Workers Alliance (AIWA). (Philippine Coconut Producers Federation. concerned citizens. only Congress. et al. R. G.. et al. the law violates the rule that public revenues shall not be appropriated for anything but a public purpose. R. namely. 33) or a claim of illegal disbursement of public funds or that the tax measure is unconstitutional. . Enriquez. August 14.. etc.. 171396. For legislators.j) Public use is no longer confined to the traditional notion of use by the public but held synonymous with public interest. etc. (David. modify and/or repeal laws. 337 SCRA 733. etc. R. (Commissioner of Internal Revenue v. 2006) c) d) e) 5. 157509.R. the proceeds of which are to be used exclusively for the protection and promotion of the coconut industry. Romulo. v. there must be a claim that the official action complained of infringes upon their prerogatives as legislators. No. and public convenience. R. 159647. February 14. January 18. No. A law was enacted imposing a tax on manufacturers of coconut oil. Requisites for taxpayers. No. the state’s concern to make it a strong and secure source not only of the livelihood of the significant segment of the population. R. Narvasa. et al. voters or legislators to have locus standi to sue. Cohen. Romulo. (Automotive Industry Workers Alliance (AIWA).etc.. President Gloria MacapagalArroyo. Ebdane. SUGGESTED ANSWER: a) Only those who shall be directly affected by such executive encroachment. can claim any injury from the alleged executive encroachment of the legislative function to amend. April 16. August 14.. 2000.... et al. there must be a showing that the issues raised are of transcendental importance which must be settled early. 140835. (Automotive Industry Workers Alliance (AIWA). 741) For voters. and therefore. It is. 178 SCRA 236..2000. No. v. SUGGESTED ANSWER: The levy is for a public purpose. 2005) ââ 3. Some of the manufacturers of coconut oil challenge the validity of the law. 140835. That public money is being deflected to any improper purpose (Pascual v. contending that the tax is to be used for a private purpose.. (Cocofed v. G. For concerned citizens. May 3. G. A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed. That tax money is “being extracted and spent in violation of specific constitutional protections against abuses of legislative power. or that public money is being deflected to any improper purpose. et al. the sustained growth of which is one of the imperatives of economic growth.

” Was there an invalid delegation of legislative power? SUGGESTED ANSWER: No. The power to tax is no longer vested exclusively on Congress. b) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution. d) Delegation to the people at large. Article X of the Constitution. local legislative bodies are now given direct authority to levy taxes. Batangas City. The President cannot set aside the findings of the Secretary of Finance. Section 28 (2). Locus standi being merely a matter of procedure. “Paradigm shift” from exclusive Congressional power to direct grant of taxing power to local legislative bodies. “is not regarded as a transfer of general legislative power. raise the rate of value-added tax to twelve percent (12%) after any of the following conditions have been satisfied. effective January 1. April 9. but pursuant to direct authority conferred by Section 5. April 28. of course. the basic . or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law. 149110. the President. No. G. 167919. Ermita. 2004 citing National Power Corporation v. R. 2006. v. G. the power of local government units to tax is still limited. City of Cabanatuan.6.. R. 2005]. In the above case the Secretary of Finance becomes merely the agent of the legislative department. which is referred to as subordinate legislation. No. b) A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed. G.. 65 Phil.. The VAT law provides that. but rather as the grant of authority to prescribe local regulations. Vera. The taxing power of local governments is limited in the sense that Congress can enact legislation granting tax exemptions. etc. to determine and declare the even upon which its expressed will takes place. Article VI of the Constitution. etc. to the interposition of the superior in cases of necessity. September 1. Ebdane.168056. (Batangas Power Corporation v. fees and other charges pursuant to Article X. no longer merely by virtue of a valid delegation as before. September 1. and to ratify treaties which may contain tax exemption provisions subject to the concurrence by the Senate in the ratification made by the President. G. upon the recommendation of the Secretary of Finance. R. who must do it. The following are examples of instances where suits have been brought by parties who have not have been personally injured by the operation of a law or any other government act but by concerned citizens. et al. 152675. and companion case. Taxing power of the local government is limited. who is not under the conditions acting as the execute alter ego or subordinate. February 14. taxpayers or voters who actually sue in the public interest: SUGGESTED ANSWER: a) Taxpayer’s suits to question contracts entered into by the national government or government-owned or controlled corporations allegedly in contravention of the law.” (People v. (Abaya v. there is a requirement that the law is complete in all aspects so what is delegated is merely the implementation of the law or there exists sufficiently determinate standards to guide the delegate and prevent a total transference of the taxing power. et al. While the power to tax by local governments may be exercised by local legislative bodies. 168056. c) The delegation to the President of the Philippines to enter into executive agreements. There is no undue delegation of legislative power but only of the discretion as to the execution of the law. shall. 56) 10. R. subject. Ermita. have been waived in certain instances where a party who is not personally injured may be allowed to bring suit. or that public money is being deflected to any improper purpose. Congress does not abdicate its functions or unduly delegate power when it describes what job must be done. [Abakada Guro Party List (etc. and what is the scope of his authority. No. e) Delegation to administrative bodies [Abakada Guro Party List (Formerly AASJS).. In this instance. 2005 and companion cases citing various cases]] 8. R. according to immemorial practice. 9. This is constitutionally permissible. No. G. . 2007) â 7. et al. No.) v. 2003) Local government legislation. section 5 of the 1987 Constitution. Instances of proper delegation: When taxing power could be delegated: Exceptions to the rule on non-delegation: SUGGESTED ANSWER: a) Delegation of tariff powers by Congress to the President under the flexible tariff clause. “(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 ½%). While the system of local government taxation has changed with the onset of the 1987 Constitution.

162015.. uniform within a locality. v. ABS-CBN Broadcasting Corporation. September 11. General principles of income taxation in the Philippines or the source rule of income taxation as provided in the NIRC of 1997. 23. Marcos. October 6. 166408. ABS-CBN Broadcasting Corporation. to tax is prescribed by Section 151 in relation to Section 137 of the LGC which expressly provides that notwithstanding any exemption granted by any law or other special law. The local company withheld the amount of P107. It is understood. that taxes imposed by local government must be for a public purpose. ABS-CBN Broadcasting Corporation. March 6. October 6. That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker. Inc. Is her contention correct? .” [Ibid. Inc. Bayan Telecommunications. Inc. the power of local governments.. 261 SCRA 667. 1996. G. City of Davao] âââ 13. No.R. 680) 11.” The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations. R. Bayan Telecommunications. R. doubts must be resolved in favor of municipal corporations. 120082. v. v. et al. G. G. is taxable only on income derived from sources within the Philippines.. Reconciliation of the local government’s authority to tax and the Congressional general taxing power. pursuant to a declared national policy. R. 484 SCRA 16) “Indeed. v. c) An individual citizen of the Philippines who is working and deriving income abroad as an overseas contract worker is taxable only on income from sources within the Philippines: Provided. emphasis supplied) ââ14. “What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation. (PLDT) vs. which includes the power to grant tax exemptions. She filed a claim for refund alleging that her sales commission is not taxable because the same was a compensation for her services rendered in Germany and therefore considered as income from sources outside the Philippines. et al. March 6. G. such as provinces and cities for example Quezon City. et al. 2006. et al. et al. (Quezon City.. Moreover. in interpreting statutory provisions on municipal fiscal powers. the City or a province may impose a franchise tax.. On the other hand. b) A nonresident citizen is taxable only on income derived from sources within the Philippines. v. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers. No. must not be confiscatory. doubts will be resolved in favor of municipal corporations. SUGGESTED ANSWER: a) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines. and f) A foreign corporation. Juliane a non-resident alien appointed as a commission agent by a domestic corporation with a sales commission of 10% all sales actually concluded and collected through her efforts. They no longer have to wait for a statutory grant of these powers. 166408. G. 484 SCRA 169) 12.doctrine on local taxation remains essentially the same. No. March 6. It must be noted that Section 137 of the LGC does not prohibit grant of future exemptions.. What it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue. G. Bayan Telecommunications. d) An alien individual. these limitations must be “consistent with the basic policy of local autonomy. NIRC of 1997. 484 SCRA 169 in turn referring to Mactan Cebu International Airport Authority. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. and must be within the jurisdiction of the local unit to pass. Henceforth. e) A domestic corporation is taxable on all income derived from sources within and without the Philippines. whether engaged or not in trade or business in the Philippines.R.” (Quezon City. No. G.R. v.. v. No. whether a resident or not of the Philippines. however. (Sec. 2008 citing City Government of Quezon City. No. 166408. is taxable only on income derived from sources within the Philippines. Congress has the inherent power to tax. The Supreme Court in a series of cases has sustained the power of Congress to grant tax exemptions over and above the power of the local government’s delegated power to tax.000 from her sales commission and remitted the same to the BIR. Inc. Further amplification by Bernas of the local government’s power to tax. 2006. the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons. et al. 162015. referring to Philippine Long Distance Telephone Company. 2006. “the power to tax is [still] primarily vested in the Congress. 2008 citing City Government of Quezon City. 162015. October 6.” (Quezon City.R. 2008 citing City Government of Quezon City. No.

Philippine Stamping Plant.. Ltd. There is no need to discuss WT rates. hence the dividends are considered as income from within. also invested directly in 40% of the shares of stock of Philippine Stamping Plant. while the other 50% plus housing. Thus. SUGGESTED ANSWER: The payments of the purchase price will be subject to withholding tax. Ensite. Ensite Ltd. and Susanto Co. Since Larry is an OCW. In 2009. Obama Airlines.. the off-line air carrier . then the income did not originate from sources from within the Philippines. Ensite. General Co.. The ”sale of tickets” in the Philippines is the activity that determines whether such income is taxable in the Philippines.. ââ 17.. the income is considered as income from within. and that title to the Philippine Stamping Plant.. also owns 100% of the shares of Susanto Co. Philippine Stamping Plant. Inc. Inc. a foreign airline company which does not maintain any flight to and from the Philippines sold air tickets in the Philippines. He will also be receiving rental income for the lease of his Philippine residence. Ltd. declared dividends to its stockholders. relating to the carriage of passengers and cargo between two points.. Inc. Ensite.. decided to sell all its shares in Philippine Stamping Plant. but the place where the services were actually performed.. a Filipino-owned Philippine corporation. Inc... Inc. Inc. both outside the Philippines. should be subject to tax on its income from within.. (Commissioner of Internal Revenue v. and are not reflected as assets of the Philippine branch. The Agreement provides that the purchase price will be paid to Ensite Ltd’s bank account in the U. Ltd. Baier-Nickel.. then he is to be taxed only on his income derived from within the Philippines such as the rentals on his Philippine residence.S.. being a foreign corporation. if applicable. is a Canadian corporation not doing business in the Philippines. enjoying the protection accorded by the Philippine Government. 2006) ââ 15. ââ 16. Focus your discussion on what is the issue.. These shares are booked in the Head Office of Ensite. Inc. Inc. British Overseas Airways Corporation (BOAC). Ltd. The important factor which determines the source of income of personal services is not the residence of the payor. Inc. a) Is Obama. seeks your advice as to whether or not it will subject the payments of the purchase price to withholding tax. and Susanto Co. The source of income which is taxable is that “activity” which produced the income. Ensite. The negotiations for the buy-out and the signing of the Agreement of Sale were all done in the Philippines. which has a duly licensed Philippine branch engage in trading activities in the Philippines. group.. Larry will bring his family to reside in Malaysia and will lease out his residence in the Philippines. Philippine Stamping Plant. shall be transferred to General Co. Since Philippine Stamping Plant. through a general sales agent. in Toronto Canada where stock certificates will be delivered. or the place of payment. a Philippine corporation.... Inc.. The situs of the source of payments is the Philippines. [Commissioner of Internal Revenue v. allowances and rentals subject to Philippine income tax? Explain briefly. will credit the 50% of Larry’s salary to his Philippine bank account. being derived from labor or personal services rendered outside of the Philippines is considered as income from without. Inc. Inc. G. Ltd. It holds 40% of the shares of Philippine Stamping Plant.. No.) and will assign Larry for an indefinite period to work full time for Kuala Lumpur Manufacturing.. subject to Philippine income taxation.. within the Philippine territory. its shares of stock have obtained a business situs in the Philippines. Philippine Stamping Plant. has a subsidiary in Malaysia (Kuala Lumpur Manufacturing. Since the activity of securing the sales were in Germany. seeks your advice as to whether it will subject the remittance to withholding tax.. ââ18. and not on his income from without. Are these salaries.. Inc. subject to income taxes on the sale of the tickets ? SUGGESTED ANSWER: Yes. Larry will sign the contract of employment in the Philippines. Ltd. an Indonesian company which has a duly licensed Philippine branch. R. a Philippine company while the 60% is owned by Fred Corporation.. or the place where the contract for service is entered into. the flow of wealth should share the burden of supporting the government.. Co. The salary of Larry will be shouldered 50% by Philippine Stamping Plant. Considering that all the activities (sales) occurred within the Philippines. SUGGESTED ANSWER: The salaries and allowances of Larry. Inc. 153793. In consideration of such protection. has an executive Larry who is a Filipino citizen. is a Canadian corporation. Ensite Co. Due to worldwide restructuring of the Ensite Ltd. cost of living and educational allowances of Larry’s dependents will be shouldered by Kuala Lumpur Manufacturing. Inc. Inc. Ensite. August 29.. the flow of wealth proceeded from and occurred..SUGGESTED ANSWER: Yes. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. Before remitting the dividends to Ensite Ltd. should subject the remittance to withholding tax. 149 SCRA 395] Off-line air carriers having general sales agents in the Philippines are engaged in or doing business in the Philippines and their income from sales of passage documents here is income from within the Philippines. being a foreign corporation is to be taxed on its income derived from sources within the Philippines. Philippine Stamping Plant. is a Philippine corporation. a Philippine corporation. SUGGESTED ANSWER: Philippine Stamping Plant. Explain your advice.

