General Principles & NIRC 2004backup2

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TAX LAW REVIEWER

SAINT LOUIS UNIVERSITY BAR OPERATIONS
GENERAL PRINCIPLES I. Concepts, Nature and Characteristics of Taxation and Taxes. Taxation Defined: As a process, it is a means by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of the government. It is merely a way of apportioning the costs of government among those who in some measures are privileged to enjoy its benefits and must bear its burdens. As a po er, taxation refers to the inherent power of the state to demand enforced contributions for public purpose or purposes. Rationa!e of Taxation " The Supreme ourt held! "It is said that taxes are what we pay for civili#ed society. $ithout taxes, the government would be paraly#ed for lack of the motive power to activate and operate it. %ence, despite the natural reluctance to surrender part of one&s hard-earned income to the taxing authorities, every person who is able must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. The s#$%iotic re!ationship is the rationa!e of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. Taxation is a symbiotic relationship, whereby in exchange for the protection that the citi#ens get from the government, taxes are paid.' ( ommissioner of Internal )evenue vs *lgue, Inc.,et al., +-,--./, 0eb. 12, 1.--3 Purposes and &%'ecti(es of Taxation 1. Re(enue ) to provide funds or property with which the State promotes the general welfare and protection of its citi#ens. ,. Non"Re(enue 45),657 a. Pro$otion of Genera! *e!fare ) Taxation may be used as an implement of police power in order to promote the general welfare of the people. 4see +ut# vs *raneta (.- 5hil 18-3 and 9sme:a vs 9rbos (;.). <o. ..--/, =ar. >1, 1..>37 b. Re+u!ation ) *s in the case of taxes levied on excises and privileges like those imposed in tobacco or alcoholic products or amusement places like night clubs, cabarets, cockpits, etc.
Prepared by the TAX LAW SECTION Chief KATHERINE APOLONIO Assistant Chief GERALD GONZALES Members AGAPITA CELINO, RICHELLE ALIMBA, ANTONIO SAQUING, ALELI GASMEN, AIDA COMENDADOR, TINA MARIE BOADO, JACQUELINE TEMPRA, CLARYLL ANNE LAMINATO, REALYN POSTRADO. All Rig !" R#"#$%#& by the SAINT LOUIS UNIVERSITY COLLEGE O' LAW BAR OPERATIONS ())*.
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In the case of Caltex Phils. Inc. vs COA (;.). <o. .,?-?, =ay -, 1..,3, it was held that taxes may also be imposed for a regulatory purpose as, for instance, in the rehabilitation and stabili#ation of a threatened industry which is affected with public industry like the oil industry. c. Reduction of Socia! Ine,ua!it# @ this is made possible through the progressive system of taxation where the objective is to prevent the under-concentration of wealth in the hands of few individuals. d. Encoura+e Econo$ic Gro th @ in the realm of tax exemptions and tax reliefs, for instance, the purpose is to grant incentives or exemptions in order to encourage investments and thereby promote the country&s economic growth. e. Protectionis$ @ in some important sectors of the economy, as in the case of foreign importations, taxes sometimes provide protection to local industries like protective tariffs and customs duties. Taxes Defined Taxes are the enforced proportional contributions from persons and property levied by the law-making body of the State by virtue of its sovereignty for the support of government and for public needs. Essentia! Characteristic of Taxes 4+6=5>S7 1. It is levied by the !a "$a-in+ %od# of the State The power to tax is a legislative power which under the onstitution only ongress can exercise through the enactment of laws. *ccordingly, the obligation to pay taxes is a statutory liability. ,. It is an enforced contribution * tax is not a voluntary payment or donation. It is not dependent on the will or contractual assent, express or implied, of the person taxed. Taxes are not contracts but positive acts of the government. >. It is generally payable in $one# Tax is a pecuniary burden @ an exaction to be discharged alone in the form of money which must be in legal tender, unless Aualified by law, such as )* >B8 which allows backpay certificates as payment of taxes. 8. It is proportionate in character - It is ordinarily based on the taxpayers ability to pay. ?. It is levied on persons or propert# " * tax may also be imposed on acts, transactions, rights or privileges.
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/. It is levied for pu%!ic purpose or purposes " Taxation involves, and a tax constitutes, a burden to provide income for public purposes. 2. It is levied by the State which has jurisdiction over the persons or property. - The persons, property or service to be taxed must be subject to the jurisdiction of the taxing state. Theor# and .asis of Taxation 1. Necessit# Theor# Taxes proceed upon the theory that the existence of the government is a necessityC that it cannot continue without the means to pay its expensesC and that for those means, it has the right to compel all citi#ens and properties within its limits to contribute. In a case, the Supreme ourt held that! Taxation is a power emanating from necessity. It is a necessary burden to preserve the State&s sovereignty and a means to give the citi#enry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citi#enry and those which come with the State&s territory and facilities, and protection which a government is supposed to provide. (Phil. Guaranty Co., Inc. vs Commissioner of Internal evenue, !" #C A $$%&. ,. The .enefits"Protection Theor#/.enefit"Recei(ed Theor# The basis of taxation is the reciprocal duty of protection between the state and its inhabitants. In return for the contributions, the taxpayer receives the general advantages and protection which the government affords the taxpayer and his property. 0ua!ifications of the .enefit"Protection Theor#: a. It does not mean that only those who are able to pay and do pay taxes can enjoy the privileges and protection given to a citi#en by the government. b. 0rom the contributions received, the government renders no special or commensurate benefit to any particular property or person. c. The only benefit to which the taxpayer is entitled is that derived from his enjoyment of the privileges of living in an organi#ed society established and safeguarded by the devotion of taxes to public purposes. (Gome' vs Palomar, (% #C A )(*& d. * taxpayer cannot object to or resist the payment of taxes solely because no personal benefit to him can be pointed out as arising from the tax. (+oren'o vs Posa,as, -. Phil "%"& >. Life%!ood Theor#
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Taxes are the lifeblood of the government, being such, their prompt and certain availability is an imperious need. (Collector of Internal evenue vs. Goo,rich International ubber Co., #ept. -, !*-%& $ithout taxes, the government would be paraly#ed for lack of motive power to activate and operate it. Nature of Taxin+ Po er 1. Inherent in so(erei+nt# @ The power of taxation is inherent in sovereignty as an incident or attribute thereof, being essential to the existence of every government. It can be exercised by the government even if the onstitution is entirely silent on the subject. a. onstitutional provisions relating to the power of taxation do not operate as grants of the power to the government. They merely constitute limitations upon a power which would otherwise be practically without limit. b. $hile the power to tax is not expressly provided for in our constitutions, its existence is recogni#ed by the provisions relating to taxation. In the case of /actan Cebu International Airport Authority vs /arcos, #ept. !!, !**-, as an incident of sovereignty, the power to tax has been described as "unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislative which imposes the tax on the constituency who are to pay it.' ,. Le+is!ati(e in character @ The power to tax is exclusively legislative and cannot be exercised by the executive or judicial branch of the government. >. Su%'ect to constitutiona! and inherent !i$itations @ *lthough in one decided case the Supreme ourt called it an awesome power, the power of taxation is subject to certain limitations. =ost of these limitations are specifically provided in the onstitution or implied therefrom while the rest are inherent and they are those which spring from the nature of the taxing power itself although, they may or may not be provided in the onstitution. Scope of Le+is!ati(e Taxin+ Po er 4S, * 5 D * =7 1. su%'ects of Taxation (the persons, property or occupation etc. to be taxed3 1. a$ount or rate of the tax 2. purposes for hich taxes sha!! %e !e(ied pro(ided the# are pu%!ic purposes 3. apportion$ent of the tax 4. situs of taxation 5. $ethod of co!!ection Is the Po er to Tax the Po er to Destro#6 In the case of Churchill, et al. vs Concepcion (". Phil *-*& it has been ruled that!
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The power to impose taxes is one so unlimited in force and so searching in extent so that the courts scarcely venture to declare that it is subject to any restriction whatever, except such as rest in the discretion of the authority which exercise it. <o attribute of sovereignty is more pervading, and at no point does the power of government affect more constantly and intimately all the relations of life than through the exaction made under it. *nd in the notable case of /cCulloch vs /arylan,, hief Eustice =arshall laid down the rule that the power to tax involves the power to destroy. *ccording to an authority, the above principle is pertinent only when there is no power to tax a particular subject and has no relation to a case where such right to tax exists. This opt-Auoted maxim instead of being regarded as a blanket authori#ation of the unrestrained use of the taxing power for any and all purposes, irrespective of revenue, is more reasonably construed as an epigrammatic statement of the political and economic axiom that since the financial needs of a state or nation may outrun any human calculation, so the power to meet those needs by taxation must not be limited even though the taxes become burdensome or confiscatory. To say that "the power to tax is the power to destroy' is to describe not the purposes for which the taxing power may be used but the degree of vigor with which the taxing power may be employed in order to raise revenue (I ooley 12.-1-13 Constitutiona! Restraints Re: Taxation is the Po er to Destro# $hile taxation is said to be the power to destroy, it is by no means unlimited. It is eAually correct to postulate that the 0power to tax is not the power to destroy while the Supreme Court sits,1 because of the constitutional restraints placed on a taxing power that violated fundamental rights. In the case of oxas, et al vs C2A (April (-, !*-)& , the S reminds us that although the power of taxation is sometimes called the power to destroy, in order to maintain the general public&s trust and confidence in the ;overnment, this power must be used justly and not treacherously. The Supreme ourt held! "The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimi#e injury to the proprietary rights of a taxpayer. It must be exercised fairly, eAually and uniformly, lest the tax collector kill the F hen that lays the 3ol,en e33&. *nd, in order to maintain the general public& trust and confidence in the ;overnment this power must be used justly and not treacherously.' The doctrine seeks to describe, in an extreme, the conseAuential nature of taxation and its resulting implications, to wit! a. The power to tax must be exercised with caution to minimi#e injury to proprietary rights of a taxpayerC b. If the tax is lawful and not violative of any of the inherent and constitutional limitations, the fact alone that it may destroy an activity or object of taxation will not entirely permit the courts to afford any reliefC and c. * subject or object that may not be destroyed by the taxing authority may not likewise be taxed. (e.g. exercise of a constitutional right3 Po er of 7udicia! Re(ie in Taxation/Doctrine of 7udicia! Non"Interference
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The courts cannot review the wisdom or advisability or expediency of a tax. The court&s power is limited only to the application and interpretation of the law. Eudicial action is limited only to review where involves! 1. The determination of validity on the tax in relation to constitutional precepts or provisions. ,. The determination, in an appropriate case, of the application of the law. Aspects of Taxation 1. Le(# @ determination of the persons, property or excises to be taxed, the sum or sums to be raised, the due date thereof and the time and manner of levying and collecting taxes (strictly speaking, such refers to taxation3 ,. Co!!ection @ consists of the manner of enforcement of the obligation on the part of those who are taxed. (this includes payment by the taxpayer and is referred to as tax administration3 The two processes together constitute the "taxation s#ste$'. .asic Princip!es of a Sound Tax S#ste$ 40*T7 1. 8isca! Ade,uac# ) the sources of tax revenue should coincide with, and approximate the needs of government expenditure. <either an excess nor a deficiency of revenue vis-G-vis the needs of government would be in keeping with the principle. ,. Ad$inistrati(e 8easi%i!it# ) tax laws should be capable of convenient, just and effective administration. >. Theoretica! 7ustice @ the tax burden should be in proportion to the taxpayer&s ability to pay (ability4to4pay principle&. The 1.-2 onstitution reAuires taxation to be eAuitable and uniform. II. C!assifications and Distinction C!assification of Taxes
A.
As to Su%'ect $atter
1. Persona!, capitation or po!! taxes @ taxes of fixed amount upon all persons of a certain class within the jurisdiction of the taxing power without regard to the amount of their property or occupations or businesses in which they may be engaged in. example! community tax
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,. Propert# Taxes @ taxes on things or property of a certain class within the jurisdiction of the taxing power. example! real estate tax >. Excise Taxes @ charges imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation. examples! income tax, estate tax or donor&s tax As to .urden
B.
1. Direct Taxes @ taxes wherein both the 0inci,ence1 as well as the 0impact1 or burden of the tax faces on one person. examples! income tax, community tax, donor&s tax, estate tax ,. Indirect Taxes @ taxes wherein the incidence of or the liability for the payment of the tax falls on one person, but the burden thereof can be shifted or passed to another person. examples! H*T, percentage taxes, customs duties excise taxes on certain specific goods I$portant Points to Consider re+ardin+ Indirect Taxes! 1. $hen the consumer or end-user of a manufacturer product is tax-exempt, such exemption covers only those taxes for which such consumer or end-user is directly liable. Indirect taxes are not included. %ence, the manufacturer cannot claim exemption from the payment of sales tax, neither can the consumer or buyer of the product demand the refund of the tax that the manufacturer might have passed on to him. (Phil. Acetylene Co. inc. vs Commissioner of Internal evenue et. al., +4!*$5$, Au3.!$, !*)$& ,. $hen the transaction itself is the one that is tax-exempt but through error the seller pays the tax and shifts the same to the buyer, the seller gets the refund, but must hold it in trust for buyer. (American ubber Co. case, +4!5*-", April "5, !*-"& >. $here the exemption from indirect tax is given to the contractee, but the evident intention is to exempt the contractor so that such contractor may no longer shift or pass on any tax to the contractee, the contractor may claim tax exemption on the transaction (Commissioner of Internal evenue vs 6ohn Gotamco an, #ons, Inc., et.al., +4"!5*(, 7eb. ($, !*)$& 8. $hen the law granting tax exemption specifically includes indirect taxes or when it is clearly manifest therein that legislative intention to exempt embraces indirect taxes, then the buyer of the product or service sold has a right to be reimbursed the amount of the taxes that the sellers passed on to him. (/ace,a vs /acarai3,supra& NOTE: In Contex Corp. vs. CI , (G. . 8o. !!!%"%. 6uly (, (55.& , the ourt held that while, )* 2,,2 does not grant tax exemptions, such grant is not all encompassing but is limited only to those taxes for which an S=I* registered business may directly liable.
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%ence, Subic Iay 0reefort Jone and 6nterprise (SI0J3 locators are not relieved from indirect axes that may be shifted to them by a H*T registered seller. In an indirect tax, which also includes H*T, the amount of tax paid on the goods, properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or leasee.
C.
As to Purpose
1. Genera!/8isca!/Re(enue @ tax imposed for the general purposes of the government, i.e., to raise revenues for governmental needs. 6xamples! income taxes, H*T, and almost all taxes ,. Specia!/Re+u!ator# @ tax imposed for special purposes, i.e., to achieve some social or economic needs. 6xamples! educational fund tax under )eal 5roperty Taxation
D.
As to 9easure of App!ication
1. Specific Tax @ tax imposed per head, unit or number, or by some standard of weight or measurement and which reAuires no assessment beyond a listing and classification of the subjects to be taxed. 6xamples! taxes on distilled spirits, wines, and fermented liAuors ,. Ad :a!ore$ Tax @ tax based on the value of the article or thing subject to tax. example! real property taxes
E.
As to Date
1. Pro+ressi(e Tax @ the rate or the amount of the tax increases as the amount of the income or earning (tax base3 to be taxed increases. examples! income tax, estate tax, donor&s tax ,. Re+ressi(e Tax @ the tax rate decreases as the amount of income or earning (tax base3 to be taxed increases. <ote! $e have no regressive taxes (this is according to Ke +eon3 >. 9ixed Tax @ tax rates are partly progressive and partly regressive. 8. Proportionate Tax @ tax rates are fixed on a flat tax base. examples! real estate tax, H*T, and other percentage taxes As to Scope or authorit# i$posin+ the tax
'.
1. Nationa! Tax ) tax imposed by the <ational ;overnment. examples! national internal revenue taxes, customs duties
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,. 9unicipa!/Loca! Tax @ tax imposed by +ocal ;overnment units. examples! real estate tax, professional tax Re+ressi(e S#ste$ of Taxation (is";"(is Re+ressi(e Tax * regressive tax, must not be confused with regressive system of taxation. Re+ressi(e Tax: tax the rate of which decreases as the tax base increases. Re+ressi(e S#ste$ of Taxation: focuses on indirect taxes, it exists when there are more indirect taxes imposed than direct taxes. Taxes distin+uished fro$ other I$positions a. To!! (s Tax To!! @ sum of money for the use of something, generally applied to the consideration which is paid for the use of a road, bridge of the like, of a public nature. Kistinctions between Tax and Toll Tax 1. demand of sovereignty ,. paid for the support of the government >. generally, no limit as to amount imposed (s To!! 1. demand of proprietorship ,. paid for the use of another&s property
>. amount depends on the cost of construction or maintenance of the public improvement used 8. imposed only by 8. imposed by the the government government or private individuals or entities %. Pena!t# (s Tax Pena!t# @ any sanctions imposed as a punishment for violations of law or acts deemed injurious. Tax Pena!t# 1. generally intended to raise revenue ,. imposed only by the government (s 1. designed to regulate conduct ,. imposed by the government or private individuals or
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entities c. Specia! Assess$ent (s Tax Specia! Assess$ent @ an enforced proportional contribution from owners of lands especially or particularly benefited by public improvements. Tax Assess$ent 1. imposed on persons, property and excise ,. personal liability of the person assessed (s 1. levied land Specia! only on
,. not a personal liability of the person assessed, i.e. his liability is limited only to the land involved >. based on necessity >. based wholly on as well as on benefits benefits received 8. general 8. exceptional both application (see as time and place Apostolic Prefect vs 2reas. Of 9a3uio, $! Phil %.$&
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I$portant Points to Consider Re+ardin+ Specia! Assess$ents: 1. Since special assessments are not taxes within the constitutional or statutory provisions on tax exemptions, it follows that the exemption under Sec. ,-(>3, *rt. HI of the onstitution does not apply to special assessments. ,. %owever, in view of the exempting proviso in #ec. (". of the +ocal Government Co,e, properties which are actually, ,irectly an, exclusively use, for reli3ious, charitable an, e,ucational purposes are not exactly exempt from real property taxes but are exempt from the imposition of special assessments as well.( see Aban& > .The +enera! ru!e is that an exemption from taxation does not include exemption from special assessment. d. License or Per$it 8ee (s Tax License or Per$it fee @ is a charge imposed under the police power for the purposes of regulation. Tax (s 1. enforced contribution assessed by sovereign authority to defray public expenses ,. for revenue purposes >. an exercise of the taxing power 8. generally no limit in the amount of tax to be paid ?. imposed also on persons and property /. non-payment does not necessarily make the act or business illegal License/Per$it 8ee 1. legal compensation or reward of an officer for specific purposes ,. for regulation purposes >. an exercise of the police power 8. amount is limited to the necessary expenses of inspection and regulation ?. imposed on the right to exercise privilege /. non-payment makes the act or business illegal
Three -inds of !icenses are reco+ni<ed in the !a : 1. +icenses for the regulation of useful occupations. ,. +icenses for the regulation or restriction of non-useful occupations or enterprises >. +icenses for revenue only I$portance of the distinctions %et een tax and !icense fee:
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1. Some limitations apply only to one and not to the other, and that exemption from taxes may not include exemption from license fees. ,. The power to regulate as an exercise of police power does not include the power to impose fees for revenue purposes. (see American /ail +ine vs City of 9utuan, +4!(-.$, /ay "!, !*-$ an, relate, cases& >. *n extraction, however, maybe considered both a tax and a license fee. 8. Iut a tax may have only a regulatory purpose. ?. The general rule is that the imposition is a tax if its primary purpose is to generate revenue and regulation is merely incidentalC but if regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition of a tax. (see Pro3ressive :evelopment Corp. vs ;ue'on City, !$( #C A -(*&
e. De%t (s Tax Kebt is based upon juridical tie, created by law, contracts, delicts or Auasi-delicts between parties for their private interest or resulting from their own acts or omissions. Tax 1. based on law (s De%t 1. based on contracts, express or implied ,. generally, cannot ,. assignable be assigned >. generally payable >. may be paid in in money kind 8. generally not 8. may be subject to subject to set-off or set-off or compensation compensation ?. imprisonment is a ?. no imprisonment sanction for non- for non-payment of payment of tax debt except poll tax /. governed by /. governed by the special prescriptive ordinary periods of periods provided for prescriptions in the Tax ode 2. does not draw 2. draws interest interest except only when so stipulated, when delinAuent or in case of default Genera! Ru!e: Taxes are not subject to set-off or legal compensation. The government and the taxpayer are not creditors and debtors or each other. 9bligations in the nature of debts are due to the government in its corporate capacity, while taxes are due to the government
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in its sovereign capacity (Philex /inin3 Corp. vs CI , (*. #C A -)$< epublic vs /ambulao +umber Co., - #C A -((& Exception: $here both the claims of the government and the taxpayer against each other have already become due and demandable as well as fully liAuated. (see :omin3o vs Garlitos, +4!)*5., 6une (*, !*-"& Pertinent Case: Philex Mining Corp. vs Commissioner of nternal !evenue G. . 8o. !(%$5., Au3. (), !**) The Supreme ourt held that! "$e have consistently ruled that there can be no offsetting of taxes against the claims that the taxpayer may have against the government. * person cannot refuse to pay a tax on the ground that the government owes him an amount eAual to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.' f. Tax Distin+uished fro$ other Ter$s. =. Su%sid# @ a pecuniary aid directly granted by the government to an individual or private commercial enterprise deemed beneficial to the public. 1. Re(enue @ refers to all the funds or income derived by the government, whether from tax or from whatever source and whatever manner. 2. Custo$s Duties @ taxes imposed on goods exported from or imported into a country. The term taxes is broader in scope as it includes customs duties. 3. Tariff @ it may be used in > senses! *s a book of rates drawn usually in alphabetical order containing the names of several kinds of merchandise with the corresponding duties to be paid for the same. *s duties payable on goods imported or exported (5K <o. ,>B3 *s the system or principle of imposing duties on the importationLexportation of goods. 4. Interna! Re(enue @ refers to taxes imposed by the legislative other than duties or imports and exports. 5. 9ar+in 8ee @ a currency measure designed to stabili#e the currency. >. Tri%ute @ synonymous with taxC taxation implies tribute from the governed to some form of sovereignty. ?. I$post @ in its general sense, it signifies any tax, tribute or duty. In its limited sense, it means a duty on imported goods and merchandise. Inherent Po ers of the State 1. 5olice 5ower ,. 5ower of 6minent Komain >. 5ower of Taxation Distinctions a$on+ the Three Po ers
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Taxation
Po!ice Po er
E$inent Do$ain
P= PO#> - levied for " exercised to - taking of the purpose promote public property for of raising welfare thru public use revenue regulations A/O=82 O7 >?AC2IO8 - no limit - limited to the - no exaction, cost of compensation regulations, paid by the issuance of the government license or surveillance 9>8>7I2# >C>I@>: - no special no direct - direct benefit or direct benefits but a results in the benefits healthy form of just received but economic compensation the standard of enjoyment society or of the 0,amnum privileges absAue inBuria1 of living in is attained an organi#ed society 8O84I/PAI />82 O7 CO82 AC2# -the - contract may contracts impairment be impaired may be rule subsist impaired 2 A8#7> O7 P OP> 2C IGD2# - taxes paid - no transfer but - property is become part only restraint on taken by the of public the exercise of gov&t upon funds property right payment of exists just compensation #COP> - affects all - affects all - affects only persons, persons, the particular property property, property and excise privileges, and comprehended even rights 9A#I#
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public public -public necessity necessity and the necessity, right of the state private and the public to property is self-protection taken for and self- public use preservation A=2DO I2C EDICD >?> CI#># 2D> POE> - only by - only by the - may be the government or granted to government its political public service, or its subdivisions companies, or political public utilities subdivisions III. Li$itations on the Po er of Taxation Li$itations, C!assified a. Inherent Li$itations or those which restrict the power although they are not embodied in the onstitution @P N I T EA 1. Pu%!ic 5urpose of Taxes ,. Non"de!e+a%i!it# of the Taxing 5ower >. Territoria!it# or the Situs of Taxation 8. Exe$ption of the ;overnment from taxes ?. Internationa! omity b. Constitutiona! Li$itations or those expressly found in the constitution or implied from its provision 1. Due process of law ,. E,ua! protection of law >. 0reedom of Speech and of the press 8. Non"infrin+e$ent of religious freedom ?. Non"i$pair$ent of contracts /. Non"i$prison$ent for debt or non-payment of poll tax 2. 9rigin of Appropriation, )evenue and Tariff Iills -. Bnifor$it#, 6Auitability and 5rogressitivity of Taxation .. De!e+ation of +egislative *uthority to 0x Tariff )ates, Import and 6xport Muotas 1B. Tax 6xemption of Properties *ctually, Kirectly, and 6xclusively used for )eligious haritable 11. Hoting reAuirements in connection with the +egislative Grant of Tax 6xemption 1,. <on-impairment of the Supreme Courts& jurisdiction in Tax ases
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1>. Tax exemption of Re(enues and *ssets, including ;rants, 6ndowments, Konations or ontributions to 6ducation Institutions c. &ther Constitutiona! Pro(isions re!ated to Taxation 1. Su%'ect and Title of Iills ,. 5ower of the President to Heto an items in an *ppropriation, )evenue or Tariff Iill >. <ecessity of an Appropriation made before money 8. Appropriation of 5ublic =oney ?. Taxes +evied for Specia! 5urposes /. *llotment to LGC Inherent Li$itations *. Pu%!ic Purpose of Taxes =. I$portant Points to Consider: a.If taxation is for a public purpose, the tax must be used! a.13 for the support of the state or a.,3 for some recogni#ed objects of governments or a.>3 directly to promote the welfare of the community (taxation as an implement of police power3 term 0public purpose1 is synonymous with 03overnmental purpose1< a purpose affecting the inhabitants of the state or taxing district as a community and not merely as individuals. c. * tax levied for a private purpose constitutes a taking of property without due process of law. d. The purposes to be accomplished by taxation need not be exclusively public. *lthough private individuals are directly benefited, the tax would still be valid provided such benefit is only incidental. e. The test is not as to who receives the money, but the character of the purpose for which it is expendedC not the immediate result of the expenditure but rather the ultimate. f. In the imposition of taxes, public purpose is presumed. ,. Test in deter$inin+ Pu%!ic Purposes in tax a. Dut# Test @ whether the thing to be threatened by the appropriation of public revenue is something which is the duty of the State, as a government.
b. The
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b. Pro$otion of Genera! *e!fare Test @ whether the law providing the tax directly promotes the welfare of the community in eAual measure. I. Non"de!e+a%i!it# of Taxin+ Po er 1. Rationa!e: Koctrine of Separation of 5owers. Taxation is purely legislative hence, ongress cannot delegate the power to others. 1. Exceptions: a. "elegation to the President #$rt.% . Se&. '(#') *+(, Constitution)-.lexi/le Tariff Clause The power granted to ongress under this constitutional provision to authori#e the 5resident to fix within specified limits and subject to such limitations and restrictions as it may impose, tariff rates and other duties and imposts include tariffs rates even for revenue purposes only. ustoms duties which are assessed at the prescribed tariff rates are very much like taxes which are freAuently imposed for both revenue-raising and regulatory purposes (Garcia vs >xecutive #ecretary, et. al., G. . 8o. !5!($", 6uly ", !**(& /. "elegations to the 0o&al 1overnment #$rt. 2. Se&. 34 *+(, Constitution) It has been held that the general principle against the delegation of legislative powers as a conseAuence of the theory of separation of powers is subject to one wellestablished exception, namely, that legislative power may be delegated to local governments. The theory of non-delegation of legislative powers does not apply in maters of local concern. (Pepsi4Cola 9ottlin3 Co. of the Phil, Inc. vs City of 9utuan, et . al., +4 (()!., Au3. (), !*-)& NOTE: In = I** vs. =arcos, the Supreme ourt ruled that considering the present provisions of the onstitution, +ocal ;overnment Nnits& power to tax is no longer just a delegated power but a power granted by the onstitution. &. "elegation to $dministrative $gen&ies with respe&t to aspe&ts of Taxation not legislative in &hara&ter. >xamplesF assessment an, collection 2. Li$itations on De!e+ation a. It shall not contravene any onstitutional provisions or inherent limitations of taxationC b. The delegation is effected either by the onstitution or by validly enacted legislative measures or statuteC and c. The delegated levy power, except when the delegation is by an express provision of onstitution itself, should only be in favor of the local legislative body of the local or municipal government concerned.
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8. Tax Le+is!ation (is";"(is Tax Ad$inistration " 6very system of taxation consists of two parts! a. the elements that enter into the imposition of the tax 4 S1 A P C A 97, or tax regulationC and b. the steps taken for its assessment and collection or tax administration If what is delegated is tax legislation, the delegation is invalidC but if what is involved is only tax administration, the non-delegability rule is not violated. . Territoria!it# or Situs of Taxation =. I$portant Points to Consider: a.Territoriality or Situs of Taxation means 0place of taxation1 depending on the nature of taxes being imposed. b.It is an inherent mandate that taxation shall only be exercised on persons, properties, and excise within the territory of the taxing power because! b.13 Tax laws do not operate beyond a country&s territorial limit. b.,3 5roperty which is wholly and exclusively within the jurisdiction of another state receives none of the protection for which a tax is supposed to be compensation. c.%owever, the fundamental basis of the right to tax is the capacity of the government to provide benefits and protection to the object of the tax. * person may be taxed, even if he is outside the taxing state, where there is between him and the taxing state, a privity of relationship justifying the levy. 1. 8actors to Consider in deter$inin+ Situs of Taxation a.kind and lassification of the Tax b.location of the subject matter of the tax c.domicile or residence of the person d.citi#enship of the person e.source of income f. place where the privilege, business or occupation is being exercised K. Exe$ption of the Go(ern$ent fro$ Taxes =. I$portant Points to Consider: Reasons for Exe$ptions: a.13 To levy tax upon public property would render necessary new taxes on other public property for the payment of the tax so laid and thus, the government would be taxing itself to raise money to pay over to itselfC a.,3 In order that the functions of the government shall not be unduly impedeC and a.>3 To reduce the amount of money that has to be handed by the government in the course of itsoperations. ,. Nnless otherwise provided by law, the exemption applies only to government entities through which the government immediately and directly exercises its sovereign powers (Infantry Post >xchan3e vs Posa,as, %. Phil )--&
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>. <otwithstanding the immunity, the government may tax itself in the absence of constitutional limitations. 8. ;overnment-owned or controlled corporations, when performing proprietary functions are generally subject to tax in the absence of tax exemption provisions in their charters or law creating them. 6. Internationa! Co$it# 1. I$portant Points to Consider: a.The property of a foreign state or government may not be taxed by another. b.The grounds for the above rule are! b.13 sovereign eAuality among states b.,3 usage among states that when one enter into the territory of another, there is an implied understanding that the power does not intend to degrade its dignity by placing itself under the jurisdiction of the latter b.>3 foreign government may not be sued without its consent so that it is useless to assess the tax since it cannot be collected b.83 reciprocity among states Constitutiona! Li$itations 1. Due Process of La a. .asis: #ec. ! Art. " 08o person shall be ,eprive, of life, liberty or property without ,ue process of law x x x.' Re,uisites: 1. The interest of the public generally as distinguished from those of a particular class reAuire the intervention of the stateC ,. The means employed must be reasonably necessary to the accomplishment for the purpose and not unduly oppressiveC >. The deprivation was done under the authority of a valid law or of the constitutionC and 8. The deprivation was done after compliance with fair and reasonable method of procedure prescribed by law. In a string of cases, the Supreme ourt held that in order that due process of law must not be done in an arbitrary, despotic, capricious, or whimsical manner. ,. E,ua! Protection of the La a..asis: #ec.! Art. " 0 xxx 8or shall any person be ,enie, the eAual protection of the laws. I$portant Points to Consider!
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1. 6Aual protection of the laws signifies that all persons subject to legislation shall be treated under circumstances and conditions both in the privileges conferred and liabilities imposed ,. This doctrine prohibits class legislation which discriminates against some and favors others. NOTE: see Tio (s. :ideo+ra$, =4= SCRA 1D?.
%. Re,uisites for a :a!id C!assification 1. =ust not be arbitrary ,. =ust not be based upon substantial distinctions >. =ust be germane to the purpose of law. 8. =ust not be limited to exiting conditions onlyC and ?. =ust apply eAually to all members of a class. >. Bnifor$it#, E,uita%i!it# and Pro+ressi(it# of Taxation a..asis: Sec. ,-(13 *rt. HI. The rule of taxation shall be uniform and eAuitable. The ongress shall evolve a progressive system of taxation. %. I$portant Points to Consider: 1. Bnifor$it# (eAuality or eAual protection of the laws3 means all taxable articles or kinds or property of the same class shall be taxed at the same rate. * tax is uniform when the same force and effect in every place where the subject of it is found. ,. E,uita%!e means fair, just, reasonable and proportionate to one&s ability to pay. >. Pro+ressi(e s#ste$ of Taxation places stress on direct rather than indirect taxes, or on the taxpayers& ability to pay 8. IneAuality which results in singling out one particular class for taxation or exemption infringes no constitutional limitation. (see Commissioner vs. +in3ayen Gulf >lectric, !-. #C A ($& ?. The rule of uniformity does not call for perfect uniformity or perfect eAuality, because this is hardly attainable. 8. 8reedo$ of Speech and of the Press a..asis: Sec. 8 *rt. III. <o law shall be passed abridging the freedom of speech, of expression or of the press xxx " b. I$portant Points to Consider: 1. There is curtailment of press freedom and freedom of thought if a tax is levied in order to suppress the basic right of the people under the onstitution. ,. * business license may not be reAuired for the sale or contribution of printed materials like newspaper for such would be imposing a prior restraint on press freedom >. %owever, an annual registration fee on all persons subject to the value-added tax does not constitute a restraint on press freedom since it is not imposed for the
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exercise of a privilege but only for the purpose of defraying part of cost of registration. ?. Non"infrin+e$ent of Re!i+ious 8reedo$ a..asis: Sec. ? *rt. III. "<o law shall be made respecting an establishment of religion or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. x x x' %. I$portant Points to Consider: 1. +icense feesLtaxes would constitute a restraint on the freedom of worship as they are actually in the nature of a condition or permit of the exercise of the right. ,. %owever, the onstitution or the 0ree 6xercise of )eligion clause does not prohibit imposing a generally applicable sales and use tax on the sale of religious materials by a religious organi#ation. (see 2olentino vs #ecretary of 7inance, ("% #C A -"5& /. Non"i$pair$ent of Contracts a..asis: Sec. 1B *rt. III. "<o law impairing the obligation of contract shall be passed.' %. I$portant Points to Consider: 1. * law which changes the terms of the contract by making new conditions, or changing those in the contract, or dispenses with those expressed, impairs the obligation. ,.The non-impairment rule, however, does not apply to public utility franchise since a franchise is subject to amendment, alteration or repeal by the ongress when the public interest so reAuires. 2. Non"i$prison$ent for non"pa#$ent of po!! tax a..asis: Sec. ,B *rt. III. "<o person shall be imprisoned for debt or non-payment of poll tax.' %. I$portant Points to Consider: 1.The only penalty for delinAuency in payment is the payment of surcharge in the form of interest at the rate of ,8O per annum which shall be added to the unpaid amount from due date until it is paid. (Sec. 1/1, +; 3 ,.The prohibition is against "imprisonment' for "non-payment of poll tax'. Thus, a person is subject to imprisonment for violation of the community tax law other than for non-payment of the tax and for non-payment of other taxes as prescribed by law. -. &ri+in or Re(enue, Appropriation and Tariff .i!!s a..asis: Sec. ,8 *rt. HI. "*ll appropriation, revenue or tariff bills, bill authori#ing increase of the public debt, bills of local application, and private bills shall originate exclusively in the %ouse of )epresentatives, but the Senate may propose or concur with amendments.'
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%. Nnder the above provision, the Senator&s power is notonly to Eon!# concur ith a$end$entsF but also "to propose amendments'. (2olentino vs #ec. of 7inance, supra& .. De!e+ation of Le+is!ati(e Authorit# to 8ix Tariff Rates, I$ports and Export 0uotas a..asis: Sec. ,-(,3 *rt. HI "x x x The ongress may, by law, authori#e the 5resident to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export Auotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the government. 1B. Tax Exe$ption of Properties Actua!!#, Direct!# and Exc!usi(e!# used for Re!i+ious, Charita%!e and Educationa! Purposes a..asis: Sec. ,-(>3 *rt. HI. " haritable institutions, churches and parsonages or convents appurtenant thereto, mosAues, non-profit cemeteries, and all lands, building, and improvements actually, ,irectly an, exclusively used for religious, charitable or educational purposes shall be exempt from taxation.' %. I$portant Points to Consider: 1. Test of the tax exemption! the use and not ownership of the property ,. To be tax-exempt, the property must be actually, directly and exclusively used for the purposes mentioned. >. The word "exclusively' means "primarily&. NOTE: .ut see Lun+ Center (s. 0C, 1G 7une 1DD3 statin+ that Eexc!usi(e!#F $eans Eso!e!#F. 8. The exemption is not limited to property actually indispensable but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes. ?. The constitutional exemption applies only to property tax. /. %owever, it would seem that under existing law, gifts made in favor or religious charitable and educational organi#ations would nevertheless Aualify for donor&s gift tax exemption. (Sec. 1B1(.3(>3, <I) 3 11. :otin+ Re,uire$ents in connection exe$ption ith the Le+is!ati(e Grant for tax
a..asis: Sec. ,-(83 *rt. HI. "<o law granting any tax exemption shall be passed without the concurrence of a majority of all the members of the ongress.' %. The above provision reAuires the concurrence of a majority not of attendees constituting a Auorum but of all members of the ongress. 1,. Non"i$pair$ent of the Supre$e CourtsH 'urisdiction in Tax Cases
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a..asis: Sec. ? (,3 *rt. HIII. "The ongress shall have the power to define, prescribe, and apportion the jurisdiction of the various courts but may not deprive the Supreme ourt of its jurisdiction over cases enumerated in Sec. ? hereof.' Sec. ? (,b3 *rt. HIII. "The Supreme ourt shall have the following powers! x x x(,3 )eview, revise, modify or affirm on appeal or certiorari x x x final judgments and orders of lower courts in x x x all cases involving the legality of any tax, impost, assessment, or toll or any penalty imposed in relation thereto.' 1>. Tax Exe$ptions of Re(enues and Assets, inc!udin+ +rants, endo $ents, donations or contri%utions to Educationa! Institutions a..asis: Sec. 8(83 *rt. PIH. "Subject to the conditions prescribed by law, all grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes shall be exempt from tax.' %. I$portant Points to Consider: 1. The exemption granted to non-stock, non-profit educational institution covers income, property, and donor&s taxes, and custom duties. ,. To be exempt from tax or duty, the revenue, assets, property or donation must be used actually, directly and exclusively for educational purpose. >. In the case or religious and charitable entities and non-profit cemeteries, the exemption is limited to property tax. 8. The said constitutional provision granting tax exemption to non-stock, non-profit educational institution is self-executing. ?. Tax exemptions, however, of proprietary (for profit3 educational institutions reAuire prior legislative implementation. Their tax exemption is not self-executing. /. +ands, Iuildings, and improvements actually, directly, and exclusively used for educational purposed are exempt from property tax, whether the educational institution is proprietary or non-profit. c.Depart$ent of 8inance &rder No. =2>"?>, dated Dec. =5, =G?> The following are some of the highlights of the K90 order governing the tax exemption of non-stock, non-profit educational institutions! 1. The tax exemption is not only limited to revenues and assets derived strictly from school operations like income from tuition and other miscellaneous fees such as matriculation, library, )9T , etc. fees, but it also extends to incidental income derived from canteen, bookstore and dormitory facilities. ,. In the case, however, of incidental income, the facilities mentioned must not only be owned and operated by the school itself but such facilities must be located inside the school campus. anteens operated by mere concessionaires are taxable. >. Income which is unrelated to school operations like income from bank deposits, trust fund and similar arrangements, royalties, dividends and rental income are taxable. 8. The use of the school&s income or assets must be in consonance with the purposes for which the school is createdC in short, use must be school-related, like the grant of scholarships, faculty development, and establishment of professional chairs, school building expansion, library and school facilities.
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TAX LAW REVIEWER

