Principle/s: - Requisites for the deductibility of ordinary and necessary trade, business, or professional expenses - Accounting method in relation

to determining when and how to report income and deductions - All Events Test

Commissioner of Internal Revenue vs Isabela Cultural Corporation Facts: On February 23, 1990, ICC a domestic corporation, received from BIR assessment notice for deficiency income tax and expanded withholding tax for the following expenses: 1) Auditing Services, 2) Security Services, and 3) Legal Services Issue: Whether the said services may be deducted from ordinary and necessary trade, business, or professional expenses? Held: The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services, are: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers. Paid or incurred during the taxable year is for the qualified by Section 45 of the NIRC which states that: The deduction provided for in this title shall be taken for the taxable year in which paid or accrued or paid of incurred, dependent upon the method of accounting upon the basis of which the net income is computed. Accounting methods for the tax purposes comprises a set of rules for determining when and how to report income and deductions. Revenue Audit Memorandum Order No. 1-2000, provides that under that accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deductions form income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the same for the next year. The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) Fixing of a right to income or liability to pay; (2) The availability of the reasonable accurate determination of such income or liability. The all events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events that is satisfied where computation remain uncertain, if its basis is unchangeable, the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year. Maech Medina | Tax I Case Digest

The propriety of an accrual must be judged by the fact that a taxpayer know, or could reasonably be expected to have known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a question of fact, such that the taxpayer bears the burden of proof of establishing the accrual of an item of income and of deduction.

Maech Medina | Tax I Case Digest

Principle/s: - A claim for refund should be construed in strictissimi juris against the taxpayer - The power of taxation is sometimes called also the power to destroy

Commissioner of Internal Revenue vs Tokyo Shipping Co. Ltd. GR No. L-68252, 1995 Facts: Private respondent is a foreign corporation represented in the Philippines by Soriamont Steamship Agencies, Incorporated. It owns and operates tamper vessel M/V Gardenia. In December 1980, NASUTRA chartered M/V Gardenia to load 16,500 metric tons of raw sugar in the Philippines. Upon arriving, however, at Guimaras, Port of Iloilo, the vessel found no sugar for loading. Claiming the pre-payment of income and common carriers taxes as erroneous since no receipt was realized from the charter agreement, private respondent instituted a claim for tax-credit or refund of P 107,142.75. Issue: Whether or not the private respondent was able to prove that it derived no receipts from its charter agreement, and hence is entitled to a refund of the taxes it pre-paid to the government. Held: A claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer. Likewise, there can be no disagreement with petitioners stance that private respondent has the burden of proof to establish the factual basis of its claim for tax refund. Section 4 (b) (2) of the National Internal Revenue code provides: A corporation organize, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippine, shall be taxable as provided in subsection (a) of this section upon the total net income derived in the preceding taxable year from all sources within the Philippines: Provided, however, that international carriers shall pay a tax of two and one half per cent (2 %) of the Gross Philippine Billings. Gross Philippine Billings include gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail, provided the cargo or mail include the gross freight charge up to final destination. Gross revenue from chartered flights originating from the Philippines shall likewise form part of Gross Philippine Billings regardless of the passage documents. Roxas vs Court of Tax Appeals provides that The power of taxation is sometimes called also the power to destroy. Therefore; it should be exercised with caution to minimize injury to the propriety rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg. And, in order to maintain the general publics trust and confidence in the Government this power must be used justly.

Maech Medina | Tax I Case Digest