It is not subject to any income tax because the activity which generated the income (the sale of the tickets) was performed outside of the Philippines. Kenya ? Reason out your answer. No. a) No imprisonment for non-payment of a poll tax. 2008) CONSTITUTIONAL LIMITATIONS 1. Constitutional limitations on the power of taxation . The power to tax is inherent in the State. sells tickets outside of the Philippines for passengers it carry from Gold City. based on the principle that taxes are a grant of the people who are taxed. but the Senate may propose and concur with amendments. Commissioner of Internal Revenue. British Overseas Airways Corporation (British Overseas Airways). d) All appropriation. revenue or tariff bills shall originate exclusively in the House of Representatives. c) Freedom of the press. G. Nos. (South African Airways v.. South Africa to the Philippines but returns to South Africa without any cargo or passengers. Pampanga. 28(A)(3)(a)] c) Would your answer be the same if Obama. R. Airport at Clark.. commutations and pardons and remittal of fines and forfeiture after conviction by final judgment. such power being inherently legislative. f) Non-impairment clause. July 21. February 16.” [NIRC of 1997. 28(A)(3)(a)] The place of sale is irrelevant. L-65773-74. b) Taxation shall be uniform and equitable. excess baggage.R. The specific or direct constitutional limitation. Inc. G. The general or indirect constitutional limitations on the power of taxation are: a) Due process clause. 2. This time Obama. bound for Nairobi. Inc. income is included in GPB. 180356. [South African Airways v. 167274-75. 149 SCRA 395] b) Supposing that Obama. h) Presidential power to grant reprieves. No improper delegation of legislative authority to tax.” [NIRC of 1997. and the grant must be made by the immediate representatives of the people. G. 2010 citing Commissioner of Internal Revenue v. Sec. Fortune Tobacco Corporation. 3. Angeles. e) No taking of private property without just compensation. Sec. c) Congress shall evolve a progressive system of taxation. 2010) 19. Three (3) readings on three separate days. No. February 16. 1987. there it must remain and be exercised. Inc. Inc. Printed copies in final form distributed three (3) days before passage. b) Equal protection clause. as long as the uplifts of passengers and cargo occur from the Philippines.. d) Religious freedom.R. . Would it then be subject to any Philippine tax on such sales? SUGGESTED ANSWER: It would not be subject to any tax. would be subject to the carrier’s tax based on Gross Philippine Billings. cargo and mail originating from the Philippines in a continuous and uninterrupted flight. It is not subject to the carrier’s tax based on gross Philippine billings because there were no lifts that originated from the Philippines. Bill should embrace only one subject expressed in the title thereof. (GPB). (Commissioner of Internal Revenue v. irrespective of the place of sale or issue and the place of payment of the ticket or passage document. The general or indirect constitutional limitations as well as the specific or direct constitutional limitations. planes from the Diosdado Macapagal Intl. g) Law-making process: 1. 180356. 3. sold tickets outside of the Philippines for travelers who are going to picked up by Obama. “Gross Philippine Billings” refers to the amount of gross revenue derived from carriage of persons. April 30. SUGGESTED ANSWER: No more. excess baggage. cargo and mail originating from the Philippines in a continuous and uninterrupted flight. Commissioner of Internal Revenue.liable for the 32% (now 30%) tax on its taxable income. No. “Gross Philippine Billings” refers to the amount of gross revenue derived from carriage of persons. irrespective of the place of sale or issue and the place of payment of the ticket or passage document. and where the people have laid the power. 2.

one class may be treated and regulated differently from another.. v. It merely requires that all persons shall be treated alike.. they were treated differently. The recognized tests are: a) b) c) The traditional (or rational basis) test. Court of Appeals. that it must not be limited to existing conditions only. that they committed identical acts for which they were charged with the violation of the same provisions of the NIRC. People. and that it must apply equally to each member of the class. directly and exclusively for educational purposes. The United States Supreme Court has established different tests to determine the validity of a classification and compliance with the equal protection clause. within the framework of national development program. which means that: a) b) c) d) the classification should be based on substantial distinctions which make for real differences. Requisites for valid classification. donations or contributions used actually. tonnage and wharfage dues: 1. G.. Tests to determine validity of classification. buildings and improvements of all kinds actually. G.R. et al. etc. (Santos. to levy taxes. i) No use of public money or property for religious purposes except if priest is assigned to the armed forces.. revenue. . 2008) It is imperative to duly establish that the one invoking equal protection and the person to which she is being compared were indeed similarly situated. 173176. g) Tax exemption of charitable institutions.. et al. 5. If the groupings are characterized by substantial distinctions that make real differences. and that they presented similar arguments and evidence in their defense .The President shall have the power to veto any particular item or items in an appropriation. The classification must also be germane to the purpose of the law and must apply to all those belonging to the same class. balance if any. through a law 3. i. All that is required of a valid classification is that it be reasonable. churches. n) Tax exemption of all revenues and assets of non-stock. Equal protection does not demand absolute equality. No. o) Tax exemption of all revenues and assets of proprietary or cooperative educational institutions subject to limitations provided by law including restrictions on dividends and provisions for reinvestment of profits. etc. that it must be germane to the purpose of the law. August 14. January 20. to general funds. 1999) ââ 6. k) The Supreme Court's power to review judgments or orders of lower courts in all cases involving the legality of any tax. but the veto shall not affect the item or items to which he does not object. assessment or toll or the legality of any penalty imposed in relation to the above. et al. and all lands. R. j) Money collected on tax levied for a special purpose to be used only for such purpose. charitable or educational purposes. et al. government orphanage or leprosarium. supra) 8. impose. e) The standard is satisfied if the classification or distinction is based on a reasonable foundation or rational basis and is not palpably arbitrary. (Santos v. fees and other charges subject to guidelines and limitations imposed by Congress consistent with the basic policy of local autonomy. August 26.e. Purisima. 166715. R. endowments. p) Tax exemption of grants. parsonages and convents appurtenant thereto.yet. Delegation by Congress 2. under like circumstances and conditions. import and export quotas. subject to Congressional limits and restrictions 4. both as to the privileges conferred and liabilities enforced. directly and exclusively for educational purposes subject to conditions prescribed by law. mosques. non-profit educational institutions used actually. directly and exclusively used for religious. No. penal institutions. or tariff bill. 127410. 2008] 7. v. No. G. The strict scrutiny (or compelling interest) test. [ABAKADA Guro Party List. l) Authority of local government units to create their own sources of revenue. h) No tax exemption without the concurrence of majority vote of all members of Congress.. Equal protection of the law clause is subject to reasonable classification. m) Automatic release of local government's just share in national taxes. f) Delegated power of the President to impose tariff rates. (Tiu. The intermediate level of scrutiny (or quasi-suspect class) test.

Government regulation that intentionally discriminates against a “suspect class” such as racial or ethnic minorities. customs duties. Hence.. (Craig v. 61. such substantial distinction is germane and intimately related to the purpose of the law. Classification based on gender or legitimacy are not “suspect.” but neither are they judged by the traditional or rational basis test. an .. Purisima. Moreover. etc. that is.S. the terms would mean that all subjects and objects of taxation which are similarly situated shall be subject to the same burdens and granted the same privileges without any discrimination whatsoever.S. There is no class legislation because there is no violation of the equal protection suit. The traditional (or rational basis) test used in order to determine the validity of classification. 166715. et al. The complainant must prove that the classification is “invidous.S. Maryland. SUGGESTED ANSWER: No.. 166) 10. an ordinance is passed by Soliman City granting a 50% discount for payment of unpaid real estate taxes for the preceding year and the condonation of all penalties on fines resulting from the late payment. (Plyler v. 420. and the condonation of all penalties on fines resulting from late payment. the incentives and/or sanctions provided in the law should logically pertain to the said agencies.. Indubitably. 429 U. etc. Santos. 449 U. 351) 12. 2008) 11. Benjie files suit to declare the ordinance void on the ground that it is a class legislation. There is a valid classification between those who already paid their taxes and those who have not. Due to a series of typhoons and adverse economic conditions. 220 U. Doe. 457 U. (ABAKADA Guro Party List. McGowan v. R. The intermediate level of scrutiny (or quasi-suspect class) test used in order to determine the validity of he classification.generation capability and collection of the BIR and the BOC. the classification and treatment accorded to the BIR and the BOC under RA 9335 fully satisfy the demands of equal protection. The municipal attorney rendered an opinion that Benjie cannot be reimbursed because the ordinance did not provide for such reimbursement.” otherwise the classification is presumed to be valid.. In such a case. 277 SCRA 617) ââ 9. 190) Thus. by itself. including granting a 50% discount in the payment of unpaid real estate taxes. has been held valid for it furthers the state policy of cushioning the financial impact of spousal loss upon the sex for whom that loss usually imposes a heavier burden. the taxing authority has the prerogative to select the subjects and objects of taxation. Shevin. The strict scrutiny (or compelling interest) test used in order to determine the validity of the classification. 416 U.9. Arguing that the ordinance rewards delinquent tax payers and discriminates against prompt ones. it’s expressed public policy is the optimization of the revenue-generation capability and collection of the BIR and the BOC. or exemption. Where the official action purports to be in conformity to the statutory classification. et al. "inequalities which result from a singling out of one particular class of taxation. however. G. Furthermore. (Lindsley v. but not widowers. The rewards law to tax collectors does not violate equal protection. Intentional discriminations against members of a quasi-suspect class violate equal protection unless they are substantially related to important government objectives. and it has been repeatedly held that. August 14. Natural Carboinic Gas Co. Boren. No. is not. 366 U." (Commissioner of Internal Revenue. a denial of the equal protection of the laws.” or ”capricious. infringe no constitutional limitation. v. United States Railroad Retirement Board v. A classification is necessary when it is narrowly drawn so that no alternative.” “wholly arbitrary. It is inherent in the power to tax that the State be free to select the subjects of taxation. Will his suit prosper ? Explain your answer briefly. With respect to RA 9335.. Equality and uniformity of taxation may mean the same as equal protection. The equal protection clause recognizes a valid classification. Thus. Fritz. v.S. a state law granting a property tax exemption to widows. The prosecution of one guilty person while others equally guilty are not prosecuted. et al. the law concerns only the BIR and the BOC because they have the common distinct primary function of generating revenues for the national government through the collection of taxes. less burdensome means is available to accomplish the state interest. is subject to strict scrutiny and considered to violate the equal protection clause unless found necessary to promote a compelling state interest. 202) 11. 10. Benjie demands that he be refunded an amount equivalent to one-half of the real property taxes he paid.S. fees and charges. a classification that has a reasonable foundation or rational basis and not arbitrary. The classification is valid if it is rationally related to a constitutionally permissible state interest. (Kahn v. Benjie is a law-abiding citizen who pays his real estate taxes promptly.S. it was held that denial of free public education to the children of illegal aliens imposes an enormous and lasting burden based on a status over which the children have no control is violative of equal protection because there is no showing that such denial furthers a “substantial” state goal. Since the subject of the law is the revenue. 13.

109791. The unlawful administration by officers of a statute fair on its face. R. v. (Philippine Long Distance Telephone Company. 2001) 16. No. Coca-Cola Bottlers Philippines. R. et al. but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. People. 181845... (4) within the same taxing jurisdiction – within the territorial jurisdiction of the City of Manila. although a violation of the statute. August 26. 2008) citing Tolentino v. This may appear on the face of the action taken with respect to a particular class or person. 2008) 12. the result would be that the trial of the district attorney for nonfeasance would become an issue in the trial of many persons charged with heinous crimes and the enforcement of law would suffer a complete breakdown. Equal protection should not be used to protect commission of crime. September 16. Tax exemptions in franchises are always subject to withdrawal. does not interfere with a contract or impairs its obligation. (Santos v. R. The policy of protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace and good order of society. v. it does not follow that they are to be protected in the commission of crime. is not a denial of equal protection unless there is shown to be present in it an element of intentional or purposeful discrimination. Inc. â 17. No. through the exercise of prophetic discernment. (Smart Communications. Inc. No. Smart Communications. G. to excuse a defendant guilty of murder because others have murdered with impunity. R. Likewise. and (6) of the same kind or character – a local business tax imposed on gross sales or receipts of the business. Inc. etc. 155491. City of Davao. G. September 16. XII.. G. R. 2009) 14.. et al. G. For not only are existing laws read into contracts in order to fix obligations as between parties. 173176. since these are being imposed: (1) on the same subject matter – the privilege of doing business in the City of Manila. (The City of Manila. Illustration of double taxation in local taxation. et al. 2008) â 13. August 4. 155491. The withdrawal of a tax exemption should not be construed as prohibiting future grants of exemption from all taxes. 7794. 2003) . People. September 16. Inc. et al. et al. etc. 235 SCRA 630) 15. et al. The Contract Clause has never been thought as a limitation on the exercise of the State’s power of taxation save only where a tax exemption has been granted for a valid consideration. The City of Davao. (3) by the same taxing authority – City of Manila. 115455. v. R. R. (Smart Communications. The City of Davao. (Santos v. alteration. No. 11) It is enough to say that the parties to a contract cannot. hence resulting in the need for these entities to share in the requirements of development. No. (2) for the same purpose – to make persons conducting business within the City of Manila contribute to city revenues. August 26. G. It would be unconscionable. 143867. When withdrawal of a tax exemption impairs the obligation of contracts. 2008) NOTES AND COMMENTS: Philippine Long Distance Telephone Company. 143867. 2001 made the observation that since Smart’s franchise was granted after the effectivity of the Local Government Code that its tax exemption privilege was reinstated.. 1994. etc. No. July 14. No. and companion cases. et al. G.. 235 SCRA 630. G. R. G. R. The primary reason for the withdrawal of tax exemption privileges granted to government owned and controlled corporations and all other units of government was that such privilege resulted to serious tax base erosion and distortions in the tax treatment of similarly situated enterprises. is not without more a denial of the equal protection of the laws. etc. A legislative franchise is granted with the express condition that it is subject to amendment. City of Davao. or repeal. Sec.. Inc. 685) The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others) 18. No. by paying the taxes and other charges due them. Secretary of Finance. if the failure of prosecutors to enforce the criminal laws as to some persons should be converted into a defense for others charged with crime. or it may only be shown by extrinsic evidence showing a discriminatory design over another not to be inferred from the action itself. G. 155491. (Philippine Ports Authority v. A lawful tax on a new subject. or an increased tax on an old one. (Tolentino v. Secretary of Finance. Art. (1987 Constitution. there is indeed double taxation if Coca-Cola is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No.. G.. et al. resulting in its unequal application to those who are entitled to be treated alike. fetter the exercise of the taxing power of the State. August 22... v. 2008 is explicit in its holding that Smart is not entitled to a tax exemption. While all persons accused of crime are to be treated on a basis of equality before the law. fiscal or otherwise. et al. City of Iloilo.. within the meaning of the constitution... etc. v. No. for instance. Inc. (5) for the same taxing periods – per calendar year. R. v. August 22. August 25. However. The City of Davao.erroneous or mistaken performance of the statutory duty. 173176.. No.

the same paragraph declares that the tax returns "shall be subject to audit by the Bureau of Internal Revenue. The “in lieu of all taxes” clause in the franchise of ABS-CBN has become functus officio with the abolition of the franchise tax on broadcasting companies with yearly gross receipts exceeding Ten Million Pesos. provincial or national. 2008. The “in lieu of all taxes” clause applies only to national internal revenue taxes and not to local taxes. 22. city or provincial. However. other than income tax. (Quezon City. 2001. (Quezon City. Carpio in a similar case involving a demand for exemption from local franchise taxes: [T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes. rendered inoperative.. No. as follows: x x x in lieu of any and all taxes of any kind. Inc. No. October 6. Inc. ABS-CBN has the burden to prove that it is in fact covered by the exemption so claimed but has failed to do so. and national tax. 2008) NOTES AND COMMENTS: This is practically the same holding in an earlier case involving another telecommunications company Smart Communications. R.. (Emphasis supplied).. Philippine Long Distance Telephone Company. It is thus. 155491. The City of Davao. National Power Corporation (NPC) is of the insistence that it is not subject to the payment of franchises taxes imposed by the Province of Isabela because all of its shares are owned by the Republic of the Philippines. 2008 citing Philippine Long Distance Telephone Company." Moreover. If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to local taxes. September 16. et al. nature or description levied. The only interpretation. It cannot apply when what is paid is a tax other than a franchise tax. a local government unit. established or collected by any authority whatsoever. v. 166408. [Smart Communications. the "in lieu of all taxes" clause does not apply to income tax.. The "in lieu of all taxes" clause does not apply to local taxes.. September 16." Nothing is mentioned in Section 9 about local taxes. x x x. etc. ABS-CBN Broadcasting Corporation. v. 155491. Congress did not expressly exempt Smart from local taxes.. City of Davao.. R. v. v. Congress used the "in lieu of all taxes" clause only in reference to national internal revenue taxes. the “in lieu of all taxes” clause has now become functus officio. 20. under the rule on strict construction of tax exemptions. an instrumentality of the National Government which is exempt from local taxation. is that the "in lieu of all taxes" clause in Smart's franchise refers only to national and not to local taxes. Congress could have used the language in Section 9(b) of Clavecilla's old franchise. R. etc. No. Congress would have expressly mentioned the exemption from municipal and provincial taxes. imposed under the National Internal Revenue Code. As such it is not a private corporation engaged in “business enjoying franchise” Is such contention meritorious? SUGGESTED ANSWER: No. Inc. October 6. It is not clear whether the exemption would include both local.) â 21. 2008) . etc. No. G. 166408. The right to exemption from local franchise tax must be clearly established and cannot be made out of inference or implications but must be laid beyond reasonable doubt. Verily. No. the uncertainty in the “in lieu of all taxes” provision should be construed against ABS-CBN. G. As appropriately pointed out in the separate opinion of Justice Antonio T. The clear intent is for the "in lieu of all taxes" clause to apply only to taxes under the National Internal Revenue Code and not to local taxes. 594 (2003)] NOTES AND COMMENTS: The author opines that the above finds application to all telecommunications companies. R. whether municipal. 447 Phil. the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code. et al. R. municipal.. The proviso in the first paragraph of Section 9 of Smart's franchise states that the grantee shall "continue to be liable for income taxes payable under Title II of the National Internal Revenue Code. et al. v. Inc. City of Davao. Since the franchise tax on the broadcasting companies with yearly gross receipts exceeding ten million pesos has been abolished. v.19. upheld the authority of the City of Davao. G. Whether the “in lieu of all taxes provision” would include exemption from local tax is not unequivocal. August 22. “In lieu of all taxes” refers to national internal revenue taxes and not to local taxes. The clause “in lieu of all taxes” does not pertain to VAT or any other tax. Even with respect to national internal revenue taxes." Also. from which the grantee is hereby expressly exempted. et al. G. 571. ABS-CBN Broadcasting Corporation. et al. 143867. “In lieu of all taxes” in the franchise of ABS-CBN does not exempt it from local franchise taxes.. to impose and collect a local franchise tax because the Local Government Code has withdrawn all tax exemptions previously enjoyed by all persons and authorized local government units to impose a tax on business enjoying a franchise tax notwithstanding the grant of tax exemption to them. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others. G. The City of Davao. It does not expressly provide what kind of taxes ABS-CBN is exempted from.