&ther Constitutiona! Pro(isions re!ated to Taxation 1. Su%'ect and Tit!e of .i!!s ISec. 15I=J =G?> ConstitutionJ "6very Iill passed by ongress shall embrace only one subject which shall be expressed in the title thereof.' NOTE: In the Tolentino 6-H*T case, supra, the 6-vat, or the 6xpanded Halue *dded Tax +aw ()* 221/3 was also Auestioned on the ground that the constitutional reAuirement on the title of a bill was not followed. ,. Po er of the President to :eto ite$s in an Appropriation, Re(enue or Tariff .i!! ISec. 1>I1J, Art. :I of the =G?> ConstitutionJ "The 5resident shall have the power to veto any particular item or items in an *ppropriation, )evenue or Tariff bill but the veto shall not affect the item or items to which he does not object.' >. Necessit# of an Appropriation $ade %efore $one# $a# %e paid out of the Treasur# ISec. 1GI=J, Art. :I of the =G?> ConstitutionJ "<o money shall be paid out of the Treasury except in pursuance of an appropriation made by law.' 8. Appropriation of Pu%!ic 9one# for the %enefit of an# Church, Sect, or S#ste$ of Re!i+ion ISec. 1GI1J, Art. :I of the =G?> ConstitutionJ '<o public money or property shall be appropriated, applied, paid or employed, directly or indirectly for the use, benefit, support of any sect, church, denomination, sectarian institution, or system of religion or of any priest, preacher, minister, or other religious teacher or dignitary as such except when such priest, preacher, minister or dignitary is assigned to the armed forces or to any penal institution, or government orphanage or leprosarium.' ?. Taxes !e(ied for Specia! Purpose ISec. 1GI2J, Art. :I of the =G?> ConstitutionJ "*ll money collected or any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. It the purpose for which a special fund was created has been fulfilled or abandoned the balance, if any, shall be transferred to the general funds of the government.' *n example is the 9il 5rice Stabili#ation 0und created under 5.K. 1.?/ to stabili#e the prices of imported crude oil. In a decided case, it was held that where under an
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executive order of the 5resident, this special fund is transferred from the general fund to a "trust liability account,' the constitutional mandate is not violated. The 95S0, according to the court, remains as a special fund subject to 9* audit ( OsmeGa vs Orbos, et al., G. . 8o. **))-, /ar. "!, !**"& /. A!!ot$ent to Loca! Go(ern$ents .asis: Sec. 5, Art. K of the =G?> Constitution "+ocal ;overnment units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them.' I:. Situs of Taxation and Dou%!e Taxation Situs of Taxation 1. Situs of Taxation literally means the P!ace of Taxation. ,. .asic Ru!e @ state where the subject to be taxed has a situs may rightfully levy and collect the tax So$e .asic Considerations Affectin+ Situs of Taxation =. Protection * legal situs cannot be given to property for the purpose of taxation where neither the property nor the person is within the protection of the taxing state In the case of /anila >lectric Co. vs Catco (-* Phil )*& , the Supreme ourt ruled that insurance premium paid on a fire insurance policy covering property situated in the 5hils. are taxable in the 5hils. 6ven though the fire insurance contract was executed outside the 5hils. and the insurance policy is delivered to the insured therein. This is because the Philippine Government must 3et somethin3 in return for the protection it 3ives to the insure, property in the Phils. an, by reason of such protection, the insurer is benefite, thereby. The $axi$ of Mo/ilia Se5uuntur Personam and Situs of Taxation *ccording to this maxim, which means 'movable follow the person,' the situs of personal property is the domicile of the owner. This is merely a fiction of law and is not allowed to stand in the way of taxation of personalty in the place where it has its actual situs and the reAuisite legislative jurisdiction exists. Exa$p!e: shares of stock may have situs for purposes of taxation in a state in which they are permanently kept regardless of the domicile of the owner, or the state in which he corporation is organi#ed. 2. Le+is!ati(e Po er to 8ix Situs ,.
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If no constitutional provisions are violated, the power of the legislative to fix situs is undoubted. Exa$p!e: our law fixes the situs of intangible personal property for purposes of the estate and gift taxes. (see Se&. *674 *++, N !C& NOTE: In those cases where the situs for certain intangibles are not categorically spelled out, there is room for applying the mobilia rule. 8. Dou%!e Taxation and the Situs Li$itation (see later topic& Criteria in 8ixin+ Tax Situs of Su%'ect of Taxation a. Persons @ 5oll tax may be levied upon persons who are residents of the State. b.Rea! Propert# @ is subject to taxation in the State in which it is located whether the owner is a resident or non-resident, and is taxable only there. Ru!e of Lex Rei Sitae c. Tan+i%!e Persona! propert# @ taxable in the state where it has actual situs @ where it is physically located. *lthough the owner resides in another jurisdiction. Ru!e of Lex Rei Sitae d.Intan+i%!e Persona! Propert# @ situs or personal property is the domicile of the owner, in accordance with the principle E9&.ILIA SE0BBNTBR PERS&NA9F, said principle, however, is not controlling when it is inconsistent with express provisions of statute or when justice demands that it should be, as where the property has in fact a situs elsewhere. (see Eells 7ar3o 9anH v. Collector $5 PDI+ "(%< Collector v. 7isher +4!!-((, 6anuary, !*-!& e. Inco$e @ properly exacted from persons who are residents or citi#ens in the taxing jurisdiction and even those who are neither residents nor citi#ens provided the income is derived from sources within the taxing state. f. .usiness, &ccupation, and Transaction @ power to levy an excise tax depends upon the place where the business is done, of the occupation is engaged in of the transaction not place. g.Gratuitous Transfer of Propert# @ transmission of property from donor to donee, or from a decedent to his heirs may be subject to taxation in the state where the transferor was a citi#en or resident, or where the property is located. :. 9u!tip!icit# of Situs There is multiplicity of situs when the same subject of taxation, like income or intangible, is subject to taxation in several taxing jurisdictions. This happens due to! a.Hariance in the concept of "domicile' for tax purposesC b.=ultiple distinct relationship that may arise with respect to intangible personalityC and c.The use to which the property may have been devoted, all of which may receive the protection of the laws of jurisdiction other than the domicile of the owner
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Re$ed# @ taxation jurisdiction may provide! a.6xemption or allowance of deductions or tax credit for foreign taxes b.6nter into treaties with other states Dou%!e Taxation T o I1J Cinds of Dou%!e Taxation 1. &%noxious or Direct Dup!icate Taxation (:ouble taxation in its strict sense& - In the objectionable or prohibited sense means that the same property is taxed twice when it should be taxed only once. Re,uisites: 1. Same property is taxed twice ,. Same purpose >. Same taxing authority 8. $ithin the same jurisdiction ?. Kuring the same taxing period /. Same kind or character of tax ,. Per$issi(e or Indirect Dup!icate Taxation (:ouble taxation in its broa, sense& @ This is the opposite of direct double taxation and is not legally objectionable. The absence of one or more of the foregoing reAuisites of the obnoxious direct tax makes it indirect. Instances of Dou%!e Taxation in its .road Sense 1. * tax on the mortgage as personal property when the mortgaged property is also taxed at its full value as real estateC ,. * tax upon a corporation for its capital stock as a whole and upon the shareholders for their sharesC >. * tax upon a corporation for its capital stock as a whole and upon the shareholders for their sharesC 8. * tax upon depositions in the bank for their deposits and a tax upon the bank for their property in which such deposits are invested ?. *n excise tax upon certain use of property and a property tax upon the same propertyC and /. * tax upon the same property imposed by two different states. 9eans to Reduce the Larsh Effect of Taxation 1. Tax Deduction ) subtraction from gross income in arriving a taxable income ,. Tax Credit ) an amount subtracted from an individual&s or entity&s tax liability to arrive at the total tax liability * deduction differ from a tax credit in that a deduction reduces taxable income while credit reduces tax liability
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>. Exe$ptions 8. Treaties with other States ?. Princip!e of Reciprocit# Constitutiona!it# Kouble Taxation in its stricter sense is undoubtedly unconstitutional but that in the broa,er sense is not necessarily so. Genera! Ru!e: 9ur onstitution does not prohibit double taxationC hence, it may not be invoked as a defense against the validity of tax laws. a.$here a tax is imposed by the <ational ;overnment and another by the city for the exercise of occupation or business as the taxes are not imposed by the same public authority (City of 9a3uio vs :e +eon, Oct. "!, !*-)& b.$hen a )eal 6state dealer&s tax is imposed for engaging in the business of leasing real estate in addition to )eal 6state Tax on the property leased and the tax on the income desired as they are different kinds of tax c.Tax on manufacturer&s products and another tax on the privilege of storing exportable copra in warehouses within a municipality are imposed as first tax is different from the second d.$here, aside from the tax, a license fee is imposed in the exercise of police power. Exception: Kouble Taxation while not forbidden, is something not favored. Such taxation, it has been held, should, whenever possible, be avoided and prevented. a.Koubts as to whether double taxation has been imposed should be resolved in favor of the taxpayer. The reason is to avoid injustice and unfairness. b.The taxpayer may seek relief under the Nniformity )ule or the 6Aual 5rotection guarantee. 8or$s of Escape fro$ Taxation Six .asic 8or$s of Escape fro$ Taxation 1. Shifting ,. Capitali#ation >. Transformation 8. Evasion ?. Avoidance /. Exemption 1. Shiftin+ @ Transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or imposed to another or someone else I$pact of taxation @ is the point at which a tax is originally imposed. Incidence of Taxation @ is the point on which a tax burden finally rests or settles down. Re!ations a$on+ Shiftin+, I$pact and Incidence of Taxation @ the impact is the initial phenomenon, the shifting is the intermediate process, and the incidence is the result. Cinds of Shiftin+:
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a. 8or ard Shiftin+ @ the burden of tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer b..ac- ard Shiftin+ @ effected when the burden of tax is transferred from the consumer or purchaser through the factors of distribution to the factor of production c. &n ard Shiftin+ @ this occurs when the tax is shifted two or more times either forward or backward ,. Capita!i<ation, defined @ the reduction in the price of the taxed object eAual to the capitali#ed value of future taxes which the purchaser expects to be called upon to pay >. Transfor$ation @ The method whereby the manufacturer or producer upon whom the tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavors to recoup himself by improving his process of production thereby turning out his units of products at a lower cost. 8. Tax E(asion @ is the use of the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax. Indicia of 8raud in Taxation a.0ailure to declare for taxation purposes true and actual income derived from business for two consecutive years, and b.Substantial underdeclaration of income tax returns of the taxpayer for four consecutive years couple, with overstatement of ,e,uction. 6vasion of the tax takes place only when there are no proceeds. 6vasion of Taxation is tantamount, fiscally speaking, to the absence of taxation. ?. Tax A(oidance @ is the use by the taxpayer of legally permissible alternative tax rates or method of assessing taxable property or income in order to avoid or reduce tax liability. Tax *voidance is not punishable by law, a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid by means which the law permits. Distinction %et een Tax E(asion and A(oidance Tax E(asion (s Tax A(oidance accomplished by accomplished by legal breaking the procedures or means letter of the law which maybe contrary to the intent of the sponsors of the tax law but nevertheless do not
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TAX LAW REVIEWER

violate the letter of the law :I. Exe$ption fro$ Taxation *. Tax Exe$ption @ is a grant of immunity, express or implied, to particular persons or corporations from the obligations to pay taxes. I. Nature of Tax Exe$ption 1. It is merely a personal privilege of the grantee ,. It is generally revocable by the government unless the exemption is founded on a contract which is protected from impairment, but the contract must contain the other essential elements of contracts, such as, for example, a valid cause or consideration. >. It implies a waiver on the part of the government of its right to collect what otherwise would be due to it, and in this sense is prejudicial thereto. 8. It is not necessarily discriminatory so long as the exemption has a reasonable foundation or rational basis. . Rationa!e of tax Exe$ption 5ublic interest would be subserved by the exemption allowed which the law-making body considers sufficient to offset monetary loss entailed in the grant of the exemption. (CI vs 9othelo #hippin3 Corp., +4(!-"", 6une (*, !*-$< CI vs PA+, +4(5*-5, Oct. "!, !*-)&
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TAX LAW REVIEWER

Grounds for Tax Exe$ptions 1. =ay be based on a contract in which case, the public represented by the ;overnment is supposed to receive a full eAuivalent therefore ,. =ay be based on some ground of public policy, such as, for example, to encourage new and necessary industries. >. =ay be created in a treaty on grounds of reciprocity or to lessen the rigors of international double or multiple taxation which occur where there are many taxing jurisdictions, as in the taxation of income and intangible personal property K. E,uit#, not a +round for Tax Exe$ption There is no tax exemption solely on the ground of eAuity, but eAuity can be used as a basis for statutory exemption. *t times the law authori#es condonation of taxes on eAuitable considerations. (Sec ,2/, ,22, +ocal ;overnment ode3 6. Cinds of Tax Exe$ptions 1. *s to %asis a. Constitutiona! Exe$ptions ) Immunities from taxation which originate from the onstitution b. Statutor# Exe$ptions ) Those which emanate from +egislation ,. *s to for$ a. Express Exe$ption ) $henever expressly granted by organic or statute of law b. I$p!ied Exe$ption ) 6xist whenever particular persons, properties or excises are deemed exempt as they fall outside the scope of the taxing provision itself >. *s to extent a. Tota! Exe$ption ) onnotes absolute immunity b. Partia! Exe$ption ) 9ne where collection of a part of the tax is dispensed with 0. Princip!es Go(ernin+ the Tax Exe$ption 1. 6xemptions from taxation are highly disfavored by law, and he who claims an exemption must be able to justify by the clearest grant of organic or statute of law. (Asiatic Petroleum vs +lanes, .* PDI+ .--< Collector of Internal evenue vs. /anila 6ocHey Club, *) PDI+ -$5& ,. %e who claims an exemption must justify that the legislative intended to exempt him by words too plain to be mistaken. (@isayan Cebu 2erminal vs CI , +4!*%"5, 7eb. ($, !*-%& >. %e who claims exemptions should convincingly prove that he is exempt 8. Tax exemptions must be strictly construed (Phil. Acetylene vs CI , +4!*$5$, Au3. !$, !*-$& ?. Tax 6xemptions are not presumed. (+eal,a >lectric Co. vs CI , +4!-.(), Apr. "5, !*-"& /. onstitutional grants of tax exemptions are self-executing (Opinion 8o. !"5, !*)$, #ec. Of 6ustice& 2. Tax exemption are personal.
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TAX LAW REVIEWER

-. Keductions for income tax purposes partake of the nature of tax exemptions, hence, they are strictly construed against the tax payer .. * tax amnesty, much like a tax exemption is never favored or presumed by law (CI vs CA, G. . 8o. !5)%$-, 6an. (5, !***& 1B.The rule of strict construction of tax exemption should not be applied to organi#ations performing strictly religious, charitable, and educational functions :II. &ther Doctrines in Taxation Prospecti(it# of Tax La s Genera! Ru!e: Taxes must only be imposed prospectively Exception: The language of the statute clearly ,eman,s or express that it shall have a retroactive effect. I$portant Points to Consider 1. In order to declare a tax transgressing the due process clause of the onstitution it must be so harsh and oppressive in its retroactive application (7ernan,e' vs 7ernan,e', ** PDI+*".& ,. Tax laws are neither political nor penal in nature they are deemed laws of the occupied territory rather than the occupying enemy. (Dila,o vs Collector, !55 PDI+ ())& >. Tax laws not being penal in character, the rule in the onstitution against the passage of the ex post facto laws cannot be invoked, except for the penalty imposed. I$prescripti%i!it# of Taxes Genera! Ru!e: Taxes are imprescriptible Exception: $hen provided otherwise by the tax law itself. 6xample! <I) provides for statutes of limitation in the assessment and collection of taxes therein imposed I$portant Point to Consider 1. The law on prescription, being a remedial measure, should be liberally construed to afford protection as a corollary, the exceptions to the law on prescription be strictly construed. (CI vs CA. G. . 8o. !5.!$!, 7eb. (., !***& Doctrine of E,uita%!e Recoup$ent It provides that a claim for refund barred by prescription may be allowed to offset unsettled tax liabilities should be pertinent only to taxes arising from the same transaction on which an overpayment is made and underpayment is due. This doctrine, however, was rejected by the Supreme ourt, saying that it was not convinced of the wisdom and proprietary thereof, and that it may work to tempt both the collecting agency and the taxpayer to delay and neglect their respective pursuits of legal action within the period set by law. (Collector vs =#2, !5. PDI+ !5-(&
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TAX LAW REVIEWER

Taxpa#erHs Suit " It is only when an act complained of, which may include legislative enactment, directly involves the illegal disbursement of public funds derived from taxation that the taxpayer&s suit may be allowed. :III. Interpretation and Construction of Tax Statutes I$portant Points to Consider: 1. 9n the interpretation and construction of tax statutes, legislative intention must be considered. ,. In case of doubt, tax statutes are construed strictly against the government and liberally construed in favor of the taxpayer. >. The rule of strict construction against the government is not applicable where the language of the tax law is plain and there is no doubt as to the legislative intent. 8. The exemptions (or eAuivalent provisions, such as tax amnesty and tax condonation3 are not presumed and when granted are strictly construed against the grantee. ?. The exemptions, however, are construed liberally in favor of the grantee in the following! a. $hen the law so provides for such liberal constructionC b. 6xemptions from certain taxes granted under special circumstances to special classes of personsC c. 6xemptions in favor of the ;overnment, its political subdivisionsC d. 6xemptions to traditional exemptees, such as, those in favor of charitable institutions. /. The tax laws are presumed valid. 2. The power to tax is presumed to exist. TAK AD9INISTRATI&N AND EN8&RCE9ENT A+encies In(o!(ed in Tax Ad$inistration 1. Iureau of Internal )evenue and the Iureau of ustoms for internal revenue and customs law enforcement, respectively. It is noteworthy that the II) is largely decentrali#ed in that a great extent of tax enforcement duties are delegated to the )egional Kirectors and )evenue Kistrict 9fficers. ,. 5rovincial, ity and =unicipal assessors and treasures for local and real property taxes. A+ents and Deputies for Co!!ection of Nationa! Interna! Re(enue Taxes
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TAX LAW REVIEWER

Nnder Sec. 1, of the 1..2 <I) , the following are constituted as agents of the ommissioner! a. The ommissioner of ustoms and his subordinates with respect to the collection of national internal revenue taxes on imported goodsC b. The head of the appropriate government office and his subordinates with respect to the collection of energy taxC and c. Ianks duly accredited by the ommissioner with respect to receipt of payments of internal revenue taxes authori#ed to be made through banks. .ureau of Interna! Re(enue Po ers and Duties a. 6xclusive and original power to interpret provisions of the <I) and other tax laws, subject to review by the Secretary of 0inanceC b. *ssessment and ollection of all national internal revenue taxes, fees and chargesC c. 6nforcement of all forfeitures, penalties and fines connected therewithC d. 6xecution of judgment in all cases decided in its favor by the ourt of Tax *ppeals and the ordinary courts. e. 6ffecting and administering the supervisory and police powers conferred to it by the Tax ode or other laws. f. 9btaining information, summoning, examining and taking testimony of persons for purposes of ascertaining the correctness of any return or in determining the liability of any person for any internal revenue tax, or in collecting any such liability. Ru!e of E No Estoppe! A+ainst the Go(ern$entF It is a settled rule of law that in the performance of its governmental functions, the state cannot be estopped by the neglect of its agents and officers. <owhere is it more true than in the field of taxation (CI vs. Aba,, et. al., +4!*-($, 6une ($, !*-)3. 6stoppel does not apply to preclude the subseAuent findings on taxability (Ibid.3 The principle of tax law enforcement is! The 1overnment is not estopped /y the mista8es or errors of its agents9 erroneous appli&ation and enfor&ement of law /y pu/li& offi&ers do not /lo&8 the su/se5uent &orre&t appli&ation of statutes (>. o,ri3ue', Inc. vs. Collector of Internal evenue, +4("5.!, 6uly "!, !*-*.& Similarly, estoppel does not apply to deprive the government of its right to raise defenses even if those defenses are being raised only for the first time on appeal (CI vs Procter I Gamble Phil. G. . 8o. --)"), !% April !*)).& Exceptions:
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TAX LAW REVIEWER

The ourt ruled in Commissioner of Internal evenue vs. C.A., et. al. G. . 8o. !!$*)(, - 7eb !**$ that like other principles of law, the non-application of estoppel to the government admits of ex&eptions in the interest of :usti&e and fair play4 as where in:usti&e will result to the taxpayer. Estoppe! A+ainst the Taxpa#er $hile the principle of estoppel may not be invoked against the government, this is not necessarily true in case of the taxpayer. In CI vs. #uyac, !5. Phil )!*, the taxpayer made several reAuests for the reinvestigation of its tax liabilities such that the government, acceding to the taxpayers reAuest, postponed the collection of its liability. The taxpayer cannot later on be permitted to raise the defense of prescription inasmuch as his previous reAuests for reinvestigation have the effect of placing him in estoppel. Nature and Cinds of Assess$ents $n assessment is the offi&ial a&tion of an administrative offi&er determining the amount of tax due from a taxpayer4 or it may /e the noti&e to the effe&t that the amount therein stated is due from the taxpayer that the payment of the tax or defi&ien&y stated therein. (9isaya +an, 2ransportation Co. vs CI , !5% Phil !"")& C!assifications: a. Se!f"assess$ent" Tax is assessed by the taxpayer himself. The amount is reflected in the tax return that is filed by him and the tax is paid at the time he files his return. (#ec. %- JAK L!K, !**$ 8I C& %. Deficienc# Assess$ent- This is an assessment made by the tax assessor whereby the correct amount of the tax is determined after an examination or investigation is conducted. The liability is determined and isC therefore, assessed for the following reasons! 1. The amount ascertained exceeds that which is shown as tax by the taxpayer in his returnC ,. <o amount is shown in the return orC >. The taxpayer did not file any return at all. (#ec. %- J9K K!K an, J(K !**$ 8I C& c. I!!e+a! and :oid Assess$ents" This is an assessment wherein the tax assessor has no power to act at all (@ictorias /illin3 vs. C2A, +4(.(!", !" /ar !*-)& d. Erroneous Assess$ent ) This is an assessment wherein the assessor has the power to assess but errs in the exercise of that power (Ibid.3 Princip!es Go(ernin+ Tax Assess$ents =. $ssessments are prima fa&ie presumed &orre&t and made in good faith.
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TAX LAW REVIEWER

The taxpayer has the duty of proving otherwise (Interprovincial Autobus vs. CI , *) Phil (*5& In the absence of any proof of any irregularities in the performance of official duties, an assessment will not be disturbed. (#y Po. @s. C2A, G. . 8o )!..-, ) Au3 !*)) *ll presumptions are in favor of tax assessments (:ayrit vs. Cru', +4"**!5, (#ept. !*))& 0ailure to present proof of error in the assessment will justify judicial affirmation of said assessments. (CI vs C.C. G. . 8o. !5.!%! an, !5%%-", !5 /ar !**%& * party challenging an appraiser&s finding of value is reAuired to prove not only that the appraised value is erroneous but also what the proper value is (Caltex vs. C.C. G. . 8o. !5.$)!, !5 6uly !**)& ,. *ssessments should not be based on presumptions no matter how logical the presumption might be. In order to stand the test of judicial scrutiny it must /e /ased on a&tual fa&ts. >. *ssessment is discretionary on the part of the ommissioner. Mandamus will not lie to &ompel him to assess a tax after investigation if he finds no ground to assess. Mandamus to &ompel the Commissioner to assess will result in the en&roa&hment on exe&utive fun&tions #/eralco #ecuirities Corp. vs. #avellano, +4 "-!)! an, +4"-$.), (" Oct !**(&. Ex&ept: The ; ! Commissioner may /e &ompelled to assess /y mandamus if in the exer&ise of his dis&retion there is eviden&e of ar/itrariness and grave a/use of dis&retion as to go /eyond statutory authority #/ace,a vs. /acarai3, G. . 8o. ))(*, ) 6une !**"). 8. The authority vested in the ommissioner to assess taxes may be delegated. $n assessment signed /y an employee for and in /ehalf of the Commissioner of nternal !evenue is valid. <owever4 it is settled that the power to ma8e final assessments &annot /e delegated. The person to whom a duty is delegated &annot lawfully delegate that duty to another. #City +umber vs. :omin3o, +4!)-!!, "5 6an !*-.&. ?. *ssessments must be directed to the right party. <en&e4 if for example4 the taxpayer /eing assessed is an estate of a de&edent4 the administrator should /e the party to whom the assessment should /e sent # epublic vs. ,ela ama, +4(!!5), (* 8ov. !*--&4 and not the heirs of the de&edent. 9eans E$p!o#ed in the Assess$ent of Taxes A. Exa$ination of Returns: Confidentiality !ule The Tax ode reAuires that after the return is filed, the ommissioner or his duly authori#ed representative shall examine the same and assess the correct amount of tax. The
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TAX LAW REVIEWER

tax or the deficiency of the tax so assessed shall be paid upon notice and demand from the ommissioner or from his duly authori#ed representative. *ny return, statement or declaration filed in any office authori#ed to receive the same shall not be withdrawn. %owever, within three (>3 days from the date of such filing, the same may be modified, changed or amended, provided that no notice for audit or investigation of such return, statement or declaration has in the meantime been actually served upon the taxpayer. (#ec -JAK, !**$ 8I C& *lthough Sec. 21 of the 1..2 <I) provides that tax returns shall constitute public records, it is necessary to know that these are confidential in nature and may not be inAuired into in unauthori#ed cases under pain of penalty of law provided for in Sec ,2B of the 1..2 <I) . The aforesaid rule, however, is subject to certain exceptions. In the following cases, inAuiry into the income tax returns of taxpayers may be authori#ed! 1. $hen the inspection of the return is authori#ed upon the written order of the 5resident of the 5hilippines. ,. $hen inspection is authori#ed under the 0inance )egulation <o. >> of the Secretary of 0inance. >. $hen the production of the tax return is material evidence in a criminal case wherein the ;overnment is interested in the result. (Cu =nBien3, et. al. vs. Posa,as, etc, %) Phil "-5& 8. $hen the production or inspection thereof is authori#ed by the taxpayer himself (@era vs Cusi +4""!!%, (* 6une !*$*&. .. Assess$ent .ased on the .est E(idence &%taina%!e The law authori#es the ommissioner to assess taxes on the basis of the best evidence obtainable in the following cases! 1. if a person fails to file a return or other document at the time prescribed by lawC or ,. he willfully or otherwise files a false or fraudulent return or other document. $hen the method is used, the ommissioner makes or amends the return from his knowledge and from such information as he can obtain through testimony or otherwise. *ssessments made as such are deemed prima facie correct and sufficient for all legal purposes. (#ec. - J9K, !**$ 8I C& ;est Eviden&e O/taina/le refers to any data, record, papers, documents, or any evidence gathered by internal revenue officers from government offices or agencies, corporations, employers, clients or patients, tenants, lessees, vendees and from all other sources, with whom the taxpayer had previous transactions or from whom he received any income, after ascertaining that a report reAuired by law as basis for the assessment of any
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TAX LAW REVIEWER

internal revenue tax has not been filed or when there is reason to believe that any such report is false, incomplete or erroneous. * case in point on the use of the best evidence obtainable is #y Po vs C2A. In that case, there was a demand made by the ommissioner on the Silver up $ine ompany owned by petitioner&s deceased husband 5o Iien Seng. The demand was for the taxpayer to submit to the II) for examination the factory&s books of accounts and records, so II) investigators raided the factory and sei#ed different brands of alcoholic beverages. The investigators, on the basis of the wines sei#ed and the sworn statements of the factory&s employees on the Auantity of raw materials consumed in the manufacture of liAuor, assessed the corresponding deficiency income and specific taxes. The Supreme ourt, on appeal, upheld the legality of the assessment. C. In(entor# Ta-in+, Sur(ei!!ance and Presu$pti(e Gross Sa!es and Receipts The ommissioner is authori#ed at any time during the taxable year to order the inventory-taking of goods of any taxpayer as a basis for assessment. If there is reason to believe that a person is not declaring his correct income, sales or receipts for internal revenue tax purposes, his business operation may be placed under observation or surveillance. The finding made in the surveillance may be used as a basis for assessing the taxes for the other months or Auarters of the same or different taxable years. (#ec. - JCK, !**$ 8I C& D. Ter$ination of Taxa%!e Period The ommissioner shall declare the tax period of a taxpayer terminated at any time when it shall come to his knowledge! a. b. c. d. That the taxpayer is retiring from business subject to taxC That he intends to leave the 5hilippines or remove his property therefromC That the taxpayer hides or conceals his propertyC or That he performs any act tending to obstruct the proceedings for the collection of the tax for the past or current Auarter or year or to render the same totally or partly ineffective unless such proceedings are begun immediately.
The written decision to terminate the tax period shall be accompanied with a reAuest for the immediate payment of the tax for the period so declared terminated and the tax for the preceding year or Auarter, or such portion thereof as may be unpaid. Said taxes shall be due and payable immediately and shall be subject to all the penalties prescribed unless paid within the time fixed in the demand made by the ommissioner (#ec. - J,K, !**$ 8I C3
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TAX LAW REVIEWER

E. 8ixin+ of Rea! Propert# :a!ues 0or purposes of computing any internal revenue tax, the value of the property shall be whichever is the higher of ! (13 the fair market value as determined by the ommissionerC or (,3 the fair market value as shown in the schedule of values of the 5rovincial and ity *ssessors for real tax purposes (#ec - J>K, !**$ 8I C&. 8. In,uir# into .an- Deposits 6xamination of bank deposits enables the ommissioner to assess the correct tax liabilities of taxpayers. %owever, bank deposits are confidential under ).*. 18B?. <otwithstanding any contrary provisions of ).*. 18B? and other general or special laws, the ommissioner is authori#ed to inAuire into the bank deposits ofC 1. a decedent to determine his gross estateC and ,. any taxpayer who has filed an application for compromise of his tax liability under Sec. ,B8 (*3 (Q3 of the Tax ode by reason of his financial incapacity to pay his tax liability. In this case, the application for compromise shall not be considered unless and until he waives in writin3 his privilege under ).*. 18B?, or under other general or special laws, and such waiver shall constitute the authority of the ommissioner to inAuire into bank deposits of the taxpayer (#ec. -J7K, !**$ 8I C&. Net *orth 9ethod in In(esti+ation The basis of using the <et $orth =ethod of investigation is Re(enue 9e$orandu$ Circu!ar No. 32">1. This method of investigation, otherwise known as "inventory method of income tax verification' is a very effective method of determining taxable income and deficiency income tax due from a taxpayer. .asic Concept and Theor# The method is an extension of the basic accounting principle! assets minus liabilities eAuals net worth. The taxpayer&s net worth is determined both at the beginning and at the end of the same taxable year. The increase or decrease in net worth is adjusted by adding all non-deductible items and subtracting therefrom non-taxable receipts. The theory is that the unexplained increase in net worth of a taxpayer is presumed to be derived from taxable sources. Le+a! Source of authorit# for use of the 9ethod The ommissioner&s authority to use the net worth method and other indirect methods of establishing taxable income is found in Sec. 8>, 1..2 <I) . This authority has been upheld by the courts in a long line of cases, notable among which is the leading case of Pere' vs. C2A, !5" Phil !!-$. The method is a practical necessity if a fair and efficient system of collecting revenue is to be maintained.
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TAX LAW REVIEWER