No. G. 127105.. R... The City of Davao. Allowing foreign taxes as a deduction from gross income. 155491. Double taxation a valid defense against the legality of a tax measure if the double taxation is direct duplicate taxation. during the same taxable period b) Taxing all of the subjects or objects for the first time without taxing all of them for the second time. for the same taxing purpose 4. G. Indirect duplicate taxation is not anathematized by the above constitutional limitations.) ââ 23. Inc. Subject or object is taxed twice 2. Central Luzon Drug Corporation. A tax deduction is defined as a subtraction fro income for tax purposes. Double taxation in its generic sense. this would be known as international juridical double taxation which is the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical grounds.R. If only the 1st element is present.C. 26. by the same taxing authority. April 15. 2008. it may mean direct duplicate taxation. or a deduction from what is owned. etc. Tax credit generally refers to an amount that is subtracted directly from one’s total tax liability. A tax deduction reduces the income that is subject to tax in order to arrive at taxable income. Tax credits where foreign taxes are allowed as deductions from local taxes that are due to be paid. a) b) c) Tax treaties which exempts foreign nationals from local taxation and local nationals from foreign taxation under the principle of reciprocity. 2005) â 30. June 25. R. If any of the elements are absent then there is indirect duplicate taxation which is not prohibited by the constitution. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others. Elements of direct duplicate taxation: a) Same 1. uniformity and equitableness of taxation. 28. without taxing all for the second time. v. or an amount that is allowed by law to reduce income prior to the application of the tax rate to compute the amount of tax which is due. because it would violate the equal protection clause of the constitution. which is prohibited under the constitution because it violates the concept of equal protection. G. No. In its particular sense. b) The presence of the 2nd element. hence violative of the equal protection clause. (Commissioner of Internal Revenue v. an allowance against the tax itself. taxing all of the subjects and objects for the first time. April 15. this means taxing the same subject or object twice during the same taxable period. 25. inserting the provision imposing a 70% limit on the amount of input tax to be credited against . Central Luzon Drug Corporation. No. Methods for avoiding double taxation (indirect duplicate taxation). ââ 24. including –whenever applicable – the income tax that is determined after applying the corresponding tax rates to taxable income. (Commissioner of Internal Revenue v. there is no violation of the equal protection clause because all subjects and objects that are similarly situated are subject to the same burdens and granted the same privileges without any discrimination whatsoever. No. When an item of income is taxed in the Philippines and the same income is taxed in another country.. Johnson and Son. deleting entirely the no pass-on provisions found in both the House and Senate Bills. et al. by the same taxing authority 3. The petitioners allege that the R-VAT law is constitutional because the Bicameral Conference Committed has exceeded its authority in including provisions which were never included in the versions of both the House and Senate such as inserting the stand-by authority to the President to increase the VAT from 10% to 12%. 159647. results to discrimination among subjects and objects that are similarly situated. September 16. G. 159647.. taxing the same subject or object twice. 2005) 29. (Commissioner of Internal Revenue v. 1999) ââ 27. A tax credit reduces the tax due. S. NOTES AND COMMENTS: a) Presence of the 2nd element violates the equal protection clause. etc. et al. Smart Communications. Inc. R.NOTES AND COMMENTS: This is practically the same holding in an earlier case involving another telecommunications company.

. non-profit educational institutions that are actually. All revenues and assets of non-stock. No. would have been prohibited with the proclamation of the constitutional provision.) v. et al. including those which are cooperatively owned. Thus.the output tax. where the local government and the taxpayer are in their own right reciprocally debtors and creditors of each other. Mambulao Lumber Co. there could be no compensation or set-off between a tax and a debt for the following reasons: a) Lifeblood theory.. 8 SCRA 443) ââ 3. may be entitled to exemptions subject to limitations provided by law including restrictions on dividends and provisions for reinvestments. Ermita. and that the debts are both due and demandable. G. 2005 and companion cases citing Tolentino v. (Republic v. and including the amendments introduced only by Senate Bill No. No. 2. [Abakada Guro Party List (etc. Revenues and assets of proprietary educational institutions. There was no grave abuse of discretion because all the changes and modifications made by the Bicameral Conference Committee were germane to subjects of the provisions referred to it for reconciliation. TAX Basis Failure to Pay Mode of Payment Assignability Payment Interest Authority Prescription based on law may result in imprisonment generally payable in money no imprisonment payable in money. 4 SCRA 622) c) Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt. contract or judgment as is allowed to be setoff. Distinguish tax from debt. Compensation takes place by operation of law. to the making and enforcing of which the personal consent of the individual taxpayer is not required. 235 SCRA 630] 32. et al. No. and are the positive acts of government.. 1994. in consequence of Articles 1278 and 1279 of the Civil Code. Otherwise.) v. Secretary of Finance.. The Bicameral Conference Committee merely exercised the judicially recognized long-standing legislative practice of giving said conference committee ample latitude for compromising differences between the Senate and the House. there was a violation of the constitutional mandate that revenue bills shall originate exclusively from the House of Representatives. R. September 1. 168056. other the exemptions granted to cooperatives.. Garlitos. SUGGESTED ANSWER: No. May there be compensation or set-off between a national tax and a debt? Reason out your answer. etc. b) Taxes are not contractual obligations but arise out of a duty to. demand. Are the contentions of such weight as to constitute grave abuse of discretion which may invalidate the law ? Explain briefly. August 25. Do you agree ? The mandate to Congress is not to prescribe but to evolve a progressive system of taxation. There is no law at the present which grants exemptions. 33. R. R. G. 2005 and companion cases] 31. . [Abakada Guro Party List (etc. (Domingo v. 168056. etc. et al.. property or service DEBT based on contract or judgment not assignable assignable unless it becomes a debt is not subject to compensation or set-off may be a subject does not draw interest unless delinquent imposed by public authority Prescriptive periods for tax under NIRC draws interest if stipulated or delayed can be imposed by private individuals debt under the Civil Code WARNING: Do not use the above arrangement in answering Bar questions. September 1. Sales taxes are also regressive. Ermita. The VAT while regressive is NOT violative of the mandate to evolve a progressive system of taxation. 115455. SUGGESTED ANSWER: As a general rule. directly and exclusively used for educational purposes shall be exempt from taxation. . sales taxes which perhaps are the oldest form of indirect taxes. G. OTHER CONCEPTS ââ1. 1950 regarding other kinds of taxes in addition to the value-added tax.

compensation takes place by operation of law. Marcos. which applied Francia v. G. Thus.. Esso Standard Eastern. Upon receiving an assessment for municipal sales taxes from the Municipal Treasurer. tax laws must be construed strictly against the State and liberally in favor of the taxpayer because taxes. Such was the holding in Domingo v.. 293 SCRA 92. Commissioner of Internal Revenue. the government admitted the fact of over-payment. In both cases. 167274-75. Exceptions: When set-off or compensation allowed for local taxes. ABS-CBN Broadcasting Corporation. the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. exemption is the exception. The basis for the rule on strict construction to statutory provisions granting tax exemptions or deductions is to minimize differential treatment and foster impartiality. 322.. etc. 1996. July 21. v. a case decided by the Supreme Court whose factual antecedents are similar to the problem. 330-331 (1997)] As burdens.R. Intermediate Appellate Court) ââ4. Inc 172 SCRA 364) While judgment should be rendered in favor of Republic for unpaid taxes. the claims of the taxpayers therein were certain and liquidated. such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import.E. This is in consequence of Article 1278 and 1279 of the Civil Code.R. Fortune Tobacco Corporation. Philippine American Accident Insurance Company. (Quezon City. 2008 citing Mactan Cebu International Airport Authority v. 99) 7. No. 141658.. expressly. Garlitos. taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax laws. 120082. September 11. (Lincoln Philippine Life Insurance Company. March 18. v. 338 Phil. Gilbert obtained a judgment for a sum of money against the municipality of Camiling. Commission on Audit. No. judgment ought at the same time to issue for Sampaguita Pictures commanding payment to the latter by the Republic of the value of the backpay certificates which the Republic received. Taxes are what civilized people pay for civilized society. Rationale for strict interpretation of tax exemption laws. 2003 ed. Garlitos.. supra citing Agpalo. et al. should not be presumed to go beyond what the law expressly and clearly declares. 680) The burden of proof rests upon the party claiming the exemption to prove that it is in fact covered by the exemption so claimed. Inc. No. 261 SCRA 667. (Quezon City. 1279 of the Civil Code. v. and unambiguously. Ericta.. In fact. 301) 9. citing CIR v. (South African Airways v. Esso Standard Eastern. R. In case of doubt.Thus. 180356. and since both of the claims became overdue. Garlitos. [Commissioner of Internal Revenue v. 2008 citing CIR v. fairness and equality of . Interpretation in the imposition of taxes. Accordingly. R. and that the debts are both due and demandable. a) Where both claims already become overdue and demandable as well as fully liquidated. No. Nos. it is basic that in case of doubt. Court of Appeals.R. February 16. is not the similar doctrine as that applied to tax exemptions. Otherwise stated. 8 SCRA 443. taxation is the rule. The claims were certain since there were no doubts or disputes as to their refundability. 6. 172 SCRA 364) In case of a tax overpayment. The judgment has become final although execution has not issued. The parties in this case are mutually debtors and creditors of each other. Court of Appeals. G. In answering the question of who is subject to tax statutes. 453 SCRA 668) 8. R. G. as burdens which must be endured by the taxpayer. 8 SCRA 443) Compensation takes place by operation of law. Statutory Construction. Inc. 8 SCRA 443) The Supreme Court upheld the validity of a set-off between the taxpayer and the government. demandable and fully liquidated. The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it does so clearly. 1279 and 1290 all of the Civil Code. REASON: Solutio indebeti. (Ibid. October 6.. G. Compensation takes place by operation of law under Art.. 166408. where the government and the taxpayer are in their own right reciprocally debtors and creditors of each other. A tax cannot be imposed without clear and express words for that purpose. (Domingo v. (Commissioner of Internal Revenue v. G. 2010 reiterating Caltex Philippines. statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority. May the Municipal Treasurer validly accept the assignment? Why? SUGGESTED ANSWER: Yes. 2005. et al. p. Strict interpretation of tax exemption laws. They are the lifeblood of the nation. A claim of tax exemption must be clearly shown and based on language in law too plain to be mistaken. (Republic v. the BIR’s obligation to refund or off-set arises from the moment the tax was paid. (Commissioner of Internal Revenue v. Inc.. Inc. 1200 in relation to Arts. 172 SCRA 623) b) c) d) e) ââ 5. (Domingo v. it is correct to say that the offsetting of a taxpayer’s tax refund with its alleged tax deficiency is unavailing under Art. Gilbert executed a partial assignment of his judgment sufficient to cover the assessment in favor of the Municipality.

No. Commissioner of Internal Revenue and Court of Tax Appeals. City of Manila. supra citing Agpalo. 119 Phil. [Commissioner. No. (Commissioner. But note Nestle Phil. Puyat & Sons v.R. (Quezon City.R. (Commissioner. Gonzales Puyat & Sons v. supra) 14. 365 . The Government is not exempt from the application of solutio indebiti. 2008 citing Surigao Consolidated Mining Co. it must hold itself against the same standard in refunding excess (or erroneous) payments of such taxes. et al. since taxation is the rule and exemption the exception. 330 SCRA 507. solutio indebiti. July 6. Mathay. The taxpayer must show that the legislature intended to exempt him from the tax by words too plain to be mistaken. 461. L-30644. et al. (Commissioner of Internal Revenue v. Inc. (Quezon City. supra at 732-733. 172 SRCA 364) 12. et al.. Court of Appeals. Commission of Internal Revenue. Fortune Tobacco Corporation. G. Mathay. supra citing Phil. 166408. Commissioner of Internal Revenue. et al. L-29987. a legislative grace. the taxpayer expects fair dealing from the Government. R. Surigao Consolidated Mining Co. Manila Electric Company v. Nos.R. supra citing AB Leasing and Finance Corporation v. 134114. [Commissioner. (Commissioner of Internal Revenue v.E. are not founded principally on legislative grace but on the legal principle which underlies all quasi-contracts abhorring a person’s unjust enrichment at the expense of another. (Commissioner. 13. July 21. [Commissioner. 37 (1963)] The rule is that tax exemptions must be strictly construed such that the exemption will not be held to be conferred unless the terms under which it is granted clearly and distinctly show that such was the intention. Fortune Tobacco Corporation. v. 2142. In case of a tax overpayment. R. R. the rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption. CIR. G. 167274-75. In other words. supra citing Commissioner of Internal Revenue v. and the latter has the duty to refund without any unreasonable delay what it has erroneously collected. Inc. 985 (1963)] The dynamic of erroneous payment of tax fits to a tee the prototypic quasi-contract. v. v. a claim for tax refund necessitates only preponderance of evidence for its approbation like in any other ordinary civil case. It has been held that “exemptions are never presumed the burden is on the claimant to establish clearly his right to exemption and cannot be made out of inference or implications but must be laid beyond reasonable doubt. For exemptions from taxation are not favored in law. In such case. v. Inc. which covers not only mistake in fact but also mistake in law. Inc. No. 127 Phil. on the other hand. 357-358. 482 (1979).. supra. 148 SCRA 315. G. supra with a note to see Surigao Consolidated Mining Co. Court of Appeals. which cannot be allowed unless granted in the most explicit and categorical language. There is parity between tax refund and tax exemption only when the former is based either on a tax exemption statute or a tax refund statute. 11. R. Nos. 2001 which held that in order for the rule on solutio indebeti to apply it is an essential condition that the petitioner must first show that its payment of the customs duties was in excess of what was required by the law at the time the subject 16 importations of milk and milk products were made.. 510. p. v. City of Manila. 2008) Tax refunds (or tax credits). Acetylene Co. 518 (2000)] And so. supra] A claim for tax refund may be based on statutes granting tax exemption or tax refund. Arts. v. Inc. v. Fireman’s Fund Insurance Co. Inc. Sr. G. No. 472 (1967). Statutory Construction. Commissioner of Internal Revenue. v. Esso Standard Eastern. Vera. 22 October 1975.. ABS-CBN Broadcasting Corporation. Commissioner of Internal Revenue.treatment among taxpayers. v. [Commissioner of Internal Revenue v.. supra citing Commissioner of Internal Revenue v. 117 Phil. 2154 and 2155). 297 in turn citing BPI-Family Savings Bank. Tax refunds premised upon a tax exemption strictly construed. And he who claims an exemption from the burden of taxation must justify his claim by showing that the legislature intended to exempt him by words too plain to be mistaken. G. Why are tax exemptions are strictly construed against the taxpayer and liberally in favor of the State? SUGGESTED ANSWER: Taxes are necessary for the continued existence of the State. supra citing CIVIL CODE. (Commissioner. Strict interpretation of a tax refund that partakes of the nature of a tax does not apply to tax refund based on erroneous payment or where there is no law that authorizes collection of the tax. nor are they presumed. 324-325. the intention to make an exemption ought to be expressed in clear and unambiguous terms.. Inc. the disputable presumption of regularity of performance of duty lies in favor of the Collector of Customs. Philex Mining Corp. supra at 338) If the State expects its taxpayers to observe fairness and honesty in paying their taxes. supra citing Ramie Textiles. 453 Phil. 302) 10. G. where the BIR’s obligation to refund or set-off arises from the moment the tax was paid under the principle of solutio indebeti... 2003 ed. July 21. 178 Phil. October 6. It should not unjustly enrich itself at the expense of taxpayers.. Tokyo Shipping Co. 33. 9 March 1987. Unless shown otherwise. Tax exemption is a result of legislative grace. [Commissioner. v. 67 SCRA 351. Ramie Textiles. given its essence. 167274-75. 2008) He who claims an exemption from his share of common burden must justify his claim that the legislature intended to exempt him by unmistakable terms. They must be expressed in the clearest and most unambiguous language and not left to mere implications. supra) Indeed. Hon.