=oreover, Sec. /4I7, 1..2 <I) , provides for a broad and general investigatory power to assess the proper tax on the best evidence obtainable whenever a report reAuired by law as basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or regulation, or when there is reason to believe that any such report is false, incomplete or erroneous. Conditions for the use of the $ethod IaJ That the taxpa#erMs %oo-s of accounts do not c!ear!# ref!ect his inco$e, or the taxpa#er has no %oo-s, or if he has %oo-s, he refuses to produce the$ # nade5uate !e&ords). The ;overnment may be forced to resort to the net worth method of proof where the few records of the taxpayer were destroyedC for, to reAuire more would be tantamount to holding that skillful concealment is an inevitable barrier to proof. I%JThat there is e(idence of a possi%!e source or sources of inco$e to account for the increase in net orth or the expenditures #Need for eviden&e of the sour&es of in&ome). In all leading cases on this matter, courts are unanimous in holding that when the tax case is civil in nature, direct proof of sources of income is not essential-that the government is not reAuired to negate all possible non-taxable sources of the alleged net worth increases. The burden of proof is upon the taxpayer to show that his net worth increase was derived from non-taxable sources. *s stated by the Supreme ourt, in civil cases, the assessor need not prove the specific source of income. This reasonable on the basic assumption that most assets are derived from a taxable source and that when this is not true, the taxpayer is in a position to explain the discrepancy. (Pere' vs. C2A, supra3 Dowever, when the taxpayer is criminally prosecuted for tax evasion, the need for evidence of a likely source of income becomes a prereAuisite for a successful prosecution. The burden of proof is always with the ;overnment. onviction in such cases, as in any criminal case, rests on proof beyond reasonable doubt. IcJ That there is a fixed startin+ point or openin+ net orth, i.e., a date %e+innin+ ith a taxa%!e #ear or prior to it, at hich ti$e the taxpa#erHs financia! condition can %e affir$ati(e!# esta%!ished ith so$e definiteness. This is an essential condition, considered to be the cornerstone of a net worth case. If the starting point or opening net worth is proven to be wrong, the whole superstructure usually fails. The courts have uniformly stressed that the validity of the result of any investigation under this method will depend entirely upon a correct opening net worth.
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TAX LAW REVIEWER

IdJ That the circu$stances are such that the $ethod does not ref!ect the taxpa#erHs inco$e ith reasona%!e accurac# and certaint# and proper and 'ust additions of persona! expenses and other non"deducti%!e expenditures ere $ade and correct, fair and e,uita%!e credit ad'ust$ents ere +i(en %# a# of e!i$inatin+ non"taxa%!e ite$s. #Proper ad:ustments to &onform to the in&ome tax laws) 5roper adjustments for non-deductible items must be made. The following non-deductibles, as the case may be, must be added to the increase or decrease in the net worth! 1. personal, living or family expensesC ,. premiums paid on any life insurance policyC >. losses from sales or exchanges of property between members of the familyC 8. income taxes paidC ?. estate, inheritance and gift taxesC /. other non-deductible taxesC 2. election expenses and other expenses against public policyC -. non-deductible contributionsC .. gifts to othersC 1B.net capital loss, and the like 9n the other hand, non-taxable items should be deducted therefrom. These items are necessary adjustments to avoid the inclusion of what otherwise are non-taxable receipts. They are! 1. ,. >. 8. ?. /. inheritance, gifts and beAuests receivedC non-taxable capital gainsC compensation for injuries or sicknessC proceeds of life insurance policiesC sweepstakes winningsC interest on government securities and the like
Increase in net worth are not taxable if they are shown not to be the result of unreported income but to be the result of the correction of errors in the taxpayer&s entries in the books relating to indebtedness to certain creditors, erroneously listed although already paid. (7ernan,e' Dermanos Inc. vs. CI , +4 (!%%!, "5 #ept. !*-*& Enforce$ent of 8orfeitures and Pena!ties Statutor# &ffenses and Pena!ties
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TAX LAW REVIEWER

=. Additions to the Tax *dditions to the tax are increments to the basic tax incident due to the taxpayer&s non-compliance with certain legal reAuirements, like the taxpayer&s refusal or failure to pay taxes andLor other violations of taxing provisions. *dditions to the tax consist of the! (13 civil penalty, otherwise known as surchar3e, which may either be ,?O or ?B O of the tax depending upon the nature of the violationC (,3 interest either for a deficiency tax or delinAuency as to paymentC (>3 other civil penalties or administrative fines such as for failure to file certain information returns and violations committed by withholding agents. (#ecs. (.$ to (%(, !**$ 8I C& Genera! Considerations on the Addition to tax a. *dditions to the tax or deficiency tax apply to all taxes, fees, and charges imposed in the Tax ode. b. The amount so added to the tax shall be collected at the same time, in the same manner, and as part of the tax. c. If the withholding agent is the government or any of its agencies, political subdivisions or instrumentalities, or a government owned or controlled corporation, the employee thereof responsible for the withholding and remittance of the tax shall be personally liable for the additions to the tax prescribed (#ec. (.$JbK, !**$ 8I C& such as the ,?O surcharge and the ,BO interest per annum on the delinAuency (#ecs. (.) an, (.* JCK, !**$ 8I C& Surchar+e The payment of the surcharge is man,atory and the ommissioner of Internal )evenue is not vested with any authority to waive or dispense with the collection thereof. In one case, the Supreme ourt held that the fact that on account of riots directed against the hinese on certain dates, they were prevented from paying their internal revenue taxes on time, does not authori#e the ommissioner to extend the time prescribed for the payment of taxes or to accept them without the additional penalty (+im Co Chui vs. Posa,as, .$ Phil .-5& The ommissioner is not vested with any authority to waive or dispense with the collection therof. (CI vs. CA, supra&. The penalty and interest are not penal but compensatory for the concomitant use of the funds by the taxpayer beyond the date when he is supposed to have paid them to the ;overnment. (Philippine efinin3 Company vs. C.A., G. . 8o. !!))$*., ) /ay !**-&.
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TAX LAW REVIEWER

*n extension of time to pay taxes granted by the ommissioner does not excuse payment of the surcharge (CI vs. Cu =nBien3, +4(-)-*, - Au3. !*$%& The following cases, however, show the instances when the imposition of the ,?O surcharge had been waived! 1. $here the taxpayer in good faith made a mistake in the interpretation of the applicable regulations thereby resulting in delay in the payment of taxes. (Connel 9ros. Co. vs. CI , +4!%.$5, (- :ec. !*-"& ,. * SubseAuent reversal by the II) of a prior ruling relied upon by the taxpayer may also be a ground for dispensing with the ,?O surcharge. (CI vs. epublic Cement Corp., +4"%-$$, !5 Au3. !*)"& >. $here a doubt existed on the part of the Iureau as to whether or not ).*. ?8>1 abolished the income tax exemptions of corporations (including electric power franchise grantees3 except those exempt under Sec. ,2 (now, Sec. >B, 1..2 <I) 3, the imposition of the surcharge may be dispensed with ( Ca3ayan >lectreic Power I +i3ht Co. vs CI , G. . 8o. -5!(-, (% #ept. !*)%& 8. In the case of failure to make and file a return or list within the time prescribed by law, not due to willful neglect, where such return or list is voluntarily filed by the taxpayer without notice from the I) or other officers, and it is shown that the failure to file it in due time was due to a reasonable cause, no surcharge will be added to the amount of tax due on the return. In such case, in order to avoid the imposition of the surcharge, the taxpayer must make a statement showing all the facts alleged as reasonable causes for failure to file the return on time in the form of an affidavit, which should be attached to the return. Interest This is an increment on any unpaid amount of tax, assessed at the rate of twenty percent (,BO3 per annum, or such higher rate as may be prescribed y rules and regulations, from the date prescribed for payment until the amount is fully paid. (#ec. (.* JAK, !**$ 8I C& Interest is c!assified into: =. Deficienc# interest *ny deficiency in the tax due, as the term is defined in this code, shall be subject to the interest of ,BO per annum, or such higher rate as may be prescribed by rules and regulations, which shall be assessed and collected from the date prescribed for its payment until the full payment thereof (#ec. (.* J9K, !**$ 8I C& 1. De!in,uenc# interest This kind of interest is imposed in case of failure to pay! (13 The amount of the tax due on any return reAuired to be filed, or (,3 The amount of the tax due for which no return is reAuired, or (>3 * deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the ommissioner.
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TAX LAW REVIEWER

2. Interest on Extended Pa#$ent Imposed when a person reAuired to pay the tax is Aualified and elects to pay the tax on installment under the provisions of the ode, but fails to pay the tax or any installment thereof, or any part of such amount or installment on or before the date prescribed for its payment, or where the ommissioner has authori#ed an extension of time within which to pay a tax or a deficiency tax or any part thereof. (#ec. (.*J,K, !**$ 8I C& Ad$inistrati(e &ffenses 1. 0ailure to 0ile ertain Information )eturns ,. 0ailure of a $ithholding *gent to ollect and )emit Taxes >. 0ailure of a $ithholding *gent to )efund 6xcess $ithholding Tax GENERAL C&NCEPT AND ITE9S &8 INC&9E I.Inco$e in Genera! A. Inco$e means all wealth which flows into the taxpayer other than as a mere return on capital. It denotes the amount of money or property received by a person or corporation within a specified time, whether as payment for services, interests, or profits from investments.(0isher vs. Trinidad, 8> 5hil .2>3 "* mere return of capital' e.g. 5ayments of loans vs. "9ther than a mere return of capital' e. g. interest paid on such loans Income is not merely increase in value of propertyC but a gain, a profit in excess of capital as a result of exchange transactions. .. .asic 8eature of our Present Inco$e Tax S#ste$ 1. The law has adopted the most co$prehensi(e tax situs by using all possible legal criteria in the determination of its tax base as well as the source of the taxable income. ,. The individual income tax system, in the main, is pro+ressi(e in nature, i. e. the tax rates increase as the tax base increases. In certain cases, however, final taxes are imposed on passive income. >. The present income tax law is now more schedu!ar than +!o%a! in the case of individual income taxpayers, but it has maintained much of its global treatment on corporation. C. 8or$s of Inco$e Income may either be received in the form of!
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TAX LAW REVIEWER

1. ,. >. 8. D. 1. ,. >. 8.
Cash @ income pertains to money or money substitutes derived as compensation or earning derived from labor, practice of profession and conduct of business. Propert# @ income denotes the earned right of ownership over tangible or intangible thing as a result of labor, business or practice of profession. Ser(ices @ income based on the performance received in payment for the work previously rendered by one person to another. ombination of cash, services or property. C!assification of Inco$e Co$pensation Inco$e @ the gain derived from labor especially employment such as salaries and commission. Profession or .usiness Inco$e @ the value derived from an exercise of profession, business or utili#ation of capital assets. e.g. income derived from sale of assets used in trade or business Passi(e Inco$e @ income in which the taxpayer merely waits for the amount to come in. e. g. interest derived from bank accounts Capita! Gain @ an income derived from the sale of assets not used in trade or business. e.g. income from sale of personal property
E. Distinction %et een &ther Ter$s and Inco$e Inco$e -- 0low of wealth -- Service of wealth -- 0ruit Capita! -- 9riginal investment or fund used in order to generate earnings -- wealth -- Tree
Inco$e Re(enue -- )efers to the earnings of individual -- )efers to all funds occurring to the person, partnership, corporation or treasury of the gov&t. estate and trust. Inco$e Receipts -- )efers to the amount after excluding -- )efer to all wealth collected over a capital invested, cost of goods, and certain period. It may include capital as other allowable deductions. well as income. 8. Inco$e $a# %e c!assified as Non ) taxa%!e or Taxa%!eN
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TAX LAW REVIEWER

1.
Non ) Taxa%!e Inco$e @ income received but not included in determination of taxable income, nor as part of the gross income. 6.xamples! 1>th month pay not exceeding 5>Bk $innings from lotto or sweepstakes Taxa%!e Inco$e @ it is the amount of the income upon which the tax rate prescribed by law is applied to obtain the amount of Income Tax.
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Taxable Income may be grouped into three (>3 categories! 5assive investment income subject to final tax R eg. )oyalties, interest from 5hil. Iank deposit. Compensation income @ refers to all income payments, in money or in kind, "arising from personal' services under an employer @ employee relationship. 8on M compensation income or 9usiness N Professional Income M any other income that is not derived from personal services or not related to an 6) @ 66 (employer @ employee3 relationship and is generally subject to tax on net income basis.
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TAX LAW REVIEWER

G. Re,uisites for inco$e to %e taxa%!e. 1. There $ust %e +ain @ there must be a value received in the form of cash or its eAuivalent as a result of rendition of service or earnings in excess of capital invested. * mere expectation of profits is not an income * transaction whereby nothing of exchangeable value comes to or is received by the taxpayer does not give rise to or create taxable income. Items or amounts received which do not add to the taxpayer&s net worth or redound to his benefits such as amounts merely deposited or entrusted to him are not considered as gains ( I) vs. Tours specialist, 1-> S )* 8B,3. ;ain need not be necessarily in cash. It may be in form of payment, reduction or cancellation of T&s indebtedness, or gain from exchange of property. ,. The +ain $ust actua!!# %e or constructi(e!# rea!i<ed or recei(ed. 1ENE!$0 !=0E: * mere increase in the value of property without actual reali#ation, either through sale or other disposition, is not taxable. The increase in value is a mere unreali'e, increase in capital. >?C>P2F EC&N&9IC .ENE8IT PRINCIPLE (II) )N+I<; <9. B,. @ .-, =*) % 1., 1..-3 -That even without the sale or other disposition if by reason of appraisal, the cost basis is used as the new tax base for purposes of computing the allowable depreciation expense, the net difference between the original cost basis and new basis due to appraisal is taxable. *n income is constructively received by a person when - it is credited to the amount of or segregated in his favor and which maybe drawn by him at any time without any limitations e. g.! Interest credited on savings bank deposits Kividends applied by the corporation against the indebtedness of stockholder Share in the profit of a partner in ;eneral 5rofessional 5artnership >. The +ain $ust not %e exc!uded %# the !a or treat# fro$ the taxation. The gain must not be exempte,. 5roperty or money received by a taxpayer in which he has "no business transaction right to retain, but a duty to return "To the one person from whom it was received is not considered as income (e. g. payment by mistake3. easonF The receipt is offset by a liability to the party making the excess payment. %owever, where the duty to return is unclear, the recipient may be reAuired to pay the tax.
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TAX LAW REVIEWER

II.
GR&SS INC&9E A. Gross Inco$e @ means all income derived during a taxable year by a taxpayer from whatever source, whether le3al or ille3al.
The term ",erive, from whatever source "implies the inclusion of all income under the law, irrespective of the voluntary or involuntary action of the taxpayer in producing the gains. It includes ille3al 3ains arising from @ gambling, betting, lotteries extortion and fraud. .. Items included in the determination of ;ross Income, but not limited to the followingC ( - ;,I),5>*K3 1. Co$pensation for ser(ices in %ut not !i$ited toN hate(er for$ paid, inc!udin+
a. #alaries @ refer to earnings received periodically for regular work other than manual labor. b. Ea3es @ are earnings received usually according to specified intervals of work, as by the hour, day or week. c. 7ees - amount received by an employee for the services rendered to the employer. d. Commission @ refers to percentage of total or an certain Auota of sales volume attained as part of incentives, such a sales commission. e. #imilar items @ like pension or retiring allowance. * pension awarded to a person where no services have been ren,ere, are mere gifts or gratuities and not taxable as income. They are subject to donor&s tax payable by the donee. ompensation for personal services is taxable when! a. Income for services rendered is taxable in the year of receipt.(cash basis3 b. ash, property or services earned during the taxable year though not actually received are deemed to have accrued to the taxpayer and are classified as income (accrual basis3.
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TAX LAW REVIEWER

8or$s of Co$pensation a. money b. in kind ompensation paid to an employee of a corporation in its stock is to be treated as if the corporation sold the stock for its market value and paid to the employee in cash. +iving Auarters furnished to the employee in addition to cash salary. The rental value should be reported as income. =eals given to employee, the value thereof substitutes income. C&N:ENIENCE &8 TLE E9PL&OER RBLE The allowances furnished to the employee which are for the convenience and advantage of the employer or for proper performance of the employees& duty, shall not be taxable on the part of the employee receiving the same. >;=I#I2>#F a. They must be furnished within the employer business premises. b. The employer accepts the same as a condition of his employment --- Promissory notes or other evi,ence of in,ebte,ness received in payment of services are considered as income to the extent of their fair market value. --- *n individual who performs services for a creditor, who in consideration thereof cancels his debt, income to that amount is reali#ed by the debtor as compensation for his services. %owever, if the cre,itor con,ones Ncancels the ,ebt without any service ren,ere, by the ,ebtor, the amount of such debt is a gift and need not be included in the gross income of the debtor. The amount is subBects to ,onors tax. c. Ioth in money and in kind. ,. Gross inco$e deri(ed fro$ the conduct of trade, %usiness or the exercise of a profession. (a3. Ketermination of gross income in case of manufacturin3, merchan,isin3 or minin3 business. 8or$u!a: ;ross Income R (;ross Sales @ cost of goods sold3 S other income (b3. Income from a lon3 term contract @ long term contract means building, installation and construction contract covering a period in excess of one year. NOTE: any income derived from these contracts shall be reported upon the basis of Percenta3e of Completion. (c3. Income from farmin3 may be reported in any of the following methods!
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TAX LAW REVIEWER

(13. Cash basis @ no inventory is used in determining profits. (,3. Accrual basis @ an inventory is used in determining profits. (>3. Crop basis @ it is generally used when the farmer is engaged in producing crops which take more than a year to gather and dispose of from the time of planting. >. Gains deri(ed fro$ dea!in+s in propert# @ refers to the income derived from the sale and or exchange of assets, which result in gain because of the excess of the amount of value received by the taxpayer. 1ENE!$0 !=0E: The entire amount of the 3ain or loss arising from the transaction shall be taxable or deductible, or the case may be. 8. Ro#a!t# Inco$e @ these are the compensations or payments for the use of property and are paid to the owner of a right. ?. Renta! Inco$e @ refers to earning derived from leasing real estate as well as personal property. It includes all other obligations assumed to be paid by the lessee to the third party in behalf of the lessor. Taxes paid by the tenant (lessee3 to or for a lessor for a business property are a,,itional rent and constitute income taxable to the lessor. *dvanced rentals! (a3. if the advanced rental is a #ecurity :eposit which restricts the lessor as to its use -- such amount shall be "exclu,e,1 in the determination of rental income. (b3. If the advance rental is Prepai, ental received without restriction as to its use @ the entire amount is "taxable' in the year it is received. 5ermanent improvements made by the lessee on leased property. $hen the lessee makes improve @ ments on the leased property and the said improvements will belong to the lessor upon the expiration of the lease contract, the lessor may report the income there from upon either by the following methods! (a3. Outri3ht metho, @ the lessor will report as income the 0=H (fair market value3 of the improvements on the year of completion. (b&. #prea, out metho, @ the lessor may spread over the life of the lease the estimated depreciated value of such improvements at the termination of the lease and report as income of each year of the lease an aliAuot part theory. Income resulting from pre @ mature termination of the lease contract.
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TAX LAW REVIEWER

RBLES: 1. If the improvement is destroyed before the termination of the lease contract -- the lessor is entitled to "deduct' as a loss for the year when such destruction takes place the amount previously reported as income. ,. If the lease is terminated prior to the expiration of the lease contract for any reason, other than a bonafide sale to the lessor @ the lessor received "additional income' for the year the value of the improvements exceed the amount of income already reported. Income of corporation from leased property. $here the property of a corporation is leased to the lessee in consideration that the latter shall pay in lieu of rental an amount eAuivalent to a certain rate of dividend on the lessor&s capital stockC it shall be considered asC (a3. )entals (income3 @ to lessee and lessor (income to the corp.3 (b3. Kividend from the lessor corporation @ as far as the shareholders are concerned. 5. Interest Inco$e *n earning derived from depositing or lending of money, goods or credits. 1ENE!$0 !=0E: Interest received by a taxpayer, whether usurious or not, is subject to income tax. E2CEPT: $hen interest income is exempted by law from income tax. >. Pri<es and innin+s 1ENE!$0 !=0E: 5ri#es and winnings whether in cash or in kind are taxable. 5ri#es and winnings are subject to ,BO final tax. $here the amount of pri#es or winning is 51Bk or less @ subject to schedular rate. ?. Pension )efers to allowance paid regularly to a person on his retirement or to his dependents on his death, in consideration of past services, meritorious work, age, loss or injury.
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TAX LAW REVIEWER

G. PartnerHs distri%uti(e profits fro$ the net inco$e of a Genera! Professiona! Partnership. NOTE: ;en. 5rofessional 5artnership -- is created by a group of individuals for the purpose of exercising their common profession 6. g. +aw firm =D. Annuities *mount payable yearly or at other regular intervals for a certain or uncertain period They also represent as installment payments for life insurance sold by insurance companies. If the part of annuity payments represent "interest1 O taxable income. If the annuity is a mere return of premium R not taxable. ==. Di(idends -- =eans any distributions made by a stock corporation to its stockholders out of its earnings or profits and payable to its stockholders in money or other property.
N&N ) TAKA.LE INTER ) C&RP&RATE PRINCIPLE Kividends from the domesticLresident corporations and shares in profits of taxable partnerships received by domesticLresident corp. are exempt from income tax. Sources of dividends payment! 6very dividend declared by a corporation is presumed to come from the "most recently accumulate, profit'. Taxable dividends include the following! (a3 Cash :ivi,en, M a dividend paid in cash and is taxable to the extent of the cash received. (b3 +iAui,atin3 ,ivi,en, @ a dividend distributed to the S%s upon dissolution of the corporation. (c3 #crip :ivi,en, M issued in a form of promissory note and it is taxable in its 0air =arket Halue. (d3 In,irect ,ivi,en, @ when a corporation forgives the indebtedness of its stockholders, the transaction has the effect of payment of dividend to the extent of the amount of the debt.
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TAX LAW REVIEWER

(e3 Property ,ivi,en,Ta dividend paid in property of a corporation such as stock investment, bands or securities held by the corporation and to the extent of the 0=H of the property received at the time of the distribution. (f3 #tocH :ivi,en, -- Involves the transfer of a portion of retained earning to capital stock by action of stockholders. it simply means the capitali#ation of retained earnings. 1ENE!$0 !=0E: * mere issuance of stock dividends is not subject to income tax, because it merely represents capital and it does not constitute income to its recipient. Iefore disposition thereof, stock dividends are nothing but a representation of interest in the corporate entity. E2CEPT ONS: $hen stock dividends are subject to tax! a.3 These shares are later redeemed for a consideration by the corporation or otherwise conveyed by the stockholder to the extent of such contribution. Nnder the <I) , if a corporation, after the distribution of a non-taxable stock dividend, proceeds to cancel or redeem its stock at such time and in such manner as to make the distribution and cancellation or redemption essentially eAuivalent to the distribution of a tax of a taxable dividend, the amount received in redemption or cancellation of the stock shall be treated as a taxable dividend to the extent that it represents a distribution of earnings or profits. (#ec.$" (9&, 8I C&. Kepending on the circumstances, corporate earnings may be distributed under the guise of initial capitali#ation by declaring the stock dividends previously issued and later redeem or cancel said dividends by paying cash to the stockholder. This process amounts to distribution of taxable dividends which is just delayed so as to escape the tax. (CI vs. CA, "5! #C A !%(& b.3 he recipient is other than the stockholder. (9achrach vs. #eifert, %$ PDI+ .)"& c.3 * change in the stockholder&s eAuity results by virtue of the stock dividend issuance. Stoc- di(idend is c!assified into: (1&. 8on M taxable @ is one where the new shares confer the same rights and interest as the old share. There is no change in the corporate identity. *fter the distribution thereof, there is no change in the proportionate interest of S%s. (,3. 2axable #tocH ,ivi,en, @ is one where there either has been a change of corporate identity or a change in the nature of the shares, where the proportionate interest of the S%s changes.
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TAX LAW REVIEWER

Nnder the corp. code, stock dividend being one payable in capital stock, cannot be declared out of outstanding capital stock but from retained earnings of the corporation. $here corporate earnings are used to purchase outstanding stocks treated as treasury stock (stocks issued and fully paid for and subseAuently reacAuired by the corporation of purchase, redemption or through same other means3 as a technical but prohibited device, to avoid the effects of income taxation, distribution of said corporate earnings in the form of stock dividend will subject S%s receiving them to income tax. The corporation parting with a portion of its earnings "to buy' the outstanding stock is in ultimate effect and result making a distribution of such earnings to the stockholders. (Commissioner vs. /annin3, -- #C A !.& III. EKCLBSI&N 8R&9 INC&9E *. Exc!usion @ refers to income received or earned but is not taxable as income because it is exempted by law or by treaty. )eceipts which are not in fact income are also excluded from ;ross Income. Exc!usion Deductions -- not taken into account in determining they are subtracted from gross gross income income 6xclusions are in the nature of tax exemptions, thus the claimant must establish them convincingly.
.. Exc!usion under the Code. ILAGI C 9R G1J 1J. Life Insurance Proceed The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise. <ote! )eason for exclusion! The contract of insurance is a contract of indemnity hence, the proceeds thereof are considered indemnity rather than a gain or profits. Instances when proceeds from insurance are taxable! a.3 $here proceeds are held by the insurer under an agreement to pay interest. The interest is included in determination of gross income. b.3 $here the transfer is for valuable consideration. ,.3 A$ount Recei(ed %# Insured as Return of Pre$iu$
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TAX LAW REVIEWER

The amount received by the insured as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term of the contract of upon surrender. eason for the exclusion! The return of premium is a mere return of capital. %owever, where the inclu,e, in the 3ross amount receive, excee, the a33re3ate premiums pai,, the excess shall be income. ".& Gift, .e,uests, and De(ises The value the property acAuired by gift, devise, or descent shall be excluded. %owever, the income from such property, as well as gift, beAuest, devise, or descent of income from property, in cases of transfers of divided interest, shall be included in gross income. 83. Inco$e Exe$pt under Treat# Income of any kind, to the extent reAuired by any treaty obligation binding upon the ;overnment of the 5hilippines. ?.3 Co$pensation for In'uries or Sic-ness *mounts received, through *ccident or %ealth Insurance or under $orkmen&s ompensation *cts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on the account of such injuries or sickness. 6xample of damages recovered from personal injuries! =oral damages for personal injuries. If the award of damages is to compensate loss of property or an award of damages to compensate loss of income L profits, such is subject to tax. /.J 9isce!!aneous Ite$s a.3 Income derived by 0oreign ;overnment @ Income derived from investments in the 5hilippines in loans, stocks, bonds or other domestic securities or from interest on deposits in banks in the 5hilippines by! (i3 0oreign governments, (ii3 0inancing institutions owned, controlled or enjoying refinancing from foreign governments, and (iii3 International or regional financial institutions established by foreign governments. b.3 Income derived by the ;overnment or its 5olitical Subdivision @ Income derived from any public utility or from the exercise of any essential governmental function accruing to the ;overnment of the 5hilippines or to any political subdivision thereof. c.3 5ri#es and *ward - 5ri#es and award to be excluded, the following conditions must concurC
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TAX LAW REVIEWER

(13 5ri#es and award made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement. (,3 The recipient was selected without any action on his part to enter the contest or proceeding. (>3 The recipient is not reAuired to render substantial future services as a condition in receiving the award. d.3 5ri#es and *ward in Sports ompetition - *ll pri#es and award granted to athletes in local and international sports competitions and tournaments whether held in the 5hils. 9r abroad and sanctioned by sports associations. e.3 5>Bk. f.3 ;SIS, SSS, =edicare and 9ther ontributions 1>th =onth 5ay and 9ther Ienefits - The total exclusion shall not exceed
2.J Retire$ent .enefits, Pension, Gratuities, etc. The following items are exempt from taxation! (a3. )etirements benefits received under )* 2/81 and those received by officials and employees of private firms in accordance with reasonable P I@A2> 9>8>7I2 P+A8. eAuisitesF (1.3 The retiring official or employee has been in service of the same employer for at least ten years. (,.3 Is not less than ?B yrs. of age at the time of his retirement. (>.3 *nd is available to official or employee only once. Pri(ate retire$ent %enefit p!an * "reasona/le private /enefit plan' means a pensionC gratuity, stock bonus or profit sharing plan maintained by an employer for the benefit of some or all of his employees @ a.3 wherein contributions are made by such employer or employees, or both, for the purpose of distributing to such employer the earnings and principal of the fund thus accumulatedC and b.3 wherein said plan provides that at no time shall any part of the principal or income of the fund be used for, or be diverted to, any purpose other than for the ex&lusive /enefit of said employee (b3. *ny amount received by an official or employees or by his heirs from the employer as a "conseAuence of separation from service due to death, sickness or other physical disability beyond the control of the said official or employer. (c3. Terminal leave and other social security benefits.
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TAX LAW REVIEWER

The terminal leave pay of government employees whose employment is co-terminous is exempt since it falls within the meaning of the phrase " for any cause beyon, the control of the sai, official or employees1 (II) )uling 18>-.-3 (d3. Ienefits received under the NS veterans *dministration. (e3. Ienefits received from SSS (f3 Ienefits received from ;SIS -.J Gains fro$ the Sa!e of .onds, De%entures or other Certificates of Inde%tedness ith $aturit# of $ore than fi(e I4J #ears. ..3 Gains fro$ Rede$ption of Shares in 9utua! 8und. C. Exc!usion fro$ inco$e under Specia! La s 1. 5ri#es received by winners in charity horse race sweepstakes from 5 S9. ,. Iack pay benefits >. Income of cooperative marketing association 8. Salaries and stipends in dollars received by non @ 0ilipino citi#ens on the technical staff of I))I (International )ice )esearch Institutes3. ?. Supplemental allowances per diem, benefits received by officer or employees of the 0oreign Service. /. Income from bonds and securities for sale in the international market. I:. 8RINGE .ENE8ITS
A. .! N1E ;ENE. TS @ mean any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee, except ranH an, file employee. Pursuant to Re(enue Re+u!ations No. 2 ) G? Idated 9a# 1=, =GG?J implementing section >> of the Tax ode, the special treatment of fringe benefits shall be applied to fringe benefits given or furnished to managerial or supervising employees and not to the rank and file. Ran- and fi!e @ means all employees who are holding neither managerial nor
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TAX LAW REVIEWER

9ana+eria! E$p!o#ee @ is one who is vested with powers or prerogatives to lay down and execute management policies andLor to hire, transfer, lay @ off, recall, discharge, assign, or discipline employees. Super(isor# E$p!o#ees @ are those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinely or clerical in nature but reAuires the use of independent judgment. The regulation does not cover those benefits properly forming part of compensation income subject to withholding tax. 8rin+e .enefit Tax I8.TJ @ refers to monetary burden imposed on any good, services or other benefits furnished or granted by an employer, in cash or in kind, in addition to basic salaries, to an individual employee, except rank and file employee. 0ormula! ;=H R =H divided /-O (as of Ean. 1, ,BBB3 0IT R (fb3 ;=H x >,O (as of Ean 1, ,BBB3 .. :ALBATI&N &8 TLE 8RINGE .ENE8ITS :a!ue of 8rin+e .enefits 13. =oney The value is the amount received ,3. 5roperty with owner ship transferred to the 0air market value of the property employee. >3. 5roperty wLo transfer of ownership Kepreciation value of the property . ITE9S *LICL ARE C&NSIDERED AS 8RINGE .ENE8ITS IL 1 IT ) 8I:1E1J =J. Lousin+ Lousin+ Pri(i!e+e (a3 +ease of residential property for the use of the employee as his usual place of residence. (b3 )esidential 5roperty owned by 6) and *ssigned to employee as his usual place of residence. 8. tax %ase =H R ?BO x rental payments =H R 4?O (0=H or Jonal Halue whichever is higher37 x ?BO 8rin+e .enefit Ifor$sJ
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TAX LAW REVIEWER

(c3 )esidential property purchased by 6) on installment basis for the use of 6) as his usual place of residence. (d3 )esidential property purchased by 6) and ownership is transferred to 66 as his usual place of residence. (e3 )esidential property transferred to employee at less than employer&s acAuisition cost.
=H R 4?O x * (*cAuisition37 x ?BO =H R 0=H or ,H $Lever is increase =H R 0=H or Jonal Halue (whichever is higher3 @ *cAuisition ost
<on @ taxable %ousing 0ringe Ienefits (a3 %ousing privilege of military officials of *05 (b3 %ousing unit, which is situated inside or adjacent to the premise of a business or factory. * housing unit is considered adjacent if it is located within the maximum %5 meters from the perimeter of the business premises. (c3 %ousing benefit granted to employees on a temporary basis not excee,in3 three ("& months. 1J. Louseho!d Expenses @ )efer to expenses of the employee paid by the employer for household personnel or other personal expenses. %ousehold expenses shall include! (a3 salaries of household helper (b3 personal driver of the 66 (employee3 (c3 5ayment for homeowner assoc., etc. 2J. Interest on !oan at !ess than $ar-et rate if the 6) (employer3 lends money to his employee -- free of interest or at a rate lower than 1,O (or prevailing market rate3 the interest foregone by the 6) or the difference of the interest assumed by the 6) and the 1,O rate shall be treated as taxable fringe benefit. *pplicable to installment payment or loan with interest rate lower than 1, O starting Eanuary 1, 1..-. 3J. Expenses for 8orei+n Tra(e! 1ENE!$0 !=0E: 6xpenses for foreign travel insured by the employee andLor family members of the employee borne by the employer shall be treated as taxable fringe benefits of the 66.
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TAX LAW REVIEWER

E2CEPT: $here the expenses for foreign travel paid by the employer for the employee are for the purpose of attending business meeting or convention. The exemption covers only the following expenses! 1. Inland travel expenses except lodging cost in hotel averaging NSU >BB or less per dayC and ,. ost of economy or business class airline ticket 4V%owever, if the ticket is a first class one, >BO of the cost of the ticket shall be subject to a fringe benefit tax7. Travel expenses should be supported by documents proving the actual occurrences of the meetings or conventions. +ikewise, documents and evidence showing the business purpose of the employees& travel must be presented otherwise, the entire cost will be considered taxable fringe benefit. 4J. 9e$%ership fees, dues and other expenses %orne %# the ER for his EE, in social or athletic clubs or other similar organi#ations ) These are treated as taxable 0ringe Ienefits of the 66 in full. 5J. Life or Lea!th Insurance " 1ENE!$0 !=0E: The cost of life or health insurance and other non @ life insurance premiums or similar amounts in excess of what the law allows borne by the 6) for his 66 shall be treated as taxable fringe benefits.
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TAX LAW REVIEWER

E2CEPT: (a.3 ontribution of the 6) for the benefits of the 66 pursuant to existing laws such as )* -,-2 (SSS3 or )* -,.1 (;SIS3. (b.3 The cost of premium borne by the 6) for the group insurance of his 66. >J. Lo!ida#s and :acation Expense ?J. 9otor :ehic!e Haluation of =otor Hehicle of any kind (a.3 =otor vehicle purchased by 6) in name of 66 (b.3 "cash for the purchased provided by the 6), the ownership is placed in the name of the 66 (c.3 5urchase on "Installment' basis, the ownership is placed in the name of the 66 (d.3 "5ortion' of purchased price shouldered by 6) (e.3 0leet of motor vehicle "leased' by the 6) (f3 0leet of =otor vehicles owned and maintained by the 6) =H R * (acAuisition ost3 =H R cash received by the 66 =H R * (exclusive of interest3L ? years =H R amount shouldered by the 6) =H R ?BO x rental payment =H R 4* L?7 x ?BO
<ote! In case of letters a, b, c and d, regardless of whether the motor vehicle is used for the personal purpose of the 66 and partly for the benefit of his 6), the monetary value shall be the entire value of the benefit. Nnder letters e and f, the fleet of motor vehicles is for the use of the business and the 66s. The value of the benefit shall be the rental payments (e3 or the acAuisition cost (f3 of all motor vehicles not normally used for sales, freight, delivery service and nonpersonal use. The use of CACD2 whether owned and maintained or leased by the 6) shall be treated as taxable fringe benefit @ the value of the benefit shall be measured based on the depreciation of the Wacht at an estimated useful life of ,B yrs. The use of AI C A72 (including helicopters3 owned and maintained by the 6) shall be treated as "business use' and not subject to 0IT.
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TAX LAW REVIEWER

GJ. Expense Account <9T6! 6xpense *ccount subject to 0ringe Ienefit Tax (a.3 6xpenses incurred by the 66 but pai, by his 6). (b.3 6xpenses paid by the 66 but reimburse, by his 6). 6xpense account not subject to 0IT. (a.3 expenses duly receipted for in the name of the 6) and (b.3 The expenditures do not partake the nature of personal expenses attributable to the 66. 5ersonal expenses of the 66 (like groceries3 paid for or reimbursed by the 6) are taxable fringe benefits, whether or not duly receipted for in the name of the 66. )epresentation and Transportation *llowances ()*T*3 --- refers to fixed amounts which are regularly received by the 66s as part of their monthly compensation income. --- they are not treated as Taxable 0ringe Ienefits but the same are treated as Taxable ompensation Income.
=DJ. Educationa! Assistance NOTE: GENERAL RBLE: The cost of the educational assistance to the 66 or his dependents which are borne by the 6) shall be treated as Taxable 0ringe Ienefits. EKCEPTI&N: 6ducational assistance not treated as Taxable 0ringe Ienefits a3 6ducation granted to 66 )eAuisites! (1.3 6ducational grant whereby the study is directly connected with the trade, business or profession of the 6). (,.3 *nd there is a written contract obligating the 66 to remain under the employment for a certain period. (b.3 6ducational *ssistance granted to the dependents of the employee in the nature of educational assistance to the dependents of the 66 through a competitive scheme un,er a scholarship pro3ram of the company. D. 8RINGE .ENE8ITS N&T SB.7ECT T& TLE 8RINGE .ENE8IT TAK
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TAX LAW REVIEWER

13. ontributions of 6) for the benefits of 66 to retirement, insurance, and hospitali#ation benefits plans. ,3. Ienefits given to rank and file 66s whether granted under I* or not. >3. 0ringe Ienefits which are exempted from income tax under the tax code or other special laws. 83. 0ringe Ienefits which are reAuired by the nature of, or necessary to the trade, business or profession of the 6). ?3. 0ringe Ienefits granted for the convenience or advantage of the 6). /3. Ke minimis benefits as may be define by the Secretary of 0inance. <9T6! DE 9INI9IS .enefits @ are privileges granted by the 6) to the 66s which are relatively of small value for the purpose of the promoting the health, goodwill, contentment and efficiency of the 66s. 6xamples of Ke =inimis benefits are the following! (1.3 =oneti#ed unused vacation leave credits of not more than ten (1B3 days during the year. (,.3 =edical cash allowance to dependent of the 66S not more than 52?B per employee per semester or 51,? per month. (>.3 )ice Subsidy @ worth 51BBB or one (13 sack of ?B kg. rice per month (8.3 Nniform and clothing allowances @ not more than 5>k per annum. (?.3 =edical Ienefit yearly @ not more than 51Bk per annum. :. DEDBCTI&NS 8R&9 GR&SS INC&9E
A. :e,uctions -- these are items or amounts authori#ed by the law to be subtracted from the pertinent items of the gross income to arrive at the taxable income. Iasic 5rinciple governing deductions! (1.3 The taxpayer seeking a deduction must point out some specific provisions of the statue authori#ing the deductionC and (,.3 %e must be able to prove that he is entitled to the deduction authori#ed or allowed.
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TAX LAW REVIEWER

Time of availing deductions! a taxpayer has the right to deduct all authori#ed allowances for the taxable year. %e cannot deduct them from the income of the next or any succeeding year. .. Cinds of Deductions 13. Keductions from compensation income of individual taxpayers @ taxpayers whose income is derived purely from compensation income (one that arises from an 6) @ 66 relationship3. *n in,ivi,ual taxpayer whose income is ,erive, from > 4>> relationship is also not allowed to deduct itemi#ed deductions (Sec. >8 <I) 3, except 5remium 5ayments on %ealth andLor %ospitali#ation Insurance, if applicable. *n individual taxpayer whose income derived from 6) @ 66 relationship is not allowed to elect an optional standard deduction (9SK3 of 1BO of his income. ,3. Keduction for self @ employed and 5rofessionals @ individual taxpayer who are self employed and Lor professionals engaged in the practice of their profession may deduct the following items from their gross income! (a.3 itemi#ed deductions or the optional deduction (9SK3. (b.3 5remium payments on health or hospitali#ation insurance. >3. Keductions from corporate income. NOTE: orporations include "partnership' other than general professional partnership engaged in trade or business in the 5hils. They are entitled to claim the itemi#ed deductions.
83. Special Keduction -- Keductions allowed to be subtracted in addition to the itemi#ed deductions allowable to corporations. <9T6! These deductions may be availed of by! (a.3 Insurance companies (b.36state and Trust (c.3 5rivate educational Institutions. C. The fo!!o in+ are the taxpa#ers ho are entit!ed to a(ai! of deduction. 13. iti#ens of the 5hilippines
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TAX LAW REVIEWER

,3. )esident aliens >3. <on @ resident aliens engaged in trade or business in the 5hils 83. Komestic corporation ?3. )esident foreign corporationL engaged in trade or business in the 5hilippines /3. Taxable co @ partnership and ;eneral 5rofessional 5artnership 23. 6states and Trusts Taxpayers who are taxed only on the basis of their gross income received from within the 5hils. (a.3 <)* (6TI3 @ non @ resident aliens not engaged in trade or business in the 5hils. (b.3 <)0 @ non resident foreign corp. those not engaged in trade or business in the 5hils. :I. ALL&*A.LE ITE9IPED DEDBCTI&NS *vailable only to taxpayers ! (a.3 self @ employedL those in the exercise of their profession (b.3 orporations
A. .usiness Expenses Genera! Re,uisites for Deducti%i!it#: (1.3 The expenses must be ordinary and necessary &rdinar# @ expenses which are commonly incurred in the trade or business of the taxpayers as distinguished from capital expenditures. *n expense is ordinary if it is normal or usual to the line of business. 1 CINDS &8 EKPENDITBRES Ia.J capita! expenditure -- not deductible from the gross income I%.J ordinar# expenditure -- deductible from the gross income in the year it was incurred -- has the effect of prolonging the life of an -- does not prolong the life of an asset for asset more than a year -- if the property acAuired has a useful life of --The acAuired property has a useful life of
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TAX LAW REVIEWER

more than 1 yr. the expenses thereof are not more than 1 yr. considered capital expenditure -- expenditure for extra ordinaryLmajor -- expenditure for minorLordinary repair repairs Necessar# expenses @ expenses which are appropriate and helpful to the taxpayer&s business or if it is intended to reali#ed profit or to minimi#e a loss. >xtraor,inary repairs - those in the nature of replacements, alteration, and expansion to the extent that they arrest deterioration and prolong the life of the property. Or,inary repairs @ those made to keep the property ordinarily efficient working condition and do not materially add to the value of the property. (,.3 It must be paid or incurred during the taxable year. NOTE: 5aid @ the payment is on cash receipt basis, expenses are deductible in the year they are incurred. Incurred @ the payment thereof is on accrual basis, expenses are deductible in the year they are incurred, whether paid or not. (>.3 It must be directly connected with trade or business or profession of the taxpayer. (8.3 it must be substantiated by adeAuate proof NOTE: The claimed deduction must be evidenced by official receipts or other adeAuate records. The evidence must establish the following! (a.3 the amount of expenses being deductedC and (b.3 the direct relation of such to the development, management, operation, andLor conduct of the trade, business or profession of the taxpayer. (?.3 It must not be against the law, morals, public policy or public order. 6xamples of ille3itimate business expenses! (not deductible3 (a.3 Iribe given to obtain protection from arrest and prosecution (b.3 Dickback (c.3 5ayments to secure political influence to obtain favorable public contracts. (d.3 5rotection payments -The le3itimate expenses of an illegitimate business however, are deductible on the theory that income tax is not a tax on gross income even if such income is earned as an illegal business.
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TAX LAW REVIEWER

Specific expenses that are part of expense in +enera!. (13 ompensation for personal services. (Including ;rossed Np monetary value of fringe benefit3 <9T6! )eAuisites for deductibilityC (In addition to the general reAuisites for deductibility3 (a.3 They are reasonable (b.3 5ayments for personal service actually rendered. (c.3 $ithholding tax imposed has been paid. Some factors in determining reasonableness of compensation. (a.3 5ayment must be made in good faith (b.3 haracter of taxpayer&s business (c.3 Holume and amount of its net earning (d.3 +ocality in which the business is in (e.3 ;eneral and economic conditions, etc. There is no fixed test for determining the reasonableness of a given compensation. It is just to assume that a reasonable compensation is only such amount as would be ordinarily be paid for like services by like enterprises in like circumstances. Ionuses to be deductible must be! (a.3 made in good faith (b.3for service actually rendered (c.3 must be reasonable V If the bonuses were granted without any service rendered, they are not considered as deductible from gross income. 5remiums paid on life insurance of an officer, employee, or business associate, where the taxpayer is directly or indirectly a beneficiary under the policy is not deductible. 5ension and compensation for injuries are also deductible limited to the amount not compensated for by insurance or otherwise. I1.J Tra(e! Expenses Travel expenses include @ transportation expenses and meals and lodging, here andLor abroad. )eAuisites for deductibility! (In addition to the general reAuisites3 (a.3 reasonable and necessary
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(b.3
incurred or paid "while away from home' @ it means away from principal place of business
<ote! If the trip is undertaken for purposes other than business or exercise of profession, the transportation expenses are personal expenses and the meals and lodging are living expenses and are not deductible. Transportation expenses of an employee from his residence to his office and back are not deductible. They are personal expenses. %owever, transportation expenses from his office to his customer&s place of business and back are deductible. They are business expenses. (c3 5aid or incurred in the conduct of trade or business. I2.J Renta!s )eAuisites for deductibility (In addition to the general reAuisites3 (a.3 =ust be made on condition to the continued use or possession of the property. (b.3 The taxpayer has not taken or is not taking title to the rented property. (c.3 )ented property is used in conduct of the business, trade, or profession of the employer. (d.3 =ust be paid or incurred within the taxable year. I3.J Entertain$ent, A$use$ent and Recreation expenses. )eAuisites for Keductibility (In addition to the general reAuisites3 (a.3 The expenses are directly related to or in furtherance of the trade, business or profession of the taxpayer (b.3 The same must be directly connected in the development, management and operation of the trade, business or profession of the Taxpayer (c.3 The expenses must be reasonable and not contrary to the law, morals, public policy or public order (d.3 Substantiated by adeAuate receipts andLor records. (e.3 =ust be paid or incurred during the taxable year. (f.3 =ust not exceed the ceiling provided by the Sec. of 0inance C&LAN RBLE $here it is certain from the evidence adduced that the taxpayer did incur expenses but that the actual amount thereof has not been established, the commissioner should make a close "approximate' thereof and his determination thereof shall bear heavily on the taxpayer for his inexactitude. (@isayas Cebu 2erminal v. Collector !5) PDI+ "(5&.
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TAX LAW REVIEWER