G.” “willful. p. v. December 6. 36 NE 365) Tax amnesty applies only to past tax periods. 293 SCRA 92. there would be no more tax to credit since there is no more tax to credit as a result of the tax exemption. 2000) 18. et al. A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or a tax law. and a course of action or failure of action which is unlawful. 354 Phil. 228 (1995)] 15. much like a tax exemption. (Vogel. G. is never favored nor presumed in law. Commissioner of Internal Revenue.R. Tax avoidance is the use of legally permissible means to reduce the tax while tax evasion is the use of illegal means to escape the payment of taxes. the tax benefits are cancelled out. G.. G. Ltd. 20. Court of Appeals.. etc. Third Edition. 1988) WHILE a tax exemption is an immunity from civil liability only. Tax amnesty distinguished from tax exemption. supra) WHILE tax exemption has prospective application... The purpose of tax amnesty is to a) b) give tax evaders who wish to relent a chance to start a clean slate. 170574. administrative and criminal penalties while tax avoidance does not. etc. 102967. The objective of tax avoidance in most instances is merely to reduce the tax that is due while is tax evasion the object is to entirely escape the payment of taxes. i. et al. 314 Phil. Castaneda. Venice H. (Lincoln Philippine Life Insurance Company. Tax Treaties: Trick or treat ?.. Tax evasion warrants the imposition of civil. R. (Philippine Banking Corporation. 137 Ind. hence of retroactive application (Castaneda. The grant of a tax amnesty. and to give the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case. Jr. a) b) c) Tax avoidance is legal while tax evasion is illegal.Phil. The Estate of Benigno P. Klaus on Double Taxation Conventions. 572. Tax avoidance distinguished from tax evasion.e. Commissioner of Internal Revenue. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. (Commissioner of Internal Revenue v. Inc. 22. a freedom from a charge or burden to which others are subjected. No. No. the payment of less than that known by the taxpayer to be legally due.1255 cited in Segarra. Philippine Daily Inquirer. (Florer v. Effect of a BIR reversal of a previous ruling interpreting a law as exempting a taxpayer.) Thus.. the need for the tax sparing provision. p. 2004) âââ21. for after all the government is never estopped from collecting taxes because of mistakes or errors on the part of its agents. Sheridan. similar to a tax exemption. February 10. No. when the tax method credit method is applied to these items of income. 2009) 17. September 15.. A reversal of a BIR ruling favorable to a taxpayer would not necessarily create a perpetual exemption in his favor. L-46881. No. 2002. Tax evasion connotes the integration of three factors: a) b) c) The end to be achieved. Jr. September 14.. 99) 16. as if no reduction has been made. Commissioner of Internal Revenue v. etc. a) Tax amnesty is an immunity from all criminal. or the nonpayment of tax when it is shown that a tax is due. (Ibid. civil and administrative liabilities arising from nonpayment of taxes (People v. If the tax credit method is used. 147188. .. Consequently. 579 (1999). A tax amnesty. v. (Banas.. . an accompanying state of mind which is described as being “evil” on “bad faith. Tax sparing is a provision in some tax treaties which provides that the state of residence allows as credit the amount that would have been paid. in effect. 28.” or ”deliberate and not accidental”. v. b) 19. 891-892 (1998). Court of Appeals. January 30. Tokyo Shipping Co. . R. such incentives are siphoned off since. must be construed strictly against the taxpayer and liberally in favor of the taxing authority. C5) There may be instances where a particular income is exempt from taxation in order to encourage foreign investments which may lead to economic development. v. It is an immunity or privilege. Davao Gulf Lumber Corp.R. Toda. 220.

363. 1405. G. 14. the Supreme Court held citing Mertens that the term partnership includes a syndicate. The shift from the ad valorem system to the specific tax system is likewise meant to promote fair competition among the players in the industries concerned. pursuant to an operation or consortium agreement under a service contract with the Government. Purpose of the NIRC of 1997. joint-stock companies. or insurance companies. Purpose of shift from ad valorem system to specific tax system in taxation of cigarettes. [Sec. The common ownership of property does not itself create a partnership between the owners. [Sec. 74 cited in Pascual v. v. are among themselves as to the management and use of such property and the application of the proceeds therefrom. Certain business organizations do not fall under the category of “corporations” under the Tax Code. 24 now Sec. financial operation. 83. joint venture or other unincorporated organization. Nos. 2nd Ed. pool. (Commissioner of Internal Revenue v. Co-heirs who own inherited properties which produce income should not automatically be considered as partners of an unregistered corporation subject to income tax for the following reasons: a) The sharing of gross returns does not of itself establish a partnership. 2008) 3. or venture is carried on. 1405. 2008) TAX ON INCOME 1. (Spurlock v. cited in Pascual v. (Commissioner of Internal Revenue v. geothermal. Act No. the Bank Deposits Secrecy Law prohibits inquiry into bank deposits. (Elements of the Law of Partnership by Floyd R. Fortune Tobacco Corporation. 102 Phil. merely continuing the dedication of the property to the use to which it had been put by their forebears. 2. Jr. (Ibid. to ensure an equitable distribution of the tax burden and to simplify tax administration by classifying cigarettes. associations. They have no common stock capital. Rep.NATIONAL INTERNAL REVENUE CODE ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE 1. 167274-75. and they may. 139 SCRA 436) There is no contribution or investment of additional capital to increase or expand the inherited properties. though they may use it for purpose of making gains. 3. Mechem. 22 (B). Commissioner of Internal Revenue.W. App. Commissioner of Internal Revenue. are not thereby rendered partners. Act No. In Evangelista v.. Commissioner of Internal Revenue. and any taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity to pay his tax liability. Nos. and no community of interest as principal proprietors in the business itself from which the proceeds were derived. As exceptions to Rep.. but who severally retain the title to their respective contribution. 166 SCRA 560) . R. [1st sentence. into high.. Joint venture or consortium formed for the purpose of undertaking construction projects engaging in petroleum. medium and low-priced based on their net retail price and accordingly graduating tax rates. 166 SCRA 560) b) c) 5. (Obillos.) Persons who contribute property or funds to a common enterprise and agree to share the gross returns of that enterprise in proportion to their contribution. NIRC of 1997] A taxpayer who authorizes the Commissioner to inquire into his bank deposits. p. and other energy operations. 167274-75. BIRC of 1997] ââ 4. whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. The Tax Code has included under the term “corporation” partnerships. Sec. the Commissioner of Internal Revenue is only authorized to inquire into the bank deposits of: a) b) c) a decedent to determine his gross estate. Sec. July 21. G. coal. group. 142 S. Fortune Tobacco Corporation. include: a) b) General professional partnerships. 5 (F). R. through or by means of which any business. Wilson. no matter how created or organized. 24 (B) of the NIRC of 1997] 2. without becoming partners. Collector. 140. July 21. Revenue generation has undoubtedly been a major consideration in the passage of the Tax Code. and therefore not subject to tax as corporations. joint accounts (cuentas en participacion). There must be an unmistakable intention to form a partnership or joint venture. among others. 160 No.

if any.. January 20. 31. 10. Rev. No. or to a (c) capital transaction depending upon the circumstances. (Lakeland Grocery Co. 16.. is not absolute and may be subordinated to the demands of social justice. The cancellation and forgiveness of indebtedness may amount to (a) payment of income. although taxes are the lifeblood of the government. Section 10 of Article II of the Constitution declares that it is a policy of the State to promote social justice in all phases of national development. To borrow the words of Justice Isagani A. Court of Appeals. 1999) 8. 331) 18. . An insolvent debtor does not realize taxable income from the cancellation or forgiveness. (Sec. it is income to the extent of the amount realized by the debtor as compensation for his services. et al.6. January 22. No. Compensation income is considered as having been earned in the place where the service was rendered and not considered as sourced from the place of origin of the money. (b) gift. Under the National Internal Revenue Code the global system is applicable to taxable corporations and the schedular to individuals. (Sec.. including their members. For example. 237 SCRA 324. shall be treated as the income of an unregistered partnership to be taxable as a corporation because of the clear intention of the brothers to join together in a venture for making money out of rentals. bought from the earnings of co-owned properties. Bearing in mind the foregoing provisions. Commissioner of Internal Revenue. 331) 17. del Rosario.. Members of cooperatives not subject to tax on the interest earned from their deposits with the cooperative. R.R. to tax a stock dividend would be to tax a capital increase rather than the income. 43 Fd 327 CCA 10th) 12. less the deductions and/or personal and additional exemptions.. If an individual performs services for a creditor who. At the same time. Simmons Gin Co. NIRC of 1997) 9. Section 2 of Article XIII of the Constitution states that the promotion of social justice shall include the commitment to create economic opportunities based on freedom of initiative and self-reliance. G. The Global system of income taxation is a system employed where the tax system views indifferently the tax base and generally treats in common all categories of taxable income of the individual. 2) 15. we find that an interpretation exempting the members of cooperatives from the imposition of the final tax under Section 24(B)(1) of the NIRC (tax on interest earned by deposits) is more in keeping with the letter and spirit of our Constitution. In relation thereto. G. Article XII of the Constitution considers cooperatives as instruments for social justice and economic development. cooperatives. Commissioner 36 BTA (F) 289) 13. the transaction has the effect of payment of a dividend. 7. in consideration thereof. (Commissioner v. 500 Phil. If a creditor merely desires to benefit a debtor and without any consideration therefor cancels the amount of the debt it is a gift from the creditor to the debtor and need not be included in the latter’s income. del Rosario. citing Commissioner of Internal Revenue v. 182722. deserve a preferential tax treatment because of the vital role they play in the attainment of economic development and social justice. (Dumaguete Cathedral Credit Coopertive [DCCC)] etc. 11. Inc. The income from the rental of the house. No less than our Constitution guarantees the protection of cooperatives. cancels the debt.” (Ibid. authorized for such types of income by the Tax Code or other special laws. 14. Thus. American Express International. Section 15.. Jr. The insolvent debtor realizes income resulting from the cancellation or forgiveness of indebtedness when he becomes solvent. Jr.. from labor or from both combined. 50. (Commissioner of Internal Revenue v. the State’s power to tax must give way to foster the creation and growth of cooperatives. 237 SCRA 324. v. 19. Regs. v. The term taxable income means the pertinent items of gross income specified in the Tax Code. No. 2010) In closing. (Philippine Branch). Income is gain derived and severed from capital. while indispensable. 586 (2005). (Tan v. The Schedular system of income taxation is a system employed where the income tax treatment varies and is made to depend on the kind or category of taxable income of the taxpayer. (Tan v. Cruz: “The power of taxation. 108576. If a corporation to which a stockholder is indebted forgives the debt.

fruits. if the employer pays more than the ceiling prescribed by these regulations. marriage. with an annual monetary value not exceeding P10.000.000. ââ 25. Uniforms and clothing allowance not exceeding P3. e. No. on account of illness. [Sec.20. What are considered as deminimis benefits not subject to withholding tax on compensation income of both managerial and rank and file employees ? SUGGESTED ANSWER: Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year. rice per month amounting to not more than P1. etc. books. What are excluded from gross income ? a) b) c) . Gifts given during Christmas and major anniversary celebrations not exceeding P5. he shall be subject to income tax on his income derived from sources from within the Philippines. other than compensation income. Income subject to “final tax” refers to an income collected through the withholding tax system.000 ceiling of “other benefits” provided under Section 32 (B)(7)(e) of the Code.00 per annum.000.000. Exclusions are something received or earned by the taxpayer which do not form part of gross income WHILE deductions are something spent or paid in earning gross income. A non-resident alien. and (3) It does not come within the definition of income (Sec.78. shall be considered as a non-resident alien doing business in the Philippines. further. However. Rev.00 ceiling. Distinguish exclusions from deductions. birth of a baby. that any amount given by the employer as benefits to its employees. Regs. 61. Medical cash allowance to dependents of employees not exceeding P750.g. Exclusions pertain to the computation of gross income WHILE deductions pertain to the computation of net income. ââ 22. and an example of a deduction are losses. No. (2) It is exempted by statute. e. and Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage. 21. provided. is considered as having been earned at the place where the activity or service was performed. 8-2000] 23. which must be in the form of a tangible persona property other than cash or gift certificate. 2. NIRC] He is allowed to avail of the itemized deductions including the personal and additional exemptions subject to the rule on reciprocity.g. shall constitute as deductible expense upon such employer. Rice subsidy of P1. The recipient is no longer required to include the income subjected to a final tax as part of his gross income in his income tax return. SUGGESTED ANSWER: Exclusions from gross income refer to a flow of wealth to the taxpayer which are not treated as part of gross income for purposes of computing the taxpayer’s taxable income.. for length of service or safety achievement.00 per annum.00 per employee per semester or P125 per month. Actual yearly medical benefits not exceeding P10. Regs.00 or one (1) sack of 50-kg. or similar items given to employees under special circumstances. The payor of the income withholds the tax and remits it to the government as a final settlement of the income tax as a final settlement of the income tax due on said income. An example of an exclusion from gross income are life insurance proceeds. who has stayed in the Philippines for an aggregate period of more than 180 days during any calendar year.000 per employee per annum. due to the following reasons: (1) It is exempted by the fundamental law. 25 (A) (1). Regs. Laundry allowance not exceeding P300 per month. 2-98 as amended by Rev. 2) WHILE deductions are the amounts which the law allows to be subtracted from gross income in order to arrive at net income. whether classified as de minimis benefits or fringe benefits. the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the P30.00 received by an employee under an established written plan which does not discriminate in favor of highly paid employees. Payment for services.00. Employees achievement awards. [Sec.1 (A) (3). a) b) c) d) e) f) g) h) i) j) The amount of de minimis benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30. Rev.000. Flowers. ââ 24. Consequently.000.

or at maturity of the term mentioned in the contract. such as retrenchment. Domestic corporations. whether individual or corporate. Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines. etc. retirement gratuities. For any cause beyond the control of said official or employee [Sec. NIRC of 1997] The retiring official or employee should not have previously availed of the privilege under the retirement plan of the same or another employer. Taxes paid or incurred within the taxable year in connection with the taxpayer’s profession. 2.78 (B) (1). bequest. endowment or annuity contracts either during the term. Availed of the benefit of exclusion only once. hence tax-exempt? SUGGESTED ANSWER: Retirement benefits received under Republic Act No. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. pensions. through accident or health insurance or Workmen’s Compensation Acts as compensation for personal injuries or sickness. 2. What kind of separation (retirement) pay is excluded from gross income. (1) (b). [Sec. [1st par. Not less than fifty (50) years of age at time of retirement. 2. or upon surrender of the contract. redundancy and cessation of business. What are the Itemized deductions from gross income and who may avail of them? a) b) Ordinary and necessary trade. business or professional expenses. 7641 and those received by officials and employees of private firms. devise. Resident citizens. trade or business. or descent. resident alien individuals and nonresident alien individuals who are engaged in trade and business. estates and trusts may also deduct this expense. Amounts received for beyond control separation. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. 32 (B) (6) (a). The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer’s profession. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. No. [1st par. Regs. Rev. employee or by his heirs. c) d) .. hence tax-exempt? SUGGESTED ANSWER: Any amount received by an official. estates and trusts may also deduct this expense. From the employer As a consequence of separation of such official or employee from the service of the employer because of 1. Amounts received. on their gross incomes other from compensation income are allowed to deduct these expenses. 32 (B) (6) (b). or 2. Sec. SSS benefits and GSIS benefits. No. Amounts received by the insured as a return of premiums paid by him under life insurance. Retiring official or employee 1. resident alien individuals and nonresident alien individuals who are engaged in trade and business. Value of property acquired by gift. What are the conditions for excluding retirement benefits from gross income. sickness or other physical disability. 7641. âââ 26. Resident citizens. on their gross incomes other from compensation income are allowed to deduct these expenses. Death. Foreign social security..78 (B). in accordance with the employer’s reasonable private benefit plan approved by the BIR.a) b) c) d) e) f) SUGGESTED ANSWER: Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured whether in a single sum or otherwise. Retirement received from reasonable private benefit plan after compliance with certain conditions. âââ Ordinary losses. theft or embezzlement. 3. plus the amounts of any damages received on whether by suit or agreement on account of such injuries or sickness. 2-98] a) b) c) 28. Rev. Sec. Domestic corporations. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. and net operating losses. Regs. Retirement benefits received under Republic Act No. 2-98] a) b) ââ 27. USVA benefits. In the service of the same employer for at least ten (10) years. losses from casualty. NIRC of 1997].

Nonresident citizens and nonresident alien individual engaged in trade or business in the Philippine on their gross incomes from within may also deduct these premiums. Domestic corporations. Domestic corporations. Domestic corporations. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. resident alien individuals and nonresident alien individuals who are engaged in trade and business. on their gross incomes other from compensation income are allowed to deduct these expenses. Depletion or deduction arising from the exhaustion of a non-replaceable asset. on their gross incomes other from compensation income are allowed to deduct these expenses. on their gross incomes other from compensation income are allowed to deduct these expenses. Resident citizens. business or profession. Resident citizens. on their gross incomes other from compensation income are allowed to deduct these expenses. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. Depreciation or a reasonable allowance for the exhaustion. and resident alien on their gross incomes and from compensation income are allowed to deduct these premiums. estates and trusts may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. Contributions to pension trusts. estates and trusts may also deduct this expense. Resident citizens. Resident citizens. estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Resident citizens. estates and trusts may also deduct this expense. on their gross incomes other from compensation income are allowed to deduct these expenses. on their gross incomes other from compensation income are allowed to deduct these expenses. âââ Bad debts due to the taxpayer. wear and tear (including reasonable allowance for obsolescence) of property used in trade or business. resident alien individuals and nonresident alien individuals who are engaged in trade and business. trade or business. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct these premiums. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations. resident alien individuals and nonresident alien individuals who are engaged in trade and business. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. resident alien individuals and nonresident alien individuals who are engaged in trade and business. Resident citizens. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Domestic corporations. not deducted as expenses and chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. Domestic corporations. resident alien individuals and nonresident alien individuals who are engaged in trade and business. resident alien individuals and nonresident alien individuals who are engaged in trade and business. usually a natural resource. actually ascertained to be worthless and charged off within the taxable year. Research and development expenditures treated as deferred expenses paid or incurred by the taxpayer in connection with his trade. resident alien individuals and nonresident alien individuals who are engaged in trade and business. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. on their gross incomes other from compensation income are allowed to deduct these expenses. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. connected with profession.e) f) g) h) i) j) k) l) Resident citizens. estates and trusts may also deduct this expense. resident alien individuals and nonresident alien individuals who are engaged in trade and business. Personal and additional exemptions. estates and trusts may also deduct this expense. Resident citizens. âââ Charitable and other contributions. Resident citizens. Domestic corporations. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident citizens on their gross incomes from . Insurance premiums for health and hospitalization. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. not sustained between related parties. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense.

Distinguish ordinary expenses from capital expenditures. Proof by evidence or records of the deductions allowed by law including compliance with the business test. it must have been paid or incurred during the taxable year dependent upon the method of accounting upon the basis of which the net income is computed. What are the requisites for the deductibility of business expenses? SUGGESTED ANSWER: The following are the requisites for deductibility of business expenses: Compliance with the business test: 1. TMG deducted the same from its 2006 gross income. 3. TMG or BIR? Explain. In 2005 XYZ Law Firm and ABC Auditing Firm rendered various services which were billed by these firms only during the following year 2006. The BIR disallowed the deduction? Who is correct. Must be ordinary and necessary. R. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. TMG Corporation is issuing the accrual method of accounting. No. G. where there is created an enforceable liability. and the (b) cash method. No. Since the bills for legal and auditing services were received only in 2006 and paid in the same year.) All-events test. February 12. 172231. ââ 29. R. 172231. fixing of a right to income or liability to pay. Liabilities. 2007). SUGGESTED ANSWER: The BIR is correct. Must not be bribes. it must be supported by receipts. R. (Ibid. a) b) c) The test does not demand that the amount of such income or liability be known absolutely. TMG should have deducted the professional and legal fees in the year they were incurred in 2005 and not in 2006 because at the time the services were rendered in 2005. 172231. . a) b) ââ 31. Isabela cultural Corporation. (Commissioner of Internal Revenue v. February 12. Isabela Cultural Corporation. (Commissioner of Internal Revenue v. February 12. Isabela cultural Corporation. What are the requisites for the deductibility of ordinary and necessary trade. 2007) a) b) c) âââ 32. like expenses paid for legal and auditing services? SUGGESTED ANSWER: the expense must be ordinary and necessary. The two (2) principal accounting methods for recognition of income are the (a) accrual method. business. records or other pertinent papers. G. R. 172231. (Commissioner of Internal Revenue v. 2. the availability of the reasonable accurate determination of such income or liability. Must be paid or incurred in carrying on a trade or business. Must be paid or incurred within the taxable year. Amounts of income accrue where the right to receive them becomes fixed. kickbacks or other illegal expenditures Compliance with the substantiation test. ââ 30. February 12. 2007) NOTES AND COMMENTS: Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. G. This test requires: 1. and 2. SUGGESTED ANSWER: Ordinary expenses are those which are common to incur in the trade or business of the taxpayer WHILE capital expenditures are those incurred to improve assets and benefits for more than one taxable year. No. Recognition of income and expenses under the accrual method of accounting. G. are incurred when fixed and determinable in nature without regard to indeterminacy merely of time of payment. Necessary expenses are those which are appropriate or helpful to the business.within may also deduct this expense. No. Isabela cultural Corporation. 2007). only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. Ordinary expenses are usually incurred during a taxable year and benefits such taxable year.. or professional expenses. (Commissioner of Internal Revenue v. 4. there was already an obligation to pay them. Nonresident alien individuals engaged in trade or business in the Philippines are allowed to deduct these exemptions under reciprocity. The accrual of income and expense is permitted when the all-events test has been met.

2. No. goodwill. It is also referred to as the “cash receipts and disbursements method” because both the receipt and disbursements are considered. 3-98] 35. if its basis is unchangeable. or could reasonably be expected to have known. Regs. [1st par. 1st par. 32 (C). d) Household personnel. Rev. it must be determined with “reasonable accuracy” implies something less than an exact or completely accurate amount. 172231. NIRC of 1997. 33 (B). dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations. Thus. Contributions of the employer for the benefit of the employee to retirement.. What is meant by “fringe benefit” for purposes of taxation? SUGGESTED ANSWER: For purposes of taxation. or efficiency of his employees. No. 2-98 as amended by Rev. and j) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. Rev. No. Sec.. Sec. 2. c) Vehicle of any kind. income is recognized only upon actual receipt of the cash payment but no deductions are allowed from the cash income unless actually disbursed through an actual payment in cash.33 (A). Rev. h) Holiday and vacation expenses. 3-98] ââ 34. but is not as much as unknowable.1 (A) (3). Regs. Regs. except rank and file employees. No. g) Expenses for foreign travel. or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees). service. and de minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue. 32(A). Fringe benefits that are not subject to the fringe benefits tax: a) b) c) d) e) f) When the fringe benefit is required by the nature of. the test is satisfied where a computation may be unknown.. within the taxable year. No. The propriety of an accrual must be judged by the fact that a taxpayer knew.The all-events test is satisfied where computation remains uncertain. G. granted or paid by the employer to the employee. 3-98] Fringe benefits which are authorized and exempted from income tax under the Tax Code or under any special law. Accrual method of accounting presents largely a question of fact.78. furnished or offered by an employer to his employees. such as maid. f) Membership fees. 3-98] ââ36. whether granted under a collective bargaining agreement or not. such as but not limited to: a) Housing. 1st par. Sec. The fringe benefits tax is a final withholding tax imposed on the grossed-up monetary value of fringe benefits furnished. e) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted. insurance and hospitalization benefit plans. [Sec. or necessary to the trade. Sec. or so-called “courtesy discounts” on purchases). (Commissioner of Internal Revenue v. business or profession of the employer. i) Educational assistance to the employee or his dependents. [Sec. 2. 2.33 (A).33 (B). R. NIRC of 1997. De minimis benefits are facilities and privileges (such as entertainment.. driver and others. Benefits given to the rank and file employees. Regs. NIRC of 1997. fringe benefit means any good. medical services. They are not considered as compensation subject to income tax and consequently to withholding tax. b) Expense account. Rev.. contentment. [Sec. Sec. February 12. Rev. 2007) d) Under the cash method income is to be construed as income for tax purposes only upon actual receipt of the cash payment.33 (C). 2. Isabela cultural Corporation. [1st par. such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. or When the fringe benefit is for the convenience or advantage of the employer. Regs. at the closing of its books for the taxable year. if such facilities are offered or furnished by the employer merely as a means of promoting the health. No. The amount of liability does not have to be determined exactly. Regs. 8-2000] . 33.

Court of Appeals. Regs. 17-71) âââ 38. (Sec. (Sec. Rev.â 37. No. 103. 4. in whole or in part. 25-2002. The same must not be sustained in a transaction entered into between related parties. Regs. 5-99) ââ 39. [Sec. or The fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust. directly or indirectly. he realized a reduction of the income tax due from him on account of the said deduction. Who are related parties? SUGGESTED ANSWER: The following are related parties: Members of the same family. 4. and lineal descendants. and The debt must be actually ascertained to be worthless and uncollectible during the taxable year. The term is also applied to amortization of the value of intangible assets the use of which in the trade or business is definitely limited in duration. of amounts due the taxpayer by others.. Sec. The debts are uncollectible despite diligent effort exerted by the taxpayer. not treated as receipt of realized taxable income. b) Declining balance method. then his subsequent recovery thereof shall be treated as a mere recovery or a return of capital. No. Rev. where the result of his business operation was a net loss even without deduction of the bad debts written-off). Rev. Preferred shares are considered capital regardless of the conditions under which such shares are issued and dividends or “interests” paid thereon are not allowed as deductions from the gross income of corporations. Regs. (Sec.e. (Revenue Memorandum Circular No. Two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned. Depreciation is the gradual diminution in the useful value of tangible property resulting from ordinary wear and tear and from normal obsolescence. 5-99) If the said taxpayer did not benefit from the deduction of the said bad debt written-off because it did not result to any reduction of his income tax in the year of such deduction (i. by or for the same individual. directly or indirectly. [Sec. 5-99) a) b) 42. c) Sum of years digits method. What is the “tax benefit” rule? SUGGESTED ANSWER: The “tax benefit rule” posits that the recovery of bad debts previously allowed as deduction in the preceding year or years shall be included as part of the taxpayer’s gross income in the year of such recovery to the extent of the income tax benefit of said deduction. 2) a) b) c) d) e) f) g) : ââ 41. No. (Sec. Rev. The same must be connected with the taxpayer’s trade. NIRC of 1997. 2. 5-99 reiterated in Rev. Regs. ancestors. business or practice of profession. spouse. 256 SCRA 667] Must have been reported as receivables in the income tax return of the current or prior years. et al. arising from money lent or from uncollectible amounts of income from goods sold or services rendered. NIRC of 1997] a) b) c) d) e) f) ââ 40. NOTES AND COMMENTS: If in the year the taxpayer claimed deduction of bad debts written-off. hence. Bad debts are those which result from the worthlessness or uncollectibility. Regs. his subsequent recovery thereof from his debtor shall be treated as a receipt of realized taxable income. Philippine Refining Corporation v. 3. A grantor and a fiduciary of any trust. Rev. An individual and a corporation more than fifty percent (50%) in value of the outstanding stock of which is owned. The family of an individual shall include only his brothers and sisters (whether by the whole or half-blood). 34 (E) (1). by or for such individual. and . The methods of depreciation are the following: a) Straight line method. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year. Regs. 36 (B).a. What are the requisites for valid deduction of bad debts from gross income? SUGGESTED ANSWER: There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable. or A fiduciary of a trust and a beneficiary of such. 43.

1. shall be allowed an additional exemption of Twenty-Five Thousand Pesos (P25. married and head of the family for purpose of availing of the basic personal exemption has already been eliminated by Rep. not gainfully employed or if such dependent. 159991. 2. G.00. shall not exceed four (4) dependents. Sec. single individuals may now claim for the additional exemptions. No. chiefly dependent upon and living with the taxpayer if such dependent is 1.000. the amounts allowed to be deducted by a taxpayer are fixed as predetermined by Congress. ââ45.d) Any other method prescribed by the Secretary of Finance upon the recommendation of the Commissioner of Internal Revenue: 1. Regs. 9504. is incapable of self-support 3. regardless of age 2. 2006 citing Madrigal and Paterno v. What is the amount allowed as basic personal exemption? SUGGESTED ANSWER: There shall be allowed a basic personal exemption amounting to Fifty thousand pesos (P50.79 (I) (1) (a). because of mental or physical defect. 10-2008.000. 2. Sec. Sinking fund method. 9504 that each of the spouses may claim the P50. only such spouse shall be allowed the personal exemption. and 4. Sec. 9504] a) b) c) d) a) b) c) d) . arrangement and numbering supplied. Sec.. Regs. No. Sec. 2-98 as amended by Rev. unmarried and 3.79 (I) (1) (b). What are the amounts of additional exemptions? SUGGESTED ANSWER: “An individual.. Rafferty and Concepcion. 418 (1918)] ââ45. 38 Phil. No.” [1st par.00.000) for each individual taxpayer. Act No. Regs. 44. Furthermore. 2-98 as amended by Rev. Rev. R. 414. the concept of head of a family does not find application anymore. Rev. In the case of married individuals where only one of the spouse is deriving gross income. No. “A dependent means 1. 3. 10-2008. 9504. 2. NIRC of 1997. not more than twenty-one (21) years of age. illegitimate or legally adopted child 2. These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence. Regs. Regs. taking into account the personal status and additional qualified dependents of the taxpayer. Hours of productive use. 35 (b). 35 (A). [Sec. Rev.79 (I) (1) (b). 10-2008] NOTES AND COMMENTS: It is clear from Rep. No. Apportionment to units of production. Act No. a legitimate. Act No. living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. NIRC of 1997 as amended by Rep.000. Furthermore. 35 (B).00) for each qualified dependent child. 2. Commissioner of Internal Revenue. Thus. Act No. No. No. NIRC of 1997 as amended by Rep. 2-98 as amended by Rev. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers and until our lawmakers make new adjustments on these personal exemptions. the distinctions between the concepts of single. 9504] NOTES AND COMMENTS: It is clear that under the amendment. Act No.” [2nd par. provided that the total number of dependents for which additional exemptions may be claimed 1. [Pansacola v. What are personal and additional exemptions? SUGGESTED ANSWER: These are the theoretical persona. arrangement and numbering supplied. whether single or married. as amended by Rep. the total familial basic personal exemption for spouses is P100. Regs. November 16. Revaluation method. 2.

No. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets. c) The condominium building owned by a realty company the units of which are for rent or for sale. (Sec. varnish. stamp collections. if they are senior citizens they may qualify as additional exemptions under the “Senior Citizens Law” but not under the NIRC of 1997. in case of condominium unit.a. 7-2003) ââ 50. or condominium unit. or d) Property used in the trade or business. whether or not connected with his trade or business. f) Inherited large tracts of agricultural land which were subdivided pursuant to the government mandate under land reform. Regs. No. Act No. 72003) ââ49. (Roxas v. of a character which is subject to the allowance for depreciation. Act 9257. paint. trailers and trucks of a hauling company. 7-2003] ââ48. 3. Examples of ordinary assets hence not capital assets: a) The machinery and equipment of a manufacturing concern subject to depreciation. Capital assets shall refer to all real properties held by a taxpayer. Sec. d) The wood. parents. e) Inherited parcels of land of substantial areas located in the heart of Metro Manila. as brothers or sisters.” (last par. managing. 9504. NIRC of 1997. not used in trade or business as evidenced by a certification from the Barangay Chairman or from the head of administration. L-25043.a. namely: a) Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of a taxpayer if on hand at the close of the taxable year. However. as amended by Rep. Rev. then sold to tenants. and as such. 2. which are the raw materials of a furniture factory. or real property used in the trade or business of the taxpayer. 9504. etc. or d) Real property used in trade or business of the taxpayer. capitalized words. glue. Rev. and as validated from the existing available records of the Bureau of Internal Revenue. d) Automobiles not used in trade and business. and which are not included among the real properties considered as ordinary assets. Regs. only qualified dependent children are considered for additional exemptions. “The Expanded Senior Citizens Act of 2003”] ââ47. No. Grandparents. 39 (A) (1). Sec. 3rd par. b) The tractors. BUT DOES NOT INCLUDE: a) Stock in trade of the taxpayer. or c) Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. 7432. Examples of capital assets: a) Stock and securities held by taxpayers other than dealers in securities. (Sec. or c) Real property used in trade or business (i. . Sec. which were subdivided into smaller lots then sold on installment basis after introducing comparatively valuable improvements not for the purpose of simply liquidating the estate but to make them more saleable . 5 (a). Act No. or b) 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. owned by an individual engaged in business. Rev. Rev. whether single detached. No. sculptures. No. Act No. c) Residential houses and lands owned and used as such.. as amended by Rep.. Sec. numbering and arrangement supplied. Rev. shall not be considered used for business purposes. Rep. buildings and/or improvements). nails.e. such as a corporation included in the enumeration of Section 30 of the Code. administering and selling the lots. [Sec. of a character which is subject to the allowance for depreciation. [last par. Senior citizen shall be treated as dependents provided for in the National Internal Revenue Code. Regs.. townhouse or apartment. Regs.. e) Paintings. 2. 2. and other collateral relatives are not qualified dependents to be claimed as additional exemptions. etc. 1968) g) “Real property used by an exempt corporation in its exempt operations.” (last sentence. 3. the employment of an attorney-in-fact for the purpose of developing. April 26.b. Court of Tax Appeals. as well. or b) Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. Regs. 7-2003) h) “Real property. b) Jewelry not used for trade and business. shall be treated as capital asset. 7-2003) The term “capital assets” means property held by the taxpayer (whether or not connected with his trade or business). be they relatives or not shall be accorded the privileges granted by the Code insofar as having dependents are concerned. objects of arts which are not used in trade or business. as amended by Rep. individual taxpayers caring for them.b.e) It is to be noted that under the NIRC of 1997. townhouse. and therefore considered as capital asset. as amended. b. sales made with frequency and continuity.

or other disposition of real property located in the Philippines. (Gutierrez v. [Sec. 24 (D) (1).c. 24 (D) (1`). c) The real property received in an exchange shall be treated as ordinary asset in the hands of the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business. et al. Regs. 7-2003) ââ 53. the presumed capital gains tax shall be imposed. 121 Phil. (Sec. or b) the current fair market value as determined below: 1. Rev. if any. In case of non-redemption of the property sold upon a foreclosure of mortgage sale. numbering and arrangement supplied] d) Sale. The classification of such property in the hands of the buyer/transferee shall be determined in accordance with the following rules: a) Real property transferred through succession or donation to the heir or donee who is not engaged in the real estate business with respect to the real property inherited or donated.. otherwise known as the ‘Civil Code of the Philippines. 3 (2). 4118. 713. In case the mortgagor exercises his right of redemption within one (1) year from the issuance of the certificate of sale. 386. the fair market value or real properties located in each zone or area as determined by the Commissioner of Internal Revenue after consultation with competent appraisers both from the private and public sectors. Lingad. (Tuazon. This is so. Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the buyer/transferee. exchange. 6 (E). Rev. concrete gutters. will use in business the property received in the exchange. [Sec. 58 SCRA 170) Inherited agricultural property improved by introduction of good roads. 3 (1). on gains from sales or other dispositions of real property. and who does not subsequently use such property in trade or business. [Sec. 4-99] 55. in a foreclosure of mortgage sale of real property. The tax is “imposed upon capital gains presumed to have been realized from the sale. Transactions covered by the presumed capital gains tax on real property: a) sale. 24 (D) (1) in relation to Sec. ââ 58. the fair market value as shown in the schedule of values of the Provincial and City Assessors. b) exchange. v. shall be considered as a capital asset in the hands of the heir or donee. 4-99] ââ 56. and the heir was not a stranger to the real estate business. Court of Tax Appeals. The basis for the final presumed capital gains tax of six per cent (6%) is whichever is the higher of the a) gross selling price. or other disposition” includes taking by the government through condemnation proceedings. NIRC of 1997] Revenue Regulations No. 672) ââ51. Rev. as the owner is now engaged in the business of subdividing real estate. The tax liability. No. based on the bid price of the highest bidder but only upon the expiration of the one year period of redemption provided for under Sec. hence an ordinary asset. No. including pacto de retro sales and other forms of conditional sales. to the government or any of its political subdivisions or agencies or to government owned or . Rev. even if not engaged in real estate business. 3135. Commissioner of Internal Revenue. 57. It is the transaction that is taxed not the gain. Tax treatment of real properties that have been transferred.’ (Sec. Jr. c) or other disposition. Gonzales v. of individual taxpayers (not corporate). 861) 54. [Sec. 3. NIRC of 1997. Regs. 7-2003) ââ 52.f.f) annual sales income from the sales was considerable. drainage and lighting systems converts the property to an ordinary asset.. both of the NIRC of 1997] It does not matter whether there was an actual gain or loss because the tax is a “presumed” capital gains tax. Court of Tax Appeals. et al. 6 of Act No.” [Sec.. 72003 has defined real property as having “the same meaning attributed to that term under Article 415 of Republic Act No. b) Real property received as dividend by stockholders who are not engaged in the real estate business and who not subsequently use such real property in trade or business shall be treated as capital assets in the hands of the recipient even if the corporation which declared the real property dividend is engaged in real estate business. no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. No. 2. exchange. and shall be paid within thirty (30) days from the expiration of the said one-year redemption period. or 2. (Calasanz v. No. Regs. 101 Phil. as amended by Act No. classified as capital assets. Holding period not applied to the taxation of the presumed capital gains derived from the sale of real property considered as capital assets. or to a taxpayer who. Regs. 144 SCRA at p. classified as capital assets. The property forms part of the stock in trade of the owner.

). Regs.]. a) b) . As a result of the ruling MBC filed an application for refund of the P33 million. 6. The MCIT shall be imposed beginning in the fourth taxable year immediately following the year in which the corporation commenced its business operations. 24 (D) (1). 1. “(5) Specific rules for determining the period when a corporation becomes subject to the MCIT (minimum corporate income tax) – For purposes of the MCIT. 4. pays the presumed capital gains tax whether: a) an individual [Sec. whether resident or not [Ibid. (Sec. it falls under the category of an existing corporation recommencing its banking operations. c) a domestic corporation. in relation to Sec. and d) the said tax exemption can only be availed of once every ten (10) years. b) an estate or trust (Ibid.” [Sec. In 2000. MBC filed a petition for review with the CTA. the BSP authorized MBC to operate as a thrift bank.controlled corporations shall be determined. NIRC of 1997]. No. Nonresident alien engaged in trade or business in the Philippines [Sec. 27 (D) (5). G. 6 (E). August 26. MBC was incorporated in 1961 and engaged in commercial banking operations since 1987. whichever comes later. then to the schedular tax [Sec. 168118. [Sec. On June 23. In a volte facie the BIR now maintains that MBC should pay the MCIT beginning January 1. 27 (E) (1). 3. b) within eighteen (18) calendar months from the date of sale or disposition c) the BIR 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. 1998 as it did not close its business operations in 1987 but merely suspended the same. 24 (D) (1) in relation to Sec. Resident alien [Ibid. when the minimum corporate income tax is greater than the tax computed under Subsection (A) of this section for the taxable year. 1999 when it was authorized by the BSP to operate as a thrift bank before the MCIT should be applied to it. both of the NIRC of 1997]. [Sec.]. Even if placed under receivership. 25 (B) in relation to Sec. 2. It sought the BIR’s ruling on whether it is entitled to the four (4) year grace period for paying on the basis of MCIT reckoned from 1999. classified as a capital asset. BIR then ruled that cessation of business activities as a result of being placed under involuntary receivership may be an economic reason for suspending the imposition of the MCIT. Nonresident alien not engaged in trade or business in the Philippines [Sec. 24 (D) (1). both of the NIRC of 1997] 59. On May 22. Rev. NIRC of 1997] Period when a corporation becomes subject to the MCIT. 1987. Commissioner of Internal Revenue. The CTA denied the petition on the ground that MBC is not a newly organized corporation. 24 (D) (2). NIRC of 1997] The date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board. Should the refund be granted ? SUGGESTED ANSWER: Yes. both of the NIRC of 1997]. Due to the BIR’s inaction. 2006) NOTES AND COMMENTS: The MCIT and when should be imposed and the four (4) year grace period. R. MBC is entitled to the grace period of four years from June 23. 24 (D) (1). (Manila Banking Corporation v. is hereby imposed on a corporation taxable under this Title. 1999. Citizen. [Sec. 4-95) Clearly then. NIRC of 1997] ââ 60. 24 (D) (1). 27 (E) (1). the taxable year in which business operations commenced shall be the year in which the domestic corporation registered with the Bureau of Internal Revenue (BIR). as defined herein. [Sec. The seller of the real property. by including the proceeds as part of gross income to be subjected to the allowable deductions and/or personal and additional exemptions. 24 (A) (1). Excepted from the payment of the presumed capital gains tax are those presumed to have been realized from the disposition by natural persons of their principal place of residence: a) the proceeds of which is fully utilized in acquiring or constructing a new principal residence. Thus. at the option of the taxpayer. it ceased operations that year by reason of insolvency and its assets and liabilities were placed under the charge of a governmentappointed receiver. It filed its tax return for the year 1999 paying the amount of P33 million computed in accordance with the minimum corporate income tax (MCIT). “A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year. both of the NIRC of 1997] or the final presumed capital gains tax of six percent (6%). the corporate existence was never affected. beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations. NIRC of 1997] 61. 25 (A) (3) in relation to Sec. No.

August 26. or • administrator 2. wherever situated. G.c) Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January 1. (Manila Banking Corporation v. Regs. to the extent of his interest existing therein at the time of his death. to the extent of his interest existing therein at the time of his death. irrespective of whether or not the insured retained the power of revocation. Proceeds of life insurance NOT included in a decedent’s gross estate. tangible. No. No. No. all of the properties enumerated in the problem irrespective of where they are situated are includible in the gross estate of Smith. a condominium unit at the Twin Towers Building at Pasig. No. intangible or mixed. 9-98) Manila Banking Corporation v. NIRC of 1997] b) One. a) The decedent takes the insurance policy on his own life 1. in order to allow new corporations to grow and develop at the initial stages of their operations. The amounts are receivable by • the decedent’s estate. tangible. William Smith. all his personal property. tangible. The intent of Congress relative to the MCIT is to grant a four (43) – year suspension of tax payment to newly organized corporations. 4-95 specifically refers to thrift banks. Consequently. an American citizen. ââ 3. 2006 did not apply Rev. 9-98 because Rev. • his executor. to the extent of the interest that Smith has at the time of his death. wherever situated. situated in the Philippines. The gross estate of a Filipino citizen or a resident alien comprises all his real property. wherever situated. [Sec. Thus. a resident alien. He left 10. a) The decedent takes the insurance policy on his own life. 1998. and more particularly. if the decedent is a Filipino citizen or a resident alien. 85 (E). G. Florida. Regs. x x x” (Rev. the assets to be included in the Estate Tax Return to be filed with the BIR should be all property. ââ 2. intangible or mixed. was a permanent resident of the Philippines. or • administrator irrespective of whether or not the insured retained the power of revocation. all his personal property. situated in the Philippines. The amounts are receivable by • The decedent’s estate. It does not come as a surprise then when many companies reported losses in their initial years of operations. R. He died in San Francisco. intangible or mixed. real or personal. for Philippine estate tax purposes. Commissioner of Internal Revenue. Proceeds of life insurance includible in a decedent’s gross estate. Corporations still starting their business operations have to stabilize their venture in order to obtain a stronghold in the industry. what constitutes gross estate ? SUGGESTED ANSWER: Yes. and b) the proceeds are receivable by a beneficiary designated as irrevocable. The amounts are receivable by any beneficiary designated in the policy of insurance as revocable beneficiary. [Sec. 2006) ESTATE TAXES ââ1.000 shares of San Miguel Corporation. the lawmaking body saw the need to provide a grace period of four years from their registration before they pay their minimum corporate income tax. ââ 4. 85 (E). Smith. R. 168118. California. 168118. In determining the gross estate of a decedent. What assets shall be included in the Estate Tax Return to be filed with the BIR? SUGGESTED ANSWER: All of the assets should be included in the Estate Tax Return to be filed with the BIR.) Purpose of the four (4) year grace period. are his properties abroad to be included. NIRC of 1997) . • his executor. Commissioner of Internal Revenue. Metro Manila and a house and lot in Miami. an American citizen and a permanent resident of the Philippines is considered. August 26. The gross estate of a non-resident alien comprises all his real property. No. other than the decedent takes the insurance policy on the life of the decedent 1. Regs. OR 2. Thus.