OP2IO8 G A82>: 2O P I@A2> >:=CA2IO8A+ I8#2I2=2IO8#. - 5rivate educational institution may, at its option, elect either! (a.3 To deduct expenditure otherwise considered as capital outlays of depreciable assets incurred during the taxable year, for the expansion of school facilities or (b.3 to deduct an allowance for depreciation thereof. .. Interest Expenses Interest @ refers to the compensation allowed by the law fixed by the parties for the loan or forbearance of money, goods or credits. Re,uisites for Deducti%i!it#: (a.3 there must be indebtedness. (b.3 the indebtedness must be that of the taxpayer (c.3 the indebtedness must be connected with the trade, business or profession of the taxpayer (d.3 the interest must have been paid or incurred during the taxable year (e.3 the interest must have been stipulated in writing (f.3 the deduction for interest expense shall be reduced by an amount eAual to >-O of the interest income subject to final tax (beginning Ean. 1, ,BBB3. Interest expenses that cannot be deducted from gross income! (1.3 Interest paid in advance by a taxpayer reporting income on cash basis provided! (a.3 Such interest may be allowed as deduction in the year the indebtedness is paid! and (b.3 If the indebtedness is payable in periodic amorti#ation -- the interest corresponding to the amorti#ed principal may be deducted during the taxable year. (,.3 If the indebtedness is incurred to finance petroleum exploration. (>.3 Interest on loans between related taxpayer! (a3 between members of a family - Irothers and sisters (whether by whole or by half blood3. - Spouse - *ncestors - +ineal descendants (b.3 between an individual and a corporation --- where more than ?B O in the value of outstanding capital stock is owned by such individual except in the case of distribution in liAuidation.
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TAX LAW REVIEWER

(c.3 between two corporations @ where more than ?BO of the 9 S of which is owned directly or indirectly by or for the same individual except distribution in liAuidation. (d.3 between the ;rantor and the fiduciary in Trust (e.3 between the fiduciary of a trust and a fiduciary of another trust if the same person is a grantor with respect to each trust. (f.3The interest should not be given to related taxpayers The taxpayer has the option of either treating the interest incurred to acAuired property used in trade, business or exercise of a profession as a! (a.3 as deductions or (b.3 as capital expenditures Ru!e: -- but the election of one excludes the other. 9ther deductible interest (a.3 interest paid on account of delinAuency in the payment of tax because a tax obligation is considered indebtedness to the government for purpose of income tax. 6xcept! fines and penalties
(b.3 Interest on scrip dividend given by a corporation to a S% in the form of a promissory note. --- It is deductible expense on the part of the corporation Except: Interest in preferred stock is not deductible because it is not interest expense incurred in indebtedness but actually a dividend on shares of stocks. (c3 In the case of banks and loan or trust companies, interest paid within the year on deposits or on savings received for investment and secured by interest-bearing certificates of indebtedness issued by such bank or company. C. Taxes The deduction is allowed to taxes proper only and not allowed in amounts representingC (a.3 surcharge (b.3 penalties (c.3 0ines incident to delinAuency Taxes that are deductible 4II+K*57 1. business taxes ,. import duties >. license taxes 8. documentary stamp taxes
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TAX LAW REVIEWER

?. any other taxes paid directly to the government, national or local, paid or accrued within the taxable year, in connection with taxpayer&s trade, business or profession. /. privilege taxes Taxes that are not deductible 40,6STIH67 1. 0oreign income tax, if claimed as tax credit Income tax imposed by a foreign country are deductible only if! (a.3 the taxpayer is Aualified to avail of tax creditC (b.3 %e does not signify in the return his desire to avail of the same as a tax credit. ;6<)N+6! Taxes allowed as deduction, when refundable or credited shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. The right to deduct income taxes paid to a foreign government is given only as an "alternative or substitute "to his right to claim a tax credit for such foreign income taxes. +imitation on deduction (a.3 non @ resident alien engaged in trade or business in the 5hils. (b.3 resident foreign corporation --- the deductions for taxes shall be allowed only if and to the extent that they are connected with income from "sources within' the 5hils. ,. 0inal Taxes >. 6state and donor&s taxes 8. Stock transaction tax on the sale, barter or exchange of sLs listed and traded through the local stock exchange. ?. Taxes assessed against local benefits tending to increase the value of the property (special assessment or levies3. /. Taxes which are not in connection with the trade, business or profession of Taxpayer. 2. Income tax imposed by the 5hilippine gov&t. -. Halue @ added Tax (H*T3 .. 6nergy Taxes
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TAX LAW REVIEWER

<ote! To be deductible, the taxes must be imposed by law and payable by the taxpayer. Thus, a value- added tax is not deductible by the customer upon whom the burden of the tax is shifted by the seller. %owever, the customer may consider the tax burden as part of his cost as an ordinary or capital expenditure if incurred in business or trade. D. Tax Credit --- refers to the taxpayer&s right to deduct from the income tax due, the amount of tax he has paid to foreign country. <9T6! Tax Credit Tax deduction -- deducted from -- deducted from 5hil income tax the gross income -- all taxes are -- only foreign allowed to be income taxes may deducted with the be claimed as exception of the credits taxes expressly excluded 5ersons entitled to tax credit 1. )esident iti#en of the 5hilippines ,. Komestic orp. except ;eneral 5rofessional 5artnership >. =embers of the ;55 8. Ieneficiaries of 6states and Trusts. 5ersons not entitled to Tax credit 1. <on )esident iti#en ,. *liens, whether residents or non @ residents >. 0oreign orporation, whether residents or non - residents onditions for allowance of tax credit! (a.3 The taxpayer must signify in his income tax return his desire to claim tax credit (b.3 The return must be accompanied by appropriate form prescribed by I) (c.3 The form must be carefully filed with all the informations reAuired. (d.3 *dditional information must be furnished (e.3 If the credit is sought for taxpayer already paid, the form must have attached to it the receipt for tax payment. +imitations on Tax redit (a.3 0or taxes paid to one foreign country- The amount of tax credit in respect of the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer&s net income from sources within such country taxable under the tax code bears to his entire taxable income for the same year.
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TAX LAW REVIEWER

8or$u!a! <et Income from 0oreign country x 5hil. Income Tax R +imit on the amount of credit. (b.3 0or taxes paid to two or more foreign countries. The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer&s net income from sources outside the 5hils. taxable under the tax code. 8or$u!a: <et Income from sources outside the 5hils x 5hil. Income Tax R +imit on the amount of credit. <et income from all sources E. Losses " implies an unintentional parting with something of value )eAuisites for Keductibility! (a.3 The loss must be that of the taxpayer. (b.3 There must be an actual loss suffered in a closed and completed transaction. --- "closed transaction "means that taxable year when the amount of loss was finally ascertained. (c.3 The loss must be connected with the taxpayer&s trade, business or profession. (d.3 The loss must not be compensated for by insurance or otherwise. (e.3 The loss must be liAuidated and charge @ off during the taxable year. -- The deduction shall be in full or not at all. (f.3 The loss must be reported to II) within 8? days from date of loss. (g.3 The loss must not be claimed as deduction for estate tax purposes in the estate tax return. lassifications of +osses! 13. 9rdinary +osses (a.3 +osses incurred in trade, business or profession. (b.3 +osses incurred of property connected with the trade, business or profession, if due to casualty or from robbery, theft or embe##lement. ,3. apital +osses (a.3 +osses from sale or exchange of capital assets. (b.3 +osses resulting from securities becoming worthless and which are capital assets.
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TAX LAW REVIEWER

* mere loss on account of the shrinkage in value of securities or shares of stock is not deductible. The loss to be deducted must be actually suffered when the stock is disposed. (c3 +osses from short sales of property. (d3 +osses due to failure to exercise privilege or options to buy or sell. >3. Special Dinds of +osses (a.3 +osses from wash sale of stock or securities +oss on wash sales not deductible whenC (1.3 * taxpayer who is not a dealer of stocks in trade has disposed shares and (,.3 $ithin the period of /B(sixty3 days beginning >B days before the date of such sale and ending >B days after such date. (>.3 The taxpayer has acAuired substantially identical stocks or securities. %owever, if losses from wash sales are claimed by a "dealer' in securities in the ordinary course of business, such losses are deductible. (b.3 +osses of the useful value of capital assets due to same change in business conditions. 6. g. $here a new law is passed directly or indirectly making the continued profitable use of the property impossible. (c.3 *bandonment losses in petroleum operations. <9T6! In case of petroleum operations which are abandoned in whole or in part, all accumulated exploration and development expenditures to a certain extent may be allowed as deduction. In case of producing well subseAuently abandoned, the amorti#ed cost therof as well as the undepreciated cost of eAuipment directly used therein shall be allowed as a deduction in the year of abandonment. (d.3 +osses due to voluntary removal of building, machinery, etc., If the demolition is incident to renewal and replacement R deductible If the demolition or removal of building is for the purpose of erecting a new one R not deductible expense. (e.3 $agering +osses (gambling3 $agering losses are deductible only to the extent of the gains from such wagering transaction. If there is no gain from the wagering transaction, the loss therefrom cannot be deducted from gross income.
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TAX LAW REVIEWER

$agering transactions - are those in which the outcome is uncertain or those that involve games of chance.
NET &PERATING L&SS CARRO ) &:ER IN&LC&J <9T6! Net &peratin+ Loss @ denotes the excess of allowable deductions over gross income. <et 9perating loss arry @ over (<9+ 93@ it means that the net operating loss for the taxable year immediately preceding the current taxable year shall be carried over as a deduction from gross income for the next three (>3 consecutive taxable yrs. immediately following the year of such loss in an amount not to exceed the taxable income during the year the loss was sustained. +imitations of availability of <9+ 9 (a.3 There must be no substantial change in ownership of the business or enterprise in that! 1. <ot less than 2?O in nominal value of the outstanding issued shares, if the business is on the name of the corporation, is held by or on behalf of the same personsC or ,. <ot less than 2?O of the paid up capital of the corporation, if the business is in the name of the corporation, is held by or on behalf of the same persons. (b.3 $here one business operation is income tax @ exempt and the other is not, the losses in the latter operations are not deductible from the profits in the taxable operation. (c.3 *ny net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed to be carried over to the next three years. <9+ 9 0or mines other than oil and gas wells. --- the net operating loss of mines incurred in the first 1B yrs. of operation shall be carried over to the next five (?3 yrs following the loss. 8. .ad De%ts Definitions 1. Iad debts are debts due to the taxpayer when actually ascertained to be worthless and charged-off within the taxable year. (Sec.>8 4617, <I) 3.
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TAX LAW REVIEWER

,. They refer to those debts resulting from the worthlessness or uncollectibility, in whole or in part, of amounts due to the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered. (Sec., 4a7, )ev. )egs. <o.?-..3 Re,uisites for deducti%i!it# of %ad de%ts 1. 2here must be a vali, an, subsistin3 ,ebt. * valid and subsisting debt is one the collection of which may be enforced in a court of law. * debt which had prescribed is no longer valid and subsisting. (. 2he same must be connecte, with the taxpayers tra,e, business or practice of profession. >. 2he same must not be sustaine, in a transaction entere, into between relate, parties enumerate, un,er #ec. "- (9& of the 8I C. The said section provides! In computing net income, no deduction shall in any case be allowed in respect of losses from sales or exchange of property directly or indirectly. i. ;etween mem/ers of a family. 0or the purpose of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole half-blood3, spouse, ancestors, and lineal descendantsC or ii. 6xcept in the case of distributions in liAuidation, /etween an individual and a &orporation more than fifty percent (?BO3 in value of the outstanding stock of which is owned, directly or indirectly, by or for such individualC or iii. 6xcept in the case of distributions in liAuidation, /etween two &orporations more than fifty percent (?BO3 in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual, if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding companyC iv. ;etween the grantor and a fidu&iary of any trustC or v. ;etween the fidu&iary of a trust and the fidu&iary of another trust if the same person is a grantor with respect to each trustC or vi. ;etween a fidu&iary of a trust and a /enefi&iary of su&h trust. 8. 2he same must be actually char3e,4off the booHs of accounts of the taxpayer as of the en, of the taxable yearC
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TAX LAW REVIEWER

* partial writing-off of a bad debt is not allowedC it must be charged-off in full or not at all (7ernan,e' Dermanos, Inc. vs. Commissioner, (* #C A %%(< Philippine efinin3 Co. vs. Court of appeals, $5 #CA: %.., (%- #C A --$&. %. 2he same must be actually ascertaine, to be worthless an, uncollectible as of the en, of the taxable year. In general, a de/t is not worthless simply /e&ause it is of dou/tful value or diffi&ult to &olle&t. $orthlessness is determined upon the exercise of a sound business judgment. The determination of worthlessness in a given case must depend upon the particular facts and circumstances of the case. The following, coupled with the creditor&s reasonable efforts to collect, may justify an ascertainment of the worthlessness of a debt. i. The flight or disappearance of the debtor ( onnel Iros. o. 45hil.7 vs. omm., T* ase <os. 811 and /1B, *pril ,B, 1.//3C ii. Insufficiency of collateral (par. 1, Sec. 1B,, )egs.C 5hil. Trust o. vs. oll., T* ase <o. >/2, Eanuary >B, 1./13C iii. Iankruptcy or insolvencyC iv. +oss of evidence of indebtedness ($estern 5acific orp. vs. oll., T* ase <o. 2,B3C v. Keath of debtor leaving no assetsC vi. Injury to debtor incapacitating him from work vii. *bsence of visible properties of the debtor (6sso Standard 6astern, Inc. vs. omm., T* ase <o. 1?>B, <ov. 11, 1./-3C and viii. 0ruitless efforts to collect small amounts from debtors scattered all over the country. (6l 5owenir )ubber 5roducts, Inc. vs. Hera, T* ases <os. 12B, and 12B?, Euly ,/, 1./..3 In the case of banks, in lieu of reAuisite <o. (?3, the Iangko Sentral ng 5ilipinas (IS53, thru its =onetary Ioard, shall ascertain the worthlessness and uncollectibility of the bad debts and it shall approve the writing off of the said indebtedness from the banks& books of accounts at the end of the taxable year. In no case may a receivable from an insurance or surety company be writtenoff from the taxpayers& books and claimed as bad debts deduction unless such company has been declared closed due to insolvency or for any such similar reason by the Insurance ommission. (Sec. >, )ev. )egs. <o. ?-..3 In order that bad debts may be deducted from gross income it must be "actually ascertained to be worthless and charge-off within the taxa/le year.> The law does not permit the charging off and the deduction of a bad debt in year
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other than in the year in which it is determined to be worthless. (5hil. Trust o. vs. ollector.3 $here under a foreclosure of a mortgage, the mortgagee buys the mortgaged property and credits the indebtedness with the purchase price, the difference between the purchase price and the indebtedness will not be allowed as a deduction for bad debts. The determination of loss is deferred until the disposal of the property. Securities %eco$in+ orth!ess If any securities which are capital assets, are ascertained to be worthless and charged-off within the taxable year, the loss resulting therefrom to the taxpayer (other than a bank or trust company incorporated under the laws of the 5hil.3 is not &onsidered as a /ad de/t /ut as a &apital loss. Losses fro$ theft or e$%e<<!e$ent The /ad de/t theory holds that since the embe##lement of funds creates a debtor-creditor relationshipC the loss is deductible as bad debt in the year when the right of recovery becomes worthless. Tax .enefit Ru!e The rule provides that the recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the Inco$e Tax .enefit of said deduction. (Sec. >8 46, 17 <I) 3 If a taxpayer reali#ed a reduction of income tax from him on account of his bad debt deduction, his subseAuent recovery thereof shall be treated as a receipt of rea!i<ed taxa%!e inco$e. If a taxpayer did not benefit from the deduction of the bad debt because it did not result to any reduction of his income tax in the year of such deduction (i.e. where the result of his business operation was a net loss even without dedu&tion of the /ad de/ts written?off)C then his subseAuent recovery shall be treated as a $ere reco(er# or a return of capita!. (Sec. 8, )ev. )egs. <o. ?-..3, hence not taxable. $here the bad debt expense was disallowed by the II) as a deduction, the subseAuent collection of the debt is not taxable.
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)ecoveries of bad debts previously deducted from gross income do not constitute taxable income unless the deduction in prior years resulted in a reduction of income tax liability. This has given rise to the Ee,uita%!e doctrine of tax %enefit.F
G. Depreciation Definition 1. Kepreciation is the gradual diminution in the useful value of tangi/le property used in trade or business resulting from exhaustion, wear and tear4 and normal o/soles&en&e. ,. The term is also applied to amorti#ation of value of intangi/le assets the use of which in trade or business is definitely limited in duration. (9asilan >states, Inc. vs. Comm., (! #C A !$&. Rationa!e The taxpayer is entitled to see that from earnings the value of the property invested is kept unimpaired4 so that at the end of any given term of years, the original investment remains as it was in the /eginning. *ccordingly, the law permits the taxpayer to recover gradually his capital investment in wasting assets free from tax. (9asilan >state, Inc. vs. Comm., supra&. The necessity for depreciation allowance arises from the fact that certain property used in business gradually approaches a point where its usefulness is exhausted. Persons Entit!ed to c!ai$ depreciation a!!o ance 1. Resident citi<ens and resident a!iens (Sec. >8 40, 17, <I) 3 a.3 In general i. * taxpayer who owns property and has a capital investment in the property may claim depreciation. ii. In the case of property held by one person for life with remainder to another person (e.g. usufruct or fideicommissary substitution3, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant.
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iii. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allowable to each. iv. If the remainder of the terms of lease is greater than the probable life of the building erected or of the improvements made by the lessee in pursuance of an agreement with the lessee, an annual deduction in the form of an allowance for depreciation may be made (Sec. 8., 28, regulations3. b.3 Kepreciation of properties used in petroleum operations The service contractor at his option may use the declining method or the straight-line method of depreciation. %owever, if the service contractor initially elects the declining balance method, it may, at any subseAuent date, shift to the straight-line method. The useful life of properties directly related to production of petroleum shall be ten #*6) years of such shorter life as may be permitted by the ommissioner of Internal )evenue 5roperties not used directly in production of petroleum shall be depreciated under the straight line method on the basis of an estimated useful life of five #3) years (Sec. >8 40, 87, <I) 3. c.3 Kepreciation of properties used in mining operations i. It shall be computed at the normal rate of depreciation if the expected life is ten #*6) years or lessC or ii. Kepreciated over any number of years between five (?3 years and the expected life is more than ten #*6) years (Sec. >8 40, ?7, <I) 3. 1. Non"resident a!iens en+a+ed in trade or %usiness and resident forei+n corporations * reasonable allowance for the deterioration of property arising out of its use or employment or its non-use in the business, trade or profession conducted by them in the 5hils. shall be permitted only when su&h property is lo&ated within the Phils. (Sec. >8 40, /7, <I) 3. Re,uisites for deducti%i!it# 1. 2he allowance for ,epreciation must be reasonable (Iacolod-=urcia =illing o. Inc. vs. omm., T* ase <o. 18B,, 9ct. >1, 1./.3.
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,. It must be for property arisin3 out of its use or employment in the business or tra,e, or out of its not bein3 use, temporarily ,urin3 the year ( onnel Iros. o. vs. ollector, T* ases <o. 811 X /1B, *pril >B, 1.//3. >. It must be char3e,4off ,urin3 the taxable year< The deduction must be made in the year in which the wear X tear occurs. Kepreciation may not be accumulated. .. A statement on the allowance must be attache, to the return. %. 2he property must have a limite, useful life. The following property may not be depreciated! ,. Inventories or stock in tradeC >. +and, apart from improvements or physical development added to itC 8. Iodies of minerals which through the process of removal suffer depletion ?. *utomobiles or other transportation eAuipment used solely by the taxpayer for pleasureC /. Iuilding used solely by the taxpayer as his residenceC 2. 0urniture or furnishing used in the said buildingC -. 5ersonal effects or clothing except properties or costumes used exclusively in a business such as theatrical business .. Intangibles, the use of which in business or trade is not of limited durationC and 1B.Incidental repairs which neither materially add to the value of property nor prolong the life, but keep it in an ordinary efficient operating condition. Li$itation of Deduction The law allows a deduction from gross income of depreciation but limits the recovery to the capital invested in the assets being appreciated. It does not authori#e depreciation of assets beyond its acAuisition cost. )eason! Keductions are mere privileges. =oreover, it will transgress the underlying purpose of depreciation allowance. 9ethods of co$putin+ depreciation a!!o ance Some of the common methods are! 1.3 #trai3ht4line metho,N 7ixe, Percenta3e /etho, - This method spreads the total depreciation over the useful life of the asset and generally results in an eAual depreciation per unit of time regardless of the use to which the properties are put. ,.3 :eclinin3 9alance /etho, - This method uses a rate (usually 1.? or , times the straight-line rate3 to the declining book value of the asset. Kepreciation is largest in amount the first year and declines in the years thereafter.
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>.3 EorHin34Dours /etho, @The total working hours of the machine until its retirement is estimated and a charge per hour is determined using the following formulas! 8.3 =nit of pro,uction metho, @ This is similar to the working-hours method with the difference that the estimated service life is stated in units of products instead of working hours. ?.3 2he sum of the Cears M :i3its /etho, @ This method reAuires the application of a changing fraction to the cost basis of the property, reduced by the estimated residual salvage value. A+ree$ent as to usefu! !ife on hich depreciation rate is %ased The taxpayer and the ommissioner of Internal )evenue may enter into agreement in writing specifically dealing with the useful life and rate depreciation of any property. I In case of modification in the agreed rate and useful life of depreciation, the taxpayer must notify the ommissioner in writing.
L. Dep!etion Definitions 1. Kepletion is the exhaustion of natural resources like mines and oil or gas wells as a result of production or severance from such mines or wells. ,. It also refers to the periodic allocation of the cost of a wasting asset over the period the natural resources is extracted or produced. @asting assets refer to natural resources, which are physically consumed and once consumed, are irreplaceable. 6xamples include coal, oil, ore, precious metals like gold and silver, and timber. Rationa!e *s the product of the mine is sold, a gradual sale is being made of the taxpayer&s capital interest in the property. Kepletion allowance enables the taxpayer to recover that capital interest free of income tax. $hen the allowance shall eAual the capital invested, no further allowance shall be granted.
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Persona! entit!ed to c!ai$ dep!etion a!!o ance *nnual depletion deduction are allowed only to mining entities which own an economic interest in mineral deposit or those which have capital investment in the mineral deposit. (Sec. >, )ev. )egulation <o. ?-2/3. In the case of a resident foreign corporation or an alien individual engaged in trade or business in the 5hils. allowance for depreciation of oil and gas wells or mines shall be authori#ed only in respect to oil and gas wells or mines located within the 5hils. (Sec. >8 4;, >7, <I) 3.
I. Charita%!e and other Contri%utions Cinds of contri%utions a!!o ed as deduction: 1. 9rdinary or contributions with limit or subject to limitation ,. Special or contributions deductible in full Re,uisites for deducti%i!it# !.& 2he contribution must actually be pai, or ma,e to the Phil. Government or any of its a3encies or political sub,ivision or to any ,omestic corporations or associations specifie, by the 2ax Co,e or other entities as allowe, by the 2ax Co,e an, existin3 special laws. (.& It must be ma,e within the taxable year< ".& It must not excee, *6A of the individualBs taxable income an, 3A of the &orporationBs taxable income /efore ,e,uctin3 the contribution (applicable only to contributions with limit&< an, ..& It must be evi,ence, by a,eAuate recor,s or receipts (#ec. ". JDK, 8I C&. Contri%utions ith !i$it The following are subject to limit (?OY1BO limit3! 1.3 Konations to the 5hilippine government or any of its agencies or any political subdivision thereof ex&lusively for pu/li& purposesC ,.3 Konations to a&&redited domestic corporations or associations organi#ed and operated exc!usi(e!# for! a.3 )eligionsC b.3 haritableC c.3 ScientificC d.3 Wouth and sports developmentC e.3 ulturalC or
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f.3 6ducational purposesC or for the g.3 )ehabilitations of veteransC and >.3 Konations to social welfare institutions or to non-government organi#ations in accordance with rules and regulations promulgated by the Secretary of 0inance, provided no part of the net in&ome of whi&h inures to the /enefit of any private sto&8holders or individual. (Sec. >8 4%,17, <I) 3. Contri%utions deducti%!e in fu!! under the Tax Code: 1.3 Konations to the government of the 5hilippines or to any of its agencies or political subdivisions including fully-owned government corporations ex&lusively to finance, to provide for, or to be used in undertaking priority activities in! a.3 6ducationC b.3 %ealthC c.3 Wouth and sports developmentC d.3 %uman settlementsC e.3 Science and cultureC and f.3 6conomic development $&&ording to the national priority plan determined /y NE"$ provided, that donations not in accordance with the said annual priority plan shall be with limitC ,.3 Konations to foreign institutions or international organi#ations in pursuance or compliance with agreements, treaties, or commitments entered into by the government of the and the foreign laws or international organi#ations or in pursuance of special laws, and >.3 Konations to certain accredited non-government organi#ation (see Sec. >8, 4%, ,73. Bnder P.D. No. 4D>! ontributions, donations, gifts and beAuests to social welfare, cultural and charitable Institutions, no part of the net in&ome of whi&h inures to the /enefit of any individual, are dedu&ti/le in full in computing the donor&s taxable income and are also exempt from donor&s and estate tax. :a!uation of Contri%utions The amount of any charitable contribution of property other than money shall be based on the a&5uisition &ost of said property.
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7. Research and De(e!op$ent * taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable year in &onne&tion with his trade4 /usiness or profession as ordinary and necessary expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as deduction during the taxa/le year when paid or in&urred. (Sec. >8, 4I, 17, <I) 3. T o a#s of treatin+ Research and De(e!op$ent Cost 1.3 *s an outright expense, in which case it may be deducted during the taxable year when paid or incurredC or (Sec.>8, 4I, 17, <I) 3. ,.3 *s a deferred expense, in which case it is to be amorti#ed over a period of not less than C6 months. (Sec >8, 4I, ,7, <I) 3. The following research and development expenditures at the option of the taxpayer may be treated as deferred expenses! 1.3 paid or incurred by the taxpayer in connection with his trade, business or professionC ,.3 not treated as expensesC >.3 the expenditure must not be chargeable to capital account
Li$itations on Deductions The following are not deductible as research and development costs! 1.3 *ny expenditures for the acAuisition or improvement of land, or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletionC and ,.3 *ny expenditures paid or incurred for the purpose of ascertaining the existence, location, extent, or Auality of any deposit of ore or other mineral, including oil or gas. (exploration expenditures subject to depletion3 4Sec. >8, 4I, >7, <I) 7.
C. Pension Trusts Re,uisites for deducti%i!it# of pa#$ents to pension trust Iunder Sec. 23, @7A, NIRCJ 1.3 2he employer must have establishe, a pension or retirement plan to provi,e for the payment of reasonable pensions to its employeesC ,.3 2he pension plan is reasonable an, actuarially soun, (Sec. 11-, )egs.3C
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".& It must be fun,e, by the employer< i.e., the employer contributes cash to the plan< ..& 2he amount contribute, must no lon3er be subBect to its control or ,isposition< an, %.& 2he payment has not therefore been allowe, as a ,e,uction. A!!o a%!e deductions in re!ation to pension trusts 1.3 ontributions to such trusts during the taxable year to cover the pension liability accruing during the year. These are considered as ordinary and necessary /usiness expenses allowed as a deduction under Sec. >8, 4*, 17, of the <I) . ,.3 * reasonable amount transferred or paid into such trust during the taxable year in ex&ess of the &ontri/utions but only if such amount! a.3 has not therefore been allowed as a deductionC and b.3 is apportioned in eAual parts over a period of ten (1B3 consecutive years beginning with the year in which the transfer or payment is made these are those referred to as payments to the pensions trust deductible pursuant to Section >8 (E3 of the <I) .
L. &ptiona! Standard Deduction 6lements of 9ptional Standard Keduction! 1.3 It is in lieu of itemi#ed deductions allowed under Section >8 (* to E3, <I) . ,.3 It is available only to individual taxpayers other than one with pure compensation income and a nonresident alien, >.3 The amount deductible should not ex&eed *6A of the taxpayerBs gross in&ome. ,.3 The taxpayer must signify in his return his intention to avail of the 9SK, otherwise he shall be considered as having availed himself of the itemi#ed deductions. >.3 9nce elected, it is irrevocable for the taxable year for which the return is made 8.3 The taxpayer need not submit with his return, financial statements, however, he must keep such records pertaining to his gross income during the taxable year.
9. Pre$iu$ Pa#$ents The premiums payments or health andL or hospitali#ation insurance of an individual taxpayer including his family are deductible regardless of whether the taxpayer is engaged in trade4 /usiness4 or profession4 or deriving &ompensation in&ome out of an employer?employee relationship.
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TAX LAW REVIEWER

*n individual taxpayer who elects the 9SK may still deduct the premium payments when applicable. Re,uisites for a!!o ance as deduction !.& 2he amount of premiums that may be ,e,ucte, shall not excee, P(,.55 per family or P(55 a month ,urin3 the taxable year< (.& 2he health an,N or hospitali'ation insurance is taHen by the taxpayer for himself or for any member or members of his family< ".& 2he family of the taxpayer has a 3ross income of not more than P(%5,555 for the taxable year< an, ..& In case the taxpayer is marrie,, only the spouse claimin3 the a,,itional exemption for ,epen,ents shall be entitle, to the ,e,uction. :II. Specia! Deductions The <I) provides special rules for deductible from gross income for the following! 1.3 Insurance companiesC ,.3 =utual Insurance companiesC >.3 =utual marine insurance companiesC 8.3 *ssessment insurance companiesC ?.3 6states and trustsC and /.3 5rivate educational institutions Insurance companies $hether domestic or foreign, doing business in the 5hils., they are allowed to deduct, in addition to the itemi#ed deductions under Section >8 of the Tax ode, the following! 1.3 <et additions, if any, reAuired by law to be made within the year to reserve funds, and ,.3 Sums other than dividends paid within the year on policy and annuity contracts. The released reserve shall be treated as income for the year of release. (Sec. >2, 4*7, <I) , Sec. 1,/, )egs.3 =utual insurance companies These companies (other than mutual life X mutual marine3 are allowed to deduct from gross income the following! 1.3 *ny portion of the premium deposits returned to the policy holders
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TAX LAW REVIEWER

,.3 Such portion of the premium deposits as are retained for the payment of losses, expenses and reinsurance reserves. (Sec. >2, I, <I) C Sec. 1,2, )egs.3 =utual marine insurance companies They are entitled to deduct from gross income the following! 1.3 *mounts repaid to policy holders on account of premium previously paid by themC and ,.3 Interest paid upon those amounts between the ascertainment date and the date of its payment. (Sec. >2, 4 7, <I) , Sec. 1,-, )egs.3 *ssessment insurance companies $hether domestic or foreign, they may deduct in a taxable year the sum actually deposited with the officers of the govt. of the 5hils., pursuant to law as additions to guarantee or reserve funds. (Sec. >2 4K7, <I) 3. :III. Ite$s not Deducti%!e In computing taxable net income, the following are not deductible! 1.3 5ersonal living or family expensesC These are not deductible from compensation and businessLprofessional income under Section ,8, (*3, <I) . ,.3 *ny amounts paid for new buildings or for permanent improvements, or betterments made to increase the value of any property or estateC <o., does not apply to intangible drilling and development cost incurred in petroleum operations which are deductible under Sec.>8 (;,13 of the <I) .(Kepletion3 E2CEPT: 5roprietary 6ducational Institutions for the capital expenditures for school expansion purposes. >.3 *ny amount expended in restoring property or in making good the exhaustion thereof for which as allowance is or has been madeC Items in nos. , and > are capita! expenditures or those expenditures that result in obtaining benefits of a permanent nature such as lands, buildings and machineries 8.3 5remiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policyC and * person is said to be finan&ially interested in the taxpayer&s business, if he is a stockholders thereof or he is to receive as his compensation a share of the property of the business.
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TAX LAW REVIEWER

?.3 +osses from sales or exchange of property between related taxpayers (Sec. >/, <I) 3. Inco$e Tax Treat$ent on the Sa!e or Exchan+e of Propert# Cate+ories of Sa!e or Exchan+e Transactions =.J SALE &R EKCLANGE &8 &RDINARO ASSETS Kefinitions a.3 Or,inary Assets ) refer to properties held by the taxpayer in the pursuit of his profession, trade or business, they are! i. Stock in TradeC ii. 5roperty of a kind which would properly be included in the inventory if on hand at the close of the taxable yearC iii. 5roperty held by the taxpayer primarily for sale to customers in the ordinary course of trade or businessC iv. 5roperty used in trade or business which is subject to the allowance for depreciationC and v. )eal property used in trade or business. (Sec. >., 4*7, <I) 3 b.3 Or,inary income (or,inary 3ain& ) includes any gain from the sale or exchange of property which is not a capital asset (Sec. ,,, 4J7, <I) 3 c.3 Or,inary +oss ) includes any loss from the sale or exchange of property which is not a capital asset. (Sec. ,,, 4J7, <I) 3 Income Tax Treatment on the Sale or 6xchange of 9rdinary *ssets The general rule in income taxation apply both as to the gain and as to the loss, any gain shall be reported as ordinary income and any loss may be allowed as a deduction in gross income. 6xemplification of )ules 1.3 If an individual taxpayer is engaged in real estate business or is a real estate dealer, the gains he may derive from the said activity will be considered as ordinary income and the losses he may incur is deductible from his gross income. The /O tax imposed on the sale of real property which is a capital asset is inapplicable to him. ,.3 If a ,omestic corporation is engaged in real estate business, the gains it may derive from said activity is considered as ordinary income and any loss incurred is considered as an ordinary loss. The loss is deductible from the corporation&s
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TAX LAW REVIEWER

ordinary income and from its income from any other source whether or,inary or capital. &rdinar# !osses (whether the taxpayer is an individual or a corporation3 are deductible either from ordinary gains or capital gains. 1.J SALE &R EKCLANGE &8 CAPITAL ASSETS Kefinitions a.3 Capital Asset means property held by the taxpayer (whether or not connected with his trade or business3 but does not include! i. Stock in tradeC ii. 5roperty of a kind which would properly be included in the inventory if on hand at the close of the taxable yearC iii. 5roperty held by the taxpayer primarily for sale to customers in the ordinary course of trade or businessC iv. 5roperty used in trade or business which in subject to the allowance for depreciationC and v. )eal property used in trade or business. (Sec. >., 4*7, <I) 3 This is an enumeration by exclusion, all others not enumerated are capital assets. b.3 Capital 3ain is the gain from the sale or exchange of capital assets. c.3 Capital loss is the loss incurred from the sale or exchange of capital assets. d.3 8et Capital 3ain is the excess of the gains from sales or exchange of capital assets over the losses from such sales or exchanges (Sec. >., 4*, ,7, <I) 3. e.3 8et capital +oss is the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges. (Sec. >., 4*, >7, <I) 3. f.3 8et Capital +oss Carry Over INCLC&J means that! i. If any taxpayer, other than a corporation, sustains in any taxable year a net capital lossC ii. Such net capital loss cannot be deducted from ordinary income due to the loss limitation rule< iii. Such loss could be carried over to the next taxable year (not thereafter3 as a deduction against net capital gain in an amount not in excess of the taxable income (i.e. net income before exemptions3 in the year the loss was sustaine,C and iv. Such loss shall be treated as a loss from the sale or exchange of capital assets held for not more than twelve (!(& months. (Sec. >., 4K7, <I) 3
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g.3 Dol,in3 perio, refers to the percentages of the gain or loss taken into account in computing the net capital gain net capital loss and net income. The percentages are! =DDQ - if the capital asset has been held for not more than twelve #*') months (short4term&N and 4DQ " if the capital asset has been held for more than twelve #*') months #long? term) The holding period of capital assets is only applicable to individual taxpayer and not to corporations. h.3 0oss 0imitation !ule provides that Capital losses are deductible only to the extent of capital 3ains.
Specific 6xamples of 5roperties classified as capital assets Capita! assets include personal property (not use, in tra,e or business3 such as movables in one&s residence, personal vehicles, appliances and furniture for personal use, jewelries etc. as well as real property ( not use, in tra,e or business3 such as residential land, idle land not used in business operations and residential house. Tax Treatment of apital gains and apital losses a.3 *s to Individual Taxpayers 13 9n personal property classified as capital asset (other than shares of stock3 The following are the applicable rules! a. The percentages of gain or loss to be taken into account shall be a.13 !55P if the capital asset has been held for !( months or lessC and a.,3 %5P if the capital asset has been held for more than !( months (hol,in3 perio, rule& b. apital losses shall be deducted only to the extent of the capital gains (loss limitation rule& c. 8et Capital +oss Carry Over ule is applicable. ,3 9n real property classified as capital assets The following are the applicable rulesC a. * final capital gains tax is imposed on individuals inclu,in3 estates an, trusts computed as follows! tax base! gross selling price or fair market value, whichever is higher tax rate! /O b. The tax is imposed on capital gains presumed to have been reali#ed from the sale, exchange or disposition of real property located in the
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5hils. classified as capital assets inclu,in3 pacto ,e retro sales an, other forms of con,itional sales (such as mortgage foreclosure sale3 c. The tax shall be in lieu of the income tax imposed on individuals under graduated rates in Sec. ,8, 4*7. apital gains from sale of real property shall not be included in the gross income of the individual taxpayer. d. There are two situations wherein the /O final tax rate may not be applied, to wit! *. If the real property classified as capital asset is sold to the government or any of its political subdivisions or to gov&t. owned or controlled corporations, the /O final tax rate or the graduated income tax rates may be used on the actual gain of the taxpayer, at the option of the taxpayerN and I. If the principal residence of the individual taxpayer is sold and the proceeds of the sale is used to acAuire or construct a new residence within !) months from the date of the sale, the sale is exempt from income tax provided! I.13 That the ommissioner is notified by the taxpayer within thirty ("5& ,ays from the date of the sale or disposition through a prescribed return of his intention to avail of tax exemptionC I.,3 The tax exemption can only be availed of once every ten (!5& yearsC and I.>3 If there is no full utili#ation of the proceeds of the sale or disposition, the portion of the gain presumed to have been reali#ed from the sale or disposition shall be subject to capital gains tax. e. The sale of rights over realty, although classified as real property under the ivil ode, is not subject to capital gains tax because the situs of these rights follow their owner who may not be located in the 5hils. 9nly real property located in the 5hils. is subject to capital gains tax. (Sec. ,8 4b, 17, <I) C II) )uling <o. B->-.., Eune ,,, 1...3. >3 &n shares of sto&8 not held /y dealers in se&urities The following are the applicable rules! a. * final capital gains tax is imposed on capital gain from sale of shares of stock, computed as follows! 1. 9n non-listed stocks or on sales of shares (listed or unlisted with stock exchanges3! not effected through the stock exchanges! %P on net capital gains not over P!55, 555 !5P on net capital 3ains in excess of P!55, 555 (Sec. ,8, 4 7, ,? 4I7, ,2 4K, ,7, ,- 4*, 2, 7, 4I, ?, 73
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,. 0or sale of shares listed and traded in the stock exchange the same shall be exempt from income tax but it shall be subject to a Stock Transfer Tax of Z of 1O of the ;ross Selling 5rice. b. The final capital gains tax is in lieu of the ordinary income tax on individuals, corporations and other taxpayers (estates X trusts3. c. The net capital gains on stock transactions shall not be included in the gross income of the seller or transferor in computing his income tax liability. d. It is a final tax, which shall in no case, be allowed as a deduction against income or credited against income tax or any other tax e. *lso subject to a stock transfer tax at a different rate are shares of stock sold or exchanged through initial public offering. b.3 *s to orporations The following rules apply whether the capital asset is personal or real property! b.13 apital gains and losses are recogni#ed to the extent of 1BBO regardless of the holding period (holding period is not applicable3C b.,3 b.>3 The net capital loss carry-over is not applicableC apital losses are deductible only to the extent of capital gainsC and
b.839rdinary losses are deductible from capital gains but net capital loss cannot be deducted from ordinary gain or income.
1. 9n persona! propert# classified as capital asset (other than shares of stock37 - 9nly the +oss +imitation )ule applies. ,. 9n rea! propert# classified as capital assets - The following are the additional rules applicable! i. * final tax of six percent (/O3 is imposed on the gain based on the gross selling price or fair market value, whichever is higher, of such lands andLor buildings. (Sec. ,2, 4*, ?7, <I) 3 ii. The tax shall be in lieu of the income tax imposed on corporations under the graduated rates in Sec. ,2 (*3 of the Tax ode.
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TAX LAW REVIEWER

>. 9n shares of stoc- not he!d %# dea!ers in securities - The rules applicable to individual taxpayer are also applicable. )eAuisites for recognition of capital gain or loss They are! 1.3 The transaction must involve property classified as capital assetC and 1.3 The transaction must arise from sale or exchange. +imitation on apital losses General ule! apital losses are allowed only to the extent of capital gains. >xception! *ny loss sustained by a domestic bank or trust company from the sale of bonds, debentures, notes or certificates or other evidences of indebtedness issued by any corporation including those issued by the government is considered as an ordinary loss and dedu&ti/le from ordinary in&ome. eason! Ianks and trust companies are considered as dealers in se&urities, hence, these securities are considered as property primarily held for sale to &ustomers in the ordinary &ourse of /usiness. 9ther apital *sset Transactions The following are considered as sales or exchanges of capital assets! 1. Retire$ent of %onds ith interest coupons or in re+istered for$ *mounts received by the holder upon the retirement of bonds, debentures, notes or certificates or other services of indebtedness issued by any corporation (including those issued by a gov&t. or political subdivision thereof3 with the interest coupons or in registered forms, shall be considered as amounts receive, in exchan3e thereof. (Sec. >., 467, <I) 3 ,. Short sa!es of propert# * short sale takes place when a seller first make a sale of stock or security which he does not own (he merely borrows the stock certificate through or from his stock broker3 and subseAuently buys or covers the stock to complete the transaction. The seller sells the shares short in the expectation of a decrease in value thereof within a reasonably short period of time. %e covers his short sale when the expected decrease in the value materiali#es or when the time for the return of the borrowed shares comes. ,.3 8ai!ure to exercise pri(i!e+e or option to %u# or se!! propert# ;ains or losses attributable to the failure to exercise privileges or options to buy and sell property shall be considered as capital gains or losses, such as the
1.
TAX LAW REVIEWER

option given to a taxpayer to buy an agricultural land is a &apital asset and the gain or the loss that may be incurred by him from the disposition of said option is either a &apital gain or a &apital loss. >.3 Securities %eco$in+ orth!ess If any securities which are capital assets are ascertained to be worthless and written off during the taxable year, the loss resulting therefrom in the case of a taxpayer other than a bank or a trust company incorporated under the laws of the 5hils. a substantial part of whose business is the receipt of deposits, is considered a capital loss. 8.3 Distri%ution in !i,uidation If, in liAuidation or dissolution, the corporation acAuires its own stock and exchanges its assets (land3 for the shares, the shareholders who surrendered their shares for land shall likewise be subject to the capital gains tax prescribed under Section ,8 ( 3 of the Tax ode. ;ains or losses from liAuidating dividends are considered as capital gains or losses inasmuch as liAuidating dividends are considered as full payment from the corporation in exchange for stocks held by the stockholders. ?.3 Read'ust$ent of interest in a +enera! professiona! partnership $hen a partner retires from a general professional partnership or the partnership is dissolved, he reali#es a gain or loss measured by the difference between the price he received for his interest and cost to him of his interest in the partnership. 2.J SALES &R EKCLANGES RESBLTING IN NON?!ECO1N T ON O. 1$ NS O! 0OSSES a.3 Exchan+e solely in 8ind Iexchange of property solely for stocHs3 in legitimate mergers or consolidations. =J * corporation which is a party to a merger or consolidation ex&hanges property solely for sto&8 in a corporation which is a party to the merger or consolidationC 1J * corporation which is a party to a merger or consolidation receives in ex&hange for property not only sto&8 of another &orporation /ut also money and-or other property and distri/utes it in pursuan&e of the plan of merger or &onsolidation . @Section 3DIcJI2JI5JIiJA 2J * shareholder ex&hanges sto&8 in a corporation which is a party to the merger or consolidation solely for the sto&8 of another corporation, also a party to the merger or consolidation.
1*
TAX LAW REVIEWER

3J * security holder of a corporation which is a party to the merger or consolidation ex&hanges his se&urities in such corporation solely for sto&8 or se&urities in another corporation, a party to the merger or consolidation. b.3 Transfer or exchange of property for stock resulting in a&5uisition of &orporate &ontrol * person exchanges his property for stock or unit of participation in a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation EControlF means ownership of stocks in a corporation possessing at least ?1O of the total voting power of all classes of stock entitled to vote. The items enumerated above are also called Etax?exempt ex&hanges.F 8,J TRANSACTI&NS RESBLTING !ECO1N T ON O. 0OSSES IN T$2$;0E 1$ NS ;=T NON?
a.3 Transactions between related taxpayers (Sec, >/, <I) 3 b.3 Illegal transactions c.3 $ash sales (except those made by dealers in securities3 @ash sale is a sale of securities where substantially identical securities are acAuired or purchased within a /1-day period beginning >B days before the sale and ending >B days after the sale. (Sec. >-, 4*7, <I) 3. )eAuisites for non-deductibility! 13 The sale or other disposition of stocks or securities resulted in a lossC ,3 There was an acAuisition, or contract or option for acAuisition of stock or securities within thirty (>B3 days before the sale or thirty (>B3 days after the saleC and >3 The stock or securities sold where substantially the same as those acAuired within the /1-day period. The word Ea&5uired' means acAuired by purchase or by an exchange, and comprehends cases where the taxpayer has entered into a contract or option within the sixty-one-day period to acAuire by a purchase or by such an exchange (Sec. 1>1, 4f7, )egs.3 ESu/stantially identi&al' means that the stock must be of the same class, or in the case of bonds, the terms thereof must be the same.
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TAX LAW REVIEWER