or the right to the income from the property. • 60% of the value if the prior decedent died more than two years but not more than three years prior to the death of the decedent. 86 (A) (2) and (B) (2). g) Amount of exempt retirement received by the heirs under Rep. whether resident or not. It is also known as a deduction for property previously taxed. There is no transfer in contemplation of death if there is no showing that the transferor “retained for his life or for any period which does not in fact end before his death: (1) the possession or enjoyment of. [Sec. devise. or of a nonresident alien decedent. or if the property was transferred to him by gift within the same period prior to his death. or inheritance. resident aliens and nonresident estates for properties which were previously subject to donor’s or estate taxes.. The notices of levy were regularly issued within the prescriptive period. • 80% of the value if the prior decedent died more than one year but not more than two years prior to the death of the decedent. the same can no longer be contested by means of a disguised protest. Items deductible from the gross estate of a resident or nonresident Filipino decedent or resident alien decedent: a) Expenses. a) An amount equal to the value specified below of b) Any property forming a part of the gross estate situated in the Philippines c) Of any person who died within five years prior to the death of the decedent.NOTES AND COMMENTS: The beneficiary must not be the decedent’s estate. but is against the interest or property right which the heir. either alone or in conjunction with any person. NIRC of 1997. his executor or administrator. devisee. 4917. e) Standard deduction of P1 million. • 40% of the value if the prior decedent died more than three years but not more than four years prior to the death of the decedent. or if the property was transferred to him by gift within the same period prior to his death. or if the property was transferred to him by gift within the same period prior to his death. or a claim against the estate as such. legatee. c) Transfers for public use.” [Sec. The probate court is determining issues which are not against the property of the decedent. or as a settlement tribunal over the estate of the deceased is not a mandatory requirement for the collection of the estate. d) The Family Home up to a value not exceeding P1 million. (Ibid. etc. Court of Appeals. numbering.) c) Where the insurance was NOT taken by the decedent upon his own life and the beneficiary is not the decedent’s estate. et al. or transferred to the decedent by gift within five years prior to his death. bequest. What is the donor’s tax rate if the donee is a stranger? . executor or administrator. The tax assessment having become final. 273 SCRA 47) DONOR’S TAXES ââ 1. executory and enforceable. or (2) the right. h) Net share of the surviving spouse in the conjugal partnership. 85 (B). to designate the person who shall possess or enjoy the property or the income therefrom. 5. arrangement and underlining supplied] ââ 8. The deduction allowed from the gross estates of citizens. or if the property was transferred to him by gift within the same period prior to his death. because the proceeds are includible as part of gross estate whether or not the decedent retained the power of revocation. 4. and • 20% of the value if the prior decedent died more than four years but not more than five years prior to the death of the decedent. or e) Which can be identified as having been acquired in exchange for property so received: • 100% of the value if the prior decedent died within one year prior to the death of the decedent. The deduction is called a vanishing deduction because the deduction allowed diminishes over a period of five (5) years. Vanishing deduction (property previously taxed) allowed as a deduction from the gross estate of a Filipino citizen. (Marcos. d) Where such property can be identified as having been received by the decedent from the donor by gift.00. indebtedness and taxes. NIRC of 1997] ââ 6. II v. of a resident alien decedent. f) Medical expenses not exceeding P500. has in the property formerly held by the decedent. or if the property was transferred to him by gift within the same period prior to his death. b) Property previously taxed. claims. The approval of the court sitting in probate. Act Mo. or from such prior decedent by gift.000. defined. Vanishing deduction (deduction for property previously taxed). ââ 7. losses.

Supposing that instead of a general renunciation. NIRC of 1997] NOTES AND COMMENTS: All relatives by affinity. Regs. What is the valuation of donated real property for donor’s tax purposes ? SUGGESTED ANSWER: The real property shall be appraised at its fair market value as of the time of the gift. Regs.” [Sec. his surviving spouse B. NIRC of 1997] 4. SUGGESTED ANSWER: My answer would be different. of her share in the hereditary estate left by the decedent is not subject to donor’s tax. the tax payable by the donor shall be 30% of the net gifts. and three minor children. Y and Z. Regs. However. B renounced her hereditary share in A’s estate to X who is a special child.00 net donation during a calendar year is exempt from donor’s tax [Sec. a. 88 (B) both of the NIRC of 1997] â 7.SUGGESTED ANSWER: When the donee or beneficiary is a stranger. or Relative by consanguinity in the collateral line within the fourth degree of relationship. A died leaving as his only heirs. SUGGESTED ANSWER: The first P100. For purposes of the donor’s tax. b. (4th par. 2-2003) âââ 8. NIRC of 1997) 6. SUGGESTED ANSWER: No. 99 (B). This is so because the renunciation was specifically and categorically done in favor of X and identified heir to the exclusion or disadvantage of Y and Z. what is meant by “net gifts?” SUGGESTED ANSWER: The net economic benefit from the transfer that accrues to the donee. Accordingly. The general renunciation by an heir. in relation to Sec. Sec. What is the tax base for donations? SUGGESTED ANSWER: The net gifts made during the calendar year. Rev. she renounced her hereditary share in the estate. NIRC of 1997] made by a resident or non resident. but imposing upon the donee the obligation to pay the mortgage liability.000. Rev. 11. then the net gift is measured by deducting from the fair market value of the property the amount of the mortgage assumed. if a mortgaged property is transferred as a gift.. as in the case B. a) . 11. No. 99 (A). (Sec. (4th par. sister (whether by whole or half-blood). the appraised value of the real property at the time of the gift shall be whichever is the higher of: a) the fair market value as determined by the Commissioner of Internal Revenue (zonal valuation) or b) the fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. 2-2003) This is so because the general renunciation by B was not specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate. How are gifts of personal property to be valued for donor’s tax purposes ? SUGGESTED ANSWER: The market value of the personal property at the time of the gift shall be considered the amount of the gift. 99 (A). ancestor and lineal descendant. No. ââ 2. would your answer be the same ? Explain. are considered as strangers. Sec. including the surviving spouse. For purposes of the donor’s tax who is a stranger? SUGGESTED ANSWER: A stranger is a is person who is not a: Brother.. spouse. [Sec. X. 102. 11. Rev. [Sec.. Sec. Give some donations that are exempt from donor’s tax.2-2003) 5. (last par. Is the renunciation subject to donor’s tax? Explain. 102. the other co-heirs in the hereditary estate. Since B does not want to participate in the distribution of the estate. The renunciation in favor of X would be subject to donor’s tax.No. irrespective of the degree. a) b) 3.

Title IV. 2009 the transaction would be exempt from donor’s tax.000. The P200. Code.000 would be exempt and the remaining P50. Sec. The proper VAT on the sale was paid. trust or philanthropic organization or research institution or organization: Provided. What is the concept of donation or gift splitting? Illustrate. As such. leases. The author has retained the “Stars System” for VAT. 11. SUGGESTED ANSWER: Donor’s taxes would be due on the insufficiency of consideration. It is also levied on every importation of goods . Act No.000. No. goods or properties. cultural or social welfare corporation. then the amount by which the fair market value of the property at the time of the execution of the Contract to Sell or execution of the Deed of Sale which is not preceded by a Contract to Sell exceeded the value of the agreed or actual consideration or selling price shall be deemed a gift. Seagate Technology (Philippines). recognized natural. R. transferee or lessee of the goods. 7549) Political contributions made by a resident or non-resident individual if registered with the COMELEC irrespective of whether donated to a political party or individual. (5th par. the reader is advised to focus on areas marked with stars and just browse the unmarked areas.00 is the totality of the net gifts for 2008.000. his first cousin. ââ 9.00 in 2008 the first P100. or adopted children to the extent of the first ten thousand pesos (P10. Gifts made by residents or non residents in favor of an educational and/or charitable. merit or importance of goods.000. sells.00 to Miklos. If you are the BIR examiner assigned to review the sale.00 on December 30. religious. 2008 and the remaining P100. Where property.00 would be subject to donor’s tax If Leon spreads the P200. properties or services. barters. but in terms of its nature as a tax on consumption.00 on January 1. Considering the limited period of time.000. That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. âââ1.9) Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by residents who are parents to each of their legitimate. [Sec. In 2008 Leon was thinking of donating a P200. 36. This is so even if the donation is separated only by two days because the basis is the calendar year. and not on the total value of the goods or services being sold or rendered. 2005 citing various authorities} VAT is a percentage tax imposed on any person whether or not a franchise grantee. Rev.. which should have been subject to tax was made by nonresident aliens and took place outside of the Philippines. SUGGESTED ANSWER: Donation or gift splitting is spreading the gift over numerous calendar years in order to avail of lower donor’s taxes. renders services. 101 (A). VAT is an indirect tax that may be shifted or passed on to the buyer. Gifts made by residents or non-residents to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit. February 11. directly liable for its payment. Rep. properties or services. who is engaged in the car “buy and sell” business sold to B P7 million Jaguar for only P4 million. However. Value-added tax (VAT) is a tax which is imposed only on the increase in the worth.000. Nature of VAT. 153866.000 donation over two (2) calendar years. No. If he donated the P200. exchanges. however. ââ10. numbering and arrangement supplied] Gifts made by non-resident aliens outside of the Philippines to Philippine residents are exempt from donor’s taxes because taxation is basically territorial. 1.000. is transferred for less than an adequate and full consideration in money or money’s worth. institution. âââ2. (Corp.000. This area is probably the most difficult area to forecast because there are no statistically perceived patterns.00). who in the course of trade or business. Leon would be enjoying the exemption for the first P100. A. The transaction.b) c) d) e) f) g) The donation by a resident or non-resident of a prize to an athlete in an international sports tournament held abroad and sanctioned by the national sports association is exempt from donor’s tax (Sec. G. it should be understood not in the context of the person or entity that is primarily. the Corporation Code prohibits corporations from making political contributions. other than real property that has been subjected to the final capital gains tax.00 net gifts for each calendar year. Regs. Sec. or to any political subdivisions of the said Government. donating P100. and shall be included in computing the amount of gifts made during the calendar year. would you issue a tax assessment on the transaction? Explain your answer briefly. [Commissioner of Internal Revenue v. NIRC of 1997. 2-2003) VALUE-ADDED TAXES (VAT) WARNING !!! Approximately 10% of the total questions asked in the Bar Examination are sourced from VAT and its concepts. foundation.

). shall be liable to VAT xxx. . How the VAT is imposed on the increase in worth. in the case of importation of taxable goods. 168056. No. Meaning of consumption as used under the VAT system. no payment is required. properties.) v. Consumption is "the use of a thing in a way that thereby exhausts it. The purchaser is subject to VAT because the VAT is merely added as part of the purchase price and not as a tax because the burden is merely shifted. a) Any person who. and b) any person who imports goods xxx However. (Quezon City. Seagate Technology (Philippines).Sec. 1. any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes. Illustration of the meaning of consumption as used under the VAT system. 16-2005. R. No. 2007] 6.) 9. R. or services by the seller. If however. having been performed in the Philippines. Inc. R. February 11. ABS-CBN Broadcasting Corporation." Applied to services. This is a single-stage tax which is payable only by the original sellers.. G. Ermita. renders services. 153866. June 8. (Abakada Guro Party List (etc. G.). Regs. R. This method relies on invoices. Sells. Further. R. February 11. Effect of exemptions from VAT which is an indirect tax. properties or services. transferor or lessor. No. v. in the course of his trade or business. 2008) âââ3. If a special law merely exempts a party as a seller from its direct liability for payment of the VAT. in the Philippines. whether an individual or corporation and whether or not made in the course of his trade or business. Who are liable for the value-added tax. the amount of which may be shifted or passed on by the seller to the purchaser of the goods. the VAT is an indirect tax and can be passed on to the buyer. [Commissioner of Internal Revenue v. the purchase transaction is not exempt. services cannot be physically used in or bound for a specific place when their destination is determined. The VAT is a tax on consumption. usually resulting in the performer's release from any past or future liability x x x" Unlike goods. the importer. June 8. yet takes place upon rendition. 166408. inputs and imports. G. et al. 164365. or 2. are therefore also consumed in the Philippines. Placer Dome Technical Services (Phils. merit or improvement of the goods or services. 153866. [Commissioner of Internal Revenue v. exchanges or leases goods or properties.105-1. R. the input taxes exceed the output taxes. Instead. a) Cost deduction method. paraphrasing supplied) âââ8. 2005 and companion cases) This was subsequently modified and a mixture of “cost deduction method” and “tax credit method” was used to determine the value-added tax payable. Should the input taxes result from zero-rated or effectively zero-rated transactions or from acquisition of capital goods. and therefore upon consumption. 164365. REASON: The VAT is a tax on consumption. etc. G. an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases. (Rev. October 6. The tax base of the VAT is limited only to the value added to such goods. the output taxes charged by a seller are equal to the input taxes passed on by the suppliers. Various VAT methods and systems. (Ibid. No. September 1." [Commissioner of Internal Revenue v. but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers. Illustration of effects of exemptions from VAT which is an indirect tax. (Ibid. No.. The seller is still exempt because it could pass on the burden of paying the tax to the purchaser. For example the services rendered by a local firm to its foreign client are performed or successfully completed upon its sending to a foreign client the drafts and bills it has gathered from service establishments here. the term means the performance or "successful completion of a contractual duty.) b) Tax credit method. 2007] âââ7. Placer Dome Technical Services (Phils. G. G. Inc. Its services. et al. barters. there can only be a "predetermined end of a course" when determining the service "location or position x x x for legal purposes..whether or not in the course of trade or business. 4. The VAT utilizes the concept of the output and input taxes. It is when the output taxes exceed the input taxes that the excess has to be paid. [Commissioner of Internal Revenue v. 2005) 4. Seagate Technology (Philippines). 2005] If at the end of a taxable period. A VAT exempt seller sells to a non-VAT exempt purchaser. No. No. the excess shall be carried over to the succeeding quarter or quarters. Such facilitation service has no physical existence. 5.

00 in any 12-month period.00) shall be entitled to a transitional input tax on the inventory on hand as of the effectivity of their VAT registration. Regs. Interpretation of the term “In the Course of Trade or Business” as used in the VAT system. Magsaysay Lines.. October 15. (a). 16-2005. the term processing shall mean pasteurization. G. although a fixed amount is not imposed for the exercise of a privilege but only for the purpose of defraying part of the cost of registration. and companion cases. religious sects which sells and distributes religious literature is not violative of religious freedom. in the course of his trade or business. arrangement and numbering supplied ) 14. No. arrangement and numbering supplied] 15. but all the time. et al. 2006) âââ18. Regs. The VAT registration fee does NOT violate religious freedom.000.500. (Tolentino v. (ABAKADA Guro Party List. . 146984. No. but which have not yet undergone processing. on the following: a) goods purchased for resale in their present condition.A. b) materials purchased for further processing. 1st par. 235 SCRA 630) 17. [Rev. Input tax is the value-added tax due on or paid by a VAT-registered person on importation of good or local purchases of goods or services. NDC. d) goods in process for sale. The VAT registration fee imposed on non-VAT enterprises which includes among others. [Rev.Output VAT less Input VAT = VAT due on the increase in worth. and milk. (b)] 16. Persons or firms engaged in the processing of sardines. The term "doing business" or “course of business” conveys the idea of business being done. Sec. et al. Ermita. Secretary of Finance. mackerel. a VAT-registered entity created for the purpose of selling real property. paraphrasing.000.. 16-2005.) 13. 2005. 1st par. The registration fee is thus more of an administrative fee. Prior to the enactment of multi-stage sales taxation.700 DWT Tween-Decker. Regs. Output tax is the value-added tax due on the sale or lease or taxable goods. Sec. Inc.4.111-1. and companion cases. And 2nd par. equivalent to four percent (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production. No. G. (Rev. et al. much less a constitutional right. Concept of presumptive input tax credits.A. âââ12. the sales taxes paid at every level of distribution are not recoverable from the taxes payable. 10. or who voluntarily register even if their turnover does not exceed P1.000.000. Concept of transitional input tax credits on beginning inventories. The NDC decided to sell in one lot its NMC shares and five (5) of its ships. Included in the input tax. merit or improvement f the goods or services. It should be stressed that a person has no vested right in statutory privileges. The right to credit the input tax be limited by legislation because it is a mere creation of law. It does not include isolated transactions. 273 imposing a 10% multi-stage tax on all sales. 7716). creditable against the output tax. As used in this paragraph.110-1. With the advent of Executive Order No. No. a) the transitional input tax and b) the presumptive input tax xxx. No. 4. which are 3. vs.500. including lease or use of properties. or e) oods and supplies for use in the course of the taxpayer’s trade or business as a VAT-registered person. 2nd sentence. a privilege that also the law can limit..R. properties or services by any VAT-registered person. one not imposed on the exercise of a privilege. c) goods which have been manufactured by the taxpayer. 8424). and in manufacturing refined sugar. shall be allowed a presumptive input tax. Regs. It includes c) input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. etc. decided to sell to private enterprise all of its shares in its wholly-owned subsidiary the National Marine Corporation (NMC).. canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such a manner as to prepare it for special use to which it could not have been put in its original form or condition. 168207. not from time to time.. The right to credit input tax as against the output tax is clearly a privilege created by law. Taxpayers who become VAT-registered persons upon exceeding the minimum turnover of P1. July 28.111-1. No. Pursuant to a government program of privatization. No. (Rev.00 (except franchise grantees of radio and television broadcasting whose threshold is P10. cooking oil and packed noodle-based instant meals... it was only then that the crediting of the input tax paid on purchase or importation of goods and services by VAT-registered persons against the output tax was established. R. on the motion for reconsideration) âââ11. and The Tax Reform Act of 1997 (R. This continued with the Expanded VAT Law (R. 4. 1st par. No.110-1.4. (Commissioner of Internal Revenue v.

"Course of business" or "doing business" connotes regularity of activity. but means conducting.106-3. capital transactions of individuals are not subject to VAT. whether or not the business is continued by the new owner or successor. SUGGESTED ANSWER: Yes.106-7 (a). (Commissioner of Internal Revenue v. Transactions considered retirement or cessation of business “deemed sale” subject to VAT. 4. a) Change of ownership of the business. Is the sale subject to VAT? SUGGESTED ANSWER: No. Sec.) Thus. The following sales of real properties are exempt from VAT. b) Dissolution of a partnership and creation of a new partnership which takes over the business. namely: a) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business. The VAT is also imposed on certain transactions “deemed sales” which include: a) Transfer. "Course of business" is what is usually done in the management of trade or business. Inc. a domestic corporation engaged in the real estate business. or exchange or goods and services. barter. otherwise known as the “Urban and Development Housing Act of 1992” and other related laws. 1.. et al. to the NMC. how much? Explain. It should be emphasized that the normal VAT-registered activity of NDC is leasing personal property."Kloeckner" type vessels. arrangement and numbering supplied] 20. âââ23. 22. Inc. Is the sale subject to the value-added tax (VAT)? If so. Creditors in payment of debt or obligation c) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned. Baliwag Navigation.registered person. the tax is imposed on sales. whether capital goods. or 1. Magsaysay Lines. use or consumption not in the course of business or properties originally intended for sale or for use in the course of business. [Rev. The bid was approved by the Committee on Privatization. 7835 and RA No. 2009. Inc. with respect to all goods on hand. On September 4.00.. Regs. not from time to time. the vessels were transferred and leased.000. 12% on the gross selling price because the sale was made in the ordinary course of trade of business of X. prosecuting and continuing business by performing progressively all the acts normally incident thereof. xxx or 2. (4) paraphrasing.00. Inc. the proprietor of a single proprietorship sells his entire business. There is change in the ownership of the business where a single proprietorship incorporates. Sale of or lease of real properties subject to VAT. supplies or materials as of the date of such retirement. Consigned goods returned by the consignee within the 60-day period are not deemed sold. and FIM Limited of the Marden Group based in Hongkong . arrangement and numbering supplied] 21. No. xxx b) Distribution or transfer to: 1. XYZ. such as RA No. 162005. No.000. The bid was made by Magsaysay Lines.000. d) Retirement from or cessation of business. 7279. R. stock-in-trade. The term "carrying on business" does not mean the performance of a single disconnected act. July 28. also its wholly-owned subsidiary. 8763. (Rev. Under the Value Added Tax (VAT). Regs. In the instant case." Magsaysay Lines. 16-2005. 1st par. 4. b) Sale of real properties utilized for low-cost housing as defined by RA No.. No. No.000. and a Notice of Award was issued to Magsaysay Lines. on a bareboat basis. 2006) âââ19. Sec. sold a building for P10. Regs. a domestic corporation engaged in the real estate business. but all the time. The NMC shares and the vessels were offered for public bidding. the sale was an isolated transaction. The vessels were constructed for the NDC between 1981 and 1984. Only real estate dealers are subject to VAT. 146984. then initially leased to Luzon Stevedoring Company. 4. Sale of real properties primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT. Subsequently. Among the stipulated terms and conditions for the public auction was that the winning bidder was to pay "a value added tax of 10% on the value of the vessels. 16-2005.. G. This finding is confirmed by the Revised Charter of the NDC which bears no indication that the NDC was created for the primary purpose of selling real property. Sec. 2. offered to buy the shares and the vessels for P168. The sale which was involuntary and made pursuant to the declared policy of Government for privatization could no longer be repeated or carried on with regularity. xxx xxx xxx . xxx [Rev. Shareholders or investors as share in the profits of the VAT. while "doing business" conveys the idea of business being done.106-7. paraphrasing. purportedly for a new company still to be formed composed of itself.. or cessation.

g) proprietors. [NIRC of 1997. That not later than January 31. j) lending investors. Rev. b) a value-added tax equivalent to twelve percent (12%) of gross receipts c) derived from the sale or exchange of services. whether covered by one or separate Deed of Conveyance. further. No. m) sales of electricity by generation companies. provided. 4. and other related laws wherein the price ceiling per unit is P225. pension houses. including those performed or rendered by the following: a) construction and service contractors. paraphrasing and numbering supplied] 24.000. operators or keepers of hotels. “Sale or exchange of services”. xxx xxx xxx Sale of residential lot valued at One Million Five Hundred Thousand Pesos (P1. and franchise grantees of gas and water utilities. transmission. trade brand or other like property or right.A. industrial or commercial knowledge or information. 7279.500. Sec.00. processing. manufacturing or repacking goods for others. patent. refreshment parlors. Also included in the phrase “sale or exchange of services. b) The lease or the use of. 2005. and p) similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. 1st par. and/or distribution companies. o) non-life insurance companies (except their crop insurances). as amended by R. [NIRC of 1997.00) and below where the instrument of sale/transfer/disposition was executed on or after November 1.109-1 (B). cafes and other eating places. or the right to use any industrial. plan. n) franchise grantees of electric utilities. indemnity and bonding companies. fidelity.108-2. f) persons engaged in milling. real estate. including surety. [Rev. If two or more adjacent residential lots are sold or disposed in favor of one buyer. Sec. trademark. design or model. although covered by separate titles and/or separate tax declarations. Regs. whether in kind or in cash. including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes. rest-houses. technical. as published by the National Statistics Office (NSO). resorts. for the purpose of utilizing the lots as one residential lot. h) proprietors or operators of restaurants.000. i) dealers in securities. No. 108 (A). shall be presumed as a sale of one residential lot.. No. including clubs and caterers. The term “sale or exchange of services” means the performance of all kinds of services in the Philippines for others for a fee.00 or as may from time to time be determined by the HUDCC and the NEDA and other related laws. commercial.00) and below. a) There shall be levied. goods or cargoes from one place in the Philippines to another place in the Philippines. No. . including the use or lease of properties. remuneration or consideration. the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed P1. arrangement and numbering supplied] 26.c) d) Sale of real properties utilized for socialized housing as defined under RA No. VAT on services and lease of properties. the amounts stated herein shall be adjusted to its present value using the Consumer Price Index. theaters. radio and television broadcasting and all other franchise grantees except franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P10. goodwill. Adjacent residential lots. 108 (A). motels. and collected. telephone and telegraph. l) common carriers by air and sea relative to their transport of passengers. and movie houses. commercial or scientific equipment. when sold or disposed of to one and the same buyer. Regs. assessed. b) stock. Sec. provided. a) The lease or the use of or the right or privilege to use any copyright.00). whether personal or real.000. inns. arrangement and numbering supplied] 25. secret formula or process.000. d) persons engaged in warehousing services e) lessors or distributors of cinematographic films. k) transportation contractors on their transport of goods or cargoes. or house & lot and other residential dwellings valued at Two Million Give Hundred Thousand Pesos (P2. 4. 9337. defined. 9337. as amended by R. (p). c) lessors of property. customs and immigration brokers. that such adjustment shall be published through revenue regulations to be issued not later than March 31 of each year. c) The supply of scientific.000.000.500.500.A. 16-2005. 2009 and every three (3) years thereafter.

No. Regs. Zero-rated sale distinguished from exempt transactions: a) A zero-rated sale is a taxable transaction but does not result in an output tax WHILE an exempt transaction is not subject to the output tax.. 150154. A zero-rated sale of goods or properties by a sale by a VAT-registered person is a taxable transaction for VAT purposes but the sale does not result in any output tax. the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. R. 4. The supply of technical advice. G. June 29. 2005) âââ30. Situs of taxation of zero-rated VAT services such as facilitating the collection of receivables from credit card members situated in the Philippines and payment to service establishments in the Philippines. (Rev.) âââ27. television. (Philipppine Branch). because the seller is entitled to recover. 2005] The “Cross Border Doctrine” is also known as the destination principle. Rationale for zero-rating of exports. Regs. 16-2005.108-2. G.d) e) f) g) h) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property. by way of a refund or as an input tax credit. 1st par. [Commissioner of Internal Revenue v. 2nd par. properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with Rev. No. No. film tapes and discs. August 9. b) The input tax on the purchases of a VAT registered person who has zero-rated sales may be allowed as tax credits or refunded WHILE the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt. 16-2005. but can claim a refund or a tax credit certificate for the VAT previously charged by suppliers. The tax paid or withheld is not deducted from the tax base. or The supply of services by a non-resident person or his employee in connection with the use of property or rights belonging to. venture. The lease of motion picture films. 2005] Under a zero-rating scheme. such rate obviously results in no tax chargeable against the purchaser. R. while imports are taxed. The Philippine VAT system adheres to the Cross Border Doctrine. the sale or exchange of a particular service is completely freed from the VAT. assistance or services rendered in connection with technical management or administration of any scientific. [Commissioner of Internal Revenue v. Inc. When applied to the tax base. This is so because the law neither makes a qualification nor adds a condition in determining the tax situs of a zerorated service. of Internal Revenue v. June 29. The place of payment is immaterial much less is the place where the output of the service will be further or ultimately used. Goods and services are taxed only in the country where they are consumed. Concept of VAT zero-rating. exports are zero-rated. 153866. February 11. American Express International. (Rev. This is also known as the “Cross Border Doctrine. Zero-rated Sales of Goods or Properties. R. 2005 citing various cases) 29. "paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [BSP]. No. no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. industrial or commercial undertaking. that is. according to which. Inc.” âââ31. Seagate Technology (Philippines).. 16-2005. satellite transmission and cable television time. Toshiba Information Equipment (Phils. The lease or the use of or the right to use radio. . The place where the service is rendered determines the jurisdiction to impose the VAT Performed in the Philippines. 152609." âââ32.) âââ28. the tax that is included in the cost of purchases attributable to the sale or exchange. âââ33. (Commissioner. G. Sec. 152609. or right as is mentioned in subparagraph (2) hereof or any such knowledge or information as is mentioned in subparagraph (3) hereof. As a general rule. actual or constructive export of goods and services from the Philippines to a foreign country must be zero-rated for VAT. However. Inc. those destined for use or consumption within the Philippines shall be imposed the twelve percent (12%) VAT. (Commissioner of Internal Revenue v. Hence. project of scheme. The law clearly provides for an exception to the destination principle.). No. Thus. G. The seller of such transactions charges no output tax. American Express International. Exception to the destination principle. for a zero percent VAT rate for services that are performed in the Philippines. the service is necessarily subject to its jurisdiction for the State necessarily has to have a “substantial connection” to it in order to enforce a zero rate. machinery or other apparatus purchased from such nonresident person. or the installation or operation of any brand. the input tax on the purchases of goods. No. while. (Philippine Branch). R. Regulations No. The tax rate is set at zero. Destination principle under the VAT System.

4. [Commissioner of Internal Revenue v. 2nd par. No. An ECOZONE may contain any or all of the following: industrial estates (IEs). 162005. Sales by suppliers from outside the borders of the ecozone to this separate customs territory are deemed as exports and treated as export sales. American Express International. [Rev. R. Inc. 149671. such as PEZA. The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the Customs Territory. An ECOZONE or a Special Economic Zone has been described as – [S]elected areas with highly developed or which have the potential to be developed into agro-industrial. but shall not result in any output tax. This is so because it meets all the requirements for VAT imposition. Sekisui Jushi Philippines. However. The services are performed or successfully completed upon send to its foreign clients the drafts and bills it has gathered from service establishments here.106-5. defined. free trade zones and tourist/recreational centers. the input tax on purchases of goods. considered export-sale. properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with Rev. No. c) Foreign currency denominated sale. industrial. No. 2005] âââ38. A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT purposes. it definitely receives consideration in foreign currency that is accounted for in conformity with law. and BIR Revenue Regulations that alter the legal requirements for zero-rating are ultra vires and invalid. Zero rating is primarily intended to be enjoyed by the seller. G. Regs.. G. These sales are zero-rated or subject to a tax rate of zero percent. Service performed by American Express in facilitating the collection of receivables from credit card members situated in the Philippines and payment to service establishments in the Philippines in behalf of its Hong-Kong based client is subject to VAT but zero-rated. 150154. while an ecozone is geographically within the Philippines. it is deemed a separate customs territory and is regarded in law as foreign soil. Sec. export processing zones (EPZs). words in italics supplied) âââ39. However. having been performed in the . No. 2005) 36. b) Considered export sales under Executive Order No. Toshiba Information Equipment (Phils. No.c) Persons engaged in transactions which are zero rated being subject to VAT are required to register WHILE registration is optional for VAT-exempt persons. 4. 16-2005. No. among which are the following: a) The service is performed in the Philippines. c) For this service. paraphrasing supplied) 35. investment and financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations. or attenuated. R. Sale of gold to the Central Bank considered as export sales. on a significant scale with a reasonable degree of frequency. August 9. 224. commercial. 16-2005.). fortuitous. August 31. Zero-rated sale of service. Manila Mining Corporation.. carried on over a sustained period of time. June 29. b) Such service is commercial in nature. (Rev. No. banking. G. Zero-rated sales by VAT-registered persons. and d) Sales to persons or entities deemed tax-exempt under special law or international agreement. 153204. Sales to ecozone. Inc. recreational. tourist. Its services. Sec. The VAT system uses the destination principle which posits that the goods and services are taxed only in the country where they are consumed. the law itself provides for clear exceptions under which the supply of services shall be zero-rated. 152609. and not at random. (Commissioner. “Ecozone”. (Philippine Branch). d) It is not an entity exempt under any of our laws or international agreements. Notably. and c) It is paid for in acceptable foreign currency of the Bangko Sentral ng Pilipinas. b) The services are within the categories provided for under the Tax Code. Regs. July 21. as follows: a) It regularly renders in the Philippines the service of facilitating the collection and payment of receivables belonging to a foreign company that is a clearly separate and distinct entity. Inc. American Express renders assistance to its foreign clients by receiving the bills of service establishments located in the country and forwarding them to their clients abroad. (Commissioner of Internal Revenue v.. G. While the service performed by American Express is subject to VAT it is zero-rated. defined. 2005) 40. As export sales.R.. Sec. (Commissioner of Internal Revenue v. R. The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: a) Export sales. 2006 citing various authorities) 37. hence. no tax is chargeable to it as purchaser. âââ34. Regs. the sale of gold to the Central Bank is zerorated. of Internal Revenue v.108-5 (a). which charges no output VAT but can claim a refund of or a tax credit certificate for the input VAT previously charged to it by suppliers.

Thus. 152609. of Internal Revenue v. No. The BIR could not change the law. 2005] . American Express International. [Commissioner.Philippines are therefore also consumed in the Philippines. Inc. its services are exempt from the destination principle and are zero-rated. June 29. R. (Philippine Branch). G.