The following are not substantially identical! i. ii. iii. iv. The common stock and the preferred stock of the same corporationC * non-voting stock and a stock with voting powerC The stock of the corporation and the stock of another corporationC and Two series of bonds where one is secured by a mortgage and the other is notC or which differ as to interest rates.
d.3 6xchanges not solely in 8ind in mergers and consolidations =J If in connection with an exchange described earlier resulting in nonrecognition of gains or losses, an individual, a shareholder, a security holder or a corporation receives not only stock or securities permitted to be received without the recognition of gain or loss, /ut also money and-or property , the gain, if an#, /ut not the loss, shall /e re&ogniDed but in an amount not in excess of the sum of the money and the fair market value of such other property received. 5rovided, that as to the shareholder, if the money andLor property received has the effect of a distri/ution of a taxa/le dividend, there shall be taxed as dividend to the shareholder an amount of the gain recogni#ed not in excess of his proportionate share of the undistributed earnings and profits of the corporation, the remainder if any, of the gain recogni#ed shall be treated as a capital gain. (Sec. 8B, 4>, a73 1J If a corporation which is a party to the merger or consolidation receives not only stock permitted to be received without the recognition of gain or loss, but also money an,Nor property, an, ,oes not ,istribute it in pursuan&e of the plan of merger or &onsolidation, the gain, if any, shall be recogni#ed in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not distributed. ISec. 3D, C,@2, %AJ 2J If a taxpayer receives stock or securities which would be permitted to be received without the recognition of the gain if it were the sole consideration, and as part of consideration, another party to the exchange assumes a liability of the taxpayer, or acAuires from the taxpayer property subject to a liability, then such assumption or acAuisition shall not /e treated as money and-or other property4 and4 therefore any gain or loss would still not /e re&ogniDed if no money andLor property was involved in the exchange. 3J If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject, exceed the total of the adjusted basis of the property transferred pursuant to such exchange, then such shall be consi,ere, as a 3ain from the sale or exchange of a capital asset or of property, which is not a capital asset, as the case may be. (Sec. 8B, 4 , 87, <I) 3
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TAX LAW REVIEWER

e.J Sa!es or exchan+es hich are not at ar$s !en+th Deter$ination of Gain or Loss omputation of ;ain or +oss The gain from the sale or other disposition of property shall be the excess of the amount reali#ed over the basis or adjusted basis for determining gain. The loss shall be the excess of the basis or adjusted basis for determining loss over the amount reali#ed. The amount realiDed from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money3 received.
Iasis of 5roperty In case the property was acAuired /efore =arch 1, 1.1>! fair market value as of said date In case the property was acAuired on or after =arch 1, 1.1>! a.3 Iy purchase @ the cost b.3 Iy gratuitous title @ b.13 Inheritance @ the fair market price or value at the date of acAuisition b.,3 ;ift @ the same as it would be in the hands of the donor or the last preceding owner by whom it was not acAuired by gift c.3 0or less than an adeAuate consideration in money or money&s worth! amount paid by the transferee for the property d.3 In a transaction where gain or loss is not recogni#ed in pursuance of a plan of merger or consolidation! the basis of the stock or securities received by the transferor @ same as the basis of the property, stock or securities exchanged decreased by! 13 the money received and ,3 fair market value of the other property received increased by! 13 the amount treated as dividend of the shareholder and ,3 the amount of any gain recogni#ed on the exchange e.3 If as a part of the consideration, the transferee assumes liability of the transferor or acAuires from the latter property subject to a liability such assumption or acAuisition shall be treated as money received by the transferor. f.3 0or the "boot' received! its fair market value. (Sec. 8B, 4 , ?73 Sources of Inco$e Sources of Inco$e in Genera!
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TAX LAW REVIEWER

The source of an income is the property, activity or services that produce the income. (Commissioner vs. 9ritish Overseas Airways Corp., !.* #C A "*%3 The term "source' is not a place but an activity or property and as such, it has a situs or location. The ascertainment of the sources of income becomes important when it is considered that not all taxpayers, whether natural or juridical, pay income taxes on all their income. 13 )esident citi#ens of the 5hils. @ taxa%!e upon inco$e deri(ed fro$ all sour&es Ifro$ sources ithin and ithout the Phi!s.J ,3 Komestic corporations @ taxa%!e inco$e deri(ed fro$ all sour&es Ifro$ sources ithin and ithout the Phi!s.J >3 <onresident citi#ens of the 5hils. @ taxa%!e upon inco$e deri(ed fro$ Phil. sour&es only Ion!# fro$ sources ithin the Phi!s.J 83 )esident aliens @ taxa%!e upon inco$e deri(ed fro$ Phil. sour&es only Ion!# fro$ sources ithin the Phi!s.J ?3 <on-resident aliens a.3 6ngaged in trade or business in the 5hils. @ taxa%!e upon inco$e deri(ed fro$ Phi!. sources on!# Ion!# fro$ sources ithin the Phi!s.J b.3 <ot engaged in trade or business in the 5hils. @ taxa%!e upon inco$e deri(ed from Phil. sour&es only Ion!# fro$ sources ithin the Phi!s.J /3 0oreign a.3 )esident (engaged in trade or business in the 5hils.3 @ taxa%!e upon inco$e deri(ed fro$ Phil. sour&es only Ion!# fro$ sources ithin the Phi!s.J b.3 <on-resident (not engaged in trade or business in the 5hils.3 @ taxa%!e upon inco$e deri(ed fro$ Phil. sour&es only Ion!# fro$ sources ithin the Phi!s.J C!assification of inco$e as to source 13 Income which is derived in full from source within the 5hils. ,3 Income which is derived in full from source outside the 5hils. >3 Income which is derived partly from sources within and partly from sources outside the 5hils. (Sec. 8,, <I) 3
+))
TAX LAW REVIEWER

Gross inco$e fro$ sources ithin the Phi!s. 13 Interests! a.3 Interests derived from sources within the 5hils. b.3 Interests on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise. (Sec. 8,, 4*, 17, <I) 3 ,3 Kividends! a.3 0rom a domestic corporation, and b.3 0rom a foreign corporation ?BO or more of the gross income of which for the >-year period ending with the close of the taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence3 was derived from sources within the 5hilippines. (Sec. 8,, 4*, ,7, <I) 3 It must be only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the 5hilippines bears to its gross income from all sources. >3 ompensation for labor or personal services performed in the 5hils. (Sec. 8,, 4*, >7, <I) 3
83 )entals and )oyalties from property locate, in the Phils. or from any interest in such property, including rentals or royalties for @ a.3 The use of, or the right or privilege to use in the Phils. any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or nightC b.3 The use of, or the right to use in the Phils. any industrial, commercial or scientific eAuipmentC c.3 The supply of scientific, technical, industrial or commercial knowledge or informationC d.3 The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a3, any such eAuipment as is mentioned in paragraph (b3 or any such knowledge or information as is mentioned in paragraph (c3C e.3 The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident personC f.3 Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or schemeC and g.3 The use of, or the right to use! 1. =otion picture filmsC
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TAX LAW REVIEWER

,. films or video tapes for use in connection with televisionC and >. tapes for use in connection with radio broadcasting ?3 ;ains, profits, and income from the sale of real property lo&ated in the Phils. and /3 ;ains, profits, and income from sale of personal property, treated as derived entirely from the &ountry where it is sold. Ex&eption to the rule! gain from the sale of shares of stock in a domestic corporation which is treated as derived entirely from sources within the 5hils. regardless of where the shares are sold. Passage of title test! it is the prevailing view that in ascertaining the place of sale, the determination of where and when the title to the goods passes from the seller to the buyer is decisive. Enu$eration in Section 31 not a!!"inc!usi(e In the case of Commissioner vs. 9ritish Overseas Airways Corporation (9OAC& J!.* #C A "*%7, the Supreme ourt held! Exxx Se&tion E, #now Se&tion 7') /y its language4 does not intend the enumeration to /e ex&lusive. t merely dire&ts that the types of in&ome listed therein /e treated as in&ome from sour&es within the Phils. a &ursory reading of the se&tion will show that it does not state that it is an all?in&lusive enumeration4 and that no other 8ind of in&ome may /e so &onsidered.xxxF . The Supreme ourt further held! "xxxThe absence of flight operations to and from the 5hils. is not determination of the source of income on the situs of income taxation. *dmittedly, I9* was an off-line international airline at the time pertinent to this case. The test of taxa/ility is the sour&e4 and the sour&e of an in&ome is that a&tivity xxx whi&h produ&ed the in&ome. NnAuestionably the passage documentations in these cases were sold in the 5hils. and the revenue therefrom was derived from a business activity regularly pursued within the 5hils.xxx' Gross Inco$e fro$ sources outside the Phi!ippines Interest other than that derived from sources within the 5hils. 1. Kividends other than those derived from sources within the 5hils. a. Kividends from foreign corporations in generalC and b. Kividends derived from foreign corporations, ?BO or more of the gross income of which for the >-year period preceding the declaration of dividends (or for such part of such period as the corporation has been in existence was derived from foreign sources ,. ompensation for labor or personal services performed outside the 5hils.
+)(
TAX LAW REVIEWER

>. )entals or royalties from property located outside the 5hils. or from any interest in such property including rentals or royalties for the use of or for the privilege of using outside the 5hils., patents, etc. 8. ;ains, profits and income from the sale of real property located outside the 5hils. ?. ;ains, profits and income from the sale of personal property located outside the 5hils., and /. Income derived from the purchase of personal property within and its sale outside the 5hils. (Sec. 8,, <I) 3 Gross Inco$e fro$ sources part!# ithin and part!# outside the Phi!s. Special rules are provided by the )egulations on the following classes of income which are treated as derived from sources partly within and partly outside the 5hils. 13 Income from transportation such as foreign steamship companies whose vessel touch the 5hil. ports (Sec. 1/>, )egulations3 and other services rendered partly within and partly outside the 5hils. such as foreign corporations carrying on the business of transmission of telegraph and cable messages between points outside the 5hils. (Sec. 1/8, )egulations3 ,3 Income from the sale of personal property pro,uce, in whole or in part by the taxpayer within an, sol, outsi,e the Phils.C or pro,uce, in whole or in part by the taxpayer outsi,e an, sol, within the Phils.
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TAX LAW REVIEWER

GENERAL PRINCIPLES &8 PLILIPPINE INC&9E TAKATI&N I. CLASSI8ICATI&N &8 TAKPAOERS Ta%!e =. Genera! :ie Sour ces of Taxa %!e Inco $e A.J Indi(idua!s I=J CITIPEN a. )esident $ith iti#en in () 3 and with out b. <on$ith )esident in citi#en (<) 3 c. 9 $ L $ith Seamen in (1J ALIEN / 8&REIGN ERS a. )esident $ith aliens ()*3 in
Tax .ase
Tax Rate
net income if engaged in trade, business or profession net income
?O >,O
?O >,O ?O >,O
net income
net income if engaged in trade, business or profession
?O >,O
b. <on)esident alien (<)*3 1. <on )esident *lien
$ith in
net income
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TAX LAW REVIEWER

6ngaged in Trade or Iusiness (<)*6TI3 ,. <on )esident *lien <ot 6ngaged in Trade or Iusiness (<)*<6T I3 I2J SPECIAL ALIENS a. 6mployed by )egional L area headAuarter s ()*%M3 b. 6mployed by )egional 9perating %eadAuarter s ()9%M3 c. 6mployed by 9ffshore Ianking Nnits (9INs3 d. 6mployed by petroleum service contractors and subcontract ors ..J Corporatio ns
withi gross income n
,?O (0inal tax withhel d3
1?O (flat rate3
1?O
1?O
1?O
.)
TAX LAW REVIEWER

(13 K9=6STI
withi net income n and with out a. withi net income 5roprietary n and 6ducational with Institution out X %ospital b. ;9 except ;SIS, SSS, 5%I , 5 S9 and 5*; 9) (,J 8&REIGN (a3 )esident (engaged in trade or business3 1. Internationa l. carrier withi net income n and with out
>,O L 1?O L ,O 1BO subject to the "predo minanc e test' >,O
$ith in
gross income
>,O
$ith in
gross 5hil. billing *mount applied for to be remitted gross income
,.?O 1?O
$ith ,.)emittanc in e Iranch 9ffice >. 9IN $ith in 8. )*%M ?. )9%M (b3 <onresident 1. inematogr aphic 0ilm owner, lessor or Kistributor
withi n withi gross income n withi gross income n
6xempt ()* .,.83 Tax exempt 1BO >,O ,?O
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TAX LAW REVIEWER

,. 9wner L+essor of aircraft, machineries and other eAuipment >. 9wner L lessor of vessels chartered by 5hil. nationals. (>3 6ST*T6 N<K6) ENKI I*+ S6TT+6= 6<T (83 I))6H9 *I+6 T)NST
withi gross rentalsL n fees
2 ZO
withi gross rentals n
8 ZO
withi net income nX with out withi net income n and with out
?O >,O
?O >,O
II. TAK &N INDI:IDBALS A.& Classification of In,ivi,ual 2axpayer 1. iti#ens of the 5hilippines may be classified intoC (a3 (b3 )esident iti#ens () 3 -[ those residing in the 5hils. <on-resident iti#ens -[ those not residing in the 5hils. * 0non4resi,ent citi'ens1 means (sec. ,, (63 <ational Internal )evenue ode (<I) 3 1. 9ne who establishes to the satisfaction of the ommissioner of Internal )evenue ( I)3 the fact of his physical presence abroad with a definite intention to reside therein. ,. * citi#en of the 5hils. who leaves the country during the taxable year to reside abroad, either as immigrant or for employment or on permanent basis.
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TAX LAW REVIEWER

>. * citi#en of the 5hils. who works and derive from abroad and whose employment thereat reAuires him to be physically present abroad most of the time during the taxable year. 8. * citi#en who has been previously considered as non-resident citi#en and who arrives in the 5hils. at any time during the taxable year to reside permanently in the country. (%e shall be considered a <) for the taxable year in which he arrives in the 5hils. with respect to his income derived from sources abroad until the date of his arrival in the 5hils.3 Re(. Re+u!ations. No. G">2, No(e$%er 15, =G>2 " The continuity of residence abroad is not essential. If physical presence is established, such physical presence for the calendar year is not interrupted by reasons of travels to the 5hils. ,. *liens L 0oreigners (a.3 )esident aliens ()*3 -[ those residing in the 5hilippines though not a citi#en thereof. (b.3 5hils. <on resident aliens (<)*3 -[ those not residing in the
1.3 Those engaged in trade or business in the 5hils. (<)*6TI3 ,.3 Those not engaged in trade L business in the 5hils. (<)*<6TI3. * "non4resi,ent alien' individual who came to the 5hils. and stayed therein for an aggregate period of more than 1-B days during any calendar year shall be deemed a <)* doing business in the 5hils. The term "en3a3e, in tra,e N business' denotes habitually or sustained activity. 0 esi,ent aliens1 are those who are actually present in the 5hils. and who are not mere transients or sojourners. 0or tax purposes a resident alien isC 1.3 *n alien who lives in the 5hils. with no definite intention to stay as a resident. ,.3 9ne who comes in the 5hils. for definite purposes which in its very nature would reAuire on extended stay and to that end, makes his home temporarily in the 5hils. >.3 *n alien who stay within the 5hils. for more than 1, months from the date of his arrival in the 5hils. 9.& Personal an, A,,itional >xemptions
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TAX LAW REVIEWER

Nature R Purpose! 5ersonal and additional exemptions are fixed amounts which are in the nature of deduction and are intended to substitute for the disallowance of personal or living expenses as deductible items.
Ta%!e 1: 5ersons entitled to personal and additional exemption Taxpay er 1.)esid ent citi#en ,.<onresiden t (<) 3 >. )eside nt alien ()*3 8. <)*6 TI ?. <)*< 6IT /. 6state 56 \ \ (for income derived wLin3 \ (wLin3 \ (by way of recipro city3 P *6 \ \ (incom e from wLin3 \ (incom e from wLin3 P % %I 5 \
P P P
P P P
\ (only up to 5,Bk3 2. Trust \ (only up to 5,Bk3
Reciprocit# means that the foreign country where the nonresident alien is a citi#en or subject grants exemption to 0ilipinos not residing there but doing trade or business, or exercising profession therein. The extent of personal exemptions allowed to such non-resident alien shall be in the amount eAual to the exemptions allowed in the income tax law in the country of which he is a subject or citi#en, to citi#ens of the 5hils. not resident in such country not to exceed the amount fixed under our laws. (Sec. >/ 4K7, <I) 3. Ta%!e 2 : Iasic 5ersonal 6xemptions for ) , <) , and )*
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TAX LAW REVIEWER

Taxpayer 1. Single person including a married person judicially decreed as legally separated ,. 6ach married person >. %ead of family
6xemption (amount3
5 ,Bk
5 >,k 5 ,?k
D>A: O7 7A/I+C [ is one who is unmarried or legally separated man or woman withC (13 9ne or both parents @ (a3 +iving with the taxpayer. (b3 Kependent upon the taxpayer for their chief support. (,3 one or more brothers (a3 +iving with the taxpayer (b3 Kependent upon the T for chief support (c3 <ot more than ,1 yrs. of age (d3 <ot married (e3 <ot gainfully employed (>3 one or more legitimate recogni#ed natural L legally adopted children. (a3 living with the Taxpayer (b3 dependent upon the Taxpayer for chief support (c3 not more than ,1 yrs. of age (d3 not married (e3 not gainfully employed )egardless of age, such children, brothers or sisters Aualify a Taxpayer as head of family is they are incapable of self-support because of mental or physical defect. >C< E. S=PPO!T1 -[ means principal or main support. =ore than fifty percent (?BO3 being provided to certain dependents is enough. This phrase does not necessarily mean that the dependent derives no name at all, he may still derive income but the same is insufficient to support him.
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TAX LAW REVIEWER

>0 % N1 @ T<F -[ reAuires the Taxpayer and his dependent to actually be residing together but temporary absence from their common residence brought by face of circumstances such as! (a3 The Taxpayer is away on business (b3 The dependent who may be boarding elsewhere is in pursuit of education. >1$ N.=00G EMP0OGE"' means that the dependent will only Aualify as such if he derives no income for himself, or he is employed but his income is not sufficient to support him independently outside of the principalLchief support afforded to him by the taxpayer. RA >321 in re!ation to exe$ptions )* 28>, (approved *pril ,>, 1..,3 expressly allows a Aualified senior citi#ens to be claimed as dependents by those who care for them hether a re!ati(e or not.
Additiona! Exe$ption uleF *n additional exemption of 5-,BBB is granted to Taxpayer for each, but not exceeding four (83 of his ! (a3 +egitimate, illegitimate andLor legally adopted children (b3 +iving with the Taxpayer (c3 hiefly dependent upon him for support (d3 <ot more than ,1 yrs. old (e3 Nnmarried (f3 <ot gainfully employed. 1. Take note of the following rules! 5ersonal exemption of married persons! a. If not legally separated, each spouse is entitled to 5>,k as personal exemption. b. If legally separated, each is entitled to 5,Bk as a single individual unless Aualifies as head of family. c. $here only one (13 of the spouses is deriving income, only such spouse shall be allowed the personal exemption. ,. 0or additional exemption a. 0or married individuals can be claimed by only 1 of the spouses. b. 0or legally separated spouses, it can be claimed only by the spouse who has custody of the childrenC but the amount claimed by both shall not exceed the maximum allowed.
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TAX LAW REVIEWER

c. i. ii. iii.
*dditional exemption can be claimed only by the "husband' unless! he waives his right in favor of his wife the husband is working abroad the wife is the on deriving income.
>. The law reAuires that married individuals, the husband and wife although reAuired to file one (13 income tax return, should nevertheless compute their individual income separately. If any income of the spouses can not be definitely attributable to or identifiable as income exclusively earned as reali#ed by either of the spouses, the same shall be divided eAually between the spouses. Ru!es on chan+e of Status These are! 1.3 If the taxpayer marries or should have additional dependent(s3 during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year. ,.3 If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemption for himself and his dependents as if he died at the close of such year. >.3 If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (,13 years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one (,13 years old or become gainfully employed at the close of such year.
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TAX LAW REVIEWER

Ta%!e 3. ates of 2ax on Certain Passive Income of In,ivi,ual 2axpayer Tax Rate R Tax .ase 5assive Income (Subject to 0inal Tax3 1. )oyalties except! (a3 Iooks, literacy works (b3 musical compositions ,. 5ri#es (exceeding 51Bk3 X other winnings (except! 5 S9 X +9TT9 winnings3 >. Interest on bank deposits 8. Interest under 6xpanded foreign currency deposit system ?. Interest on longterm deposits [ ? yrs. ] > yrs. > to ] 8 yrs. /. Kividend from Komestic corporation, joint stock company insurance or mutual fund comp. and )9%Ms of =ultinational comp. 2. apital gains from the sale of real property located in the 5hils. -. Sales of Shares of Stocks not traded in local exchange ITIJ6< <)*6TI <)*<6TI X )* ,BO 1BO 1BO ,BO ,BO 1BO 1BO ,BO -
,BO 2.?O
,BO exempt
6xempt
exempt ,BO 1,O 1BO
exempt ,BO 1,O 1BO
exempt ,BO 1,O 1BO
/O (;S5L /O 0=H, whichever is higher3 ?O - not ?O exceeding 51BBk 1BO
/O
?O 1BO
.0
TAX LAW REVIEWER

1BO amount in excess of 51BBk .. ash andL or property dividends beginn /O ing Ean. 1.. beginn -O ing Ean. 1... beginn 1BO ing Ean. ,BBB ,BO ,?O
*ny income or gain derived in which a final tax is imposed shall no longer be included in the taxable net income of the taxpayer (applicable only to citi#ens and aliens3 0inal tax is imposed without deduction. <either is the provision on personal additional applicable. *liens employed by )*%Ms X )9%Ms, 9INs, 5etroleum service contractor X subcontractor of a multinational corporations are entitled to 1?O tax, only on those! Salaries, wages, annuities, honoraria and the like as received from such )*%Ms or )9%Ms. 5rovided that the same tax treatment is extended to 0ilipino employees having the same position in such entities. III. TAK &N C&RP&RATI&NS IC&RP&RATE TAKPAOERSJ
CO PO A2IO8 :>7I8>: (Sec. ,8(b3 Tax ode3 - The term shall include partnership, no matter how created or organi#ed, joint stock companies, joint accounts, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to operating or consortium agreement under a service contract with the government. G>8> A+ P O7>##IO8A+ PA 28> #DIP (GPP J " are formed by persons for the role purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade X business. CO PO A2IO8# A > C+A##I7I>: I82O 2EO C+A##># 8A/>+C: (13 :omestic -[ those created or organi#ed in the 5hils. or under its laws.
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TAX LAW REVIEWER

(,3 7orei3n -[ those created organi#ed or existing under any laws other than those of the 5hils. and they are eitherC )esident foreign R those foreign corporation engaged in trade or business within the 5hils. <on-resident R those foreign corporation not engaged in trade or business within the 5hils. 0:OI8G O >8GAGI8G I81 or 02 A8#AC2I8G 9=#I8>##1 -[ The term implies a continuity of commercial dealings and arrangements and contemplates to that extent, the performance of acts or works or the exercise of some of the functions normally insistent to and in the progressive prosecution of commercial gain or for the purpose and the object of the business organi#ation (Comm. vs. 9ritish Overseas Airways Corporation M 9OAC case !.* # "*%&
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TAX LAW REVIEWER

Ta%!e 4 ates an, 2ax base on Corporate 2axpayers in General 2axpayers (Tax )ates and Tax Iase3 Komestic Taxes Imposed )0 <)0 orp. <et <et ;ross income Income Income 1.3 <ormal >,O >,O >,O orporate (Ean. 1, Income Tax ,BBB3 (< IT3 ,.3 =inimum ,O ,O orporate Income Tax (= IT3 >.3 Iranch 1?O )emittance Tax 8.3 Improperly 1BO 1BO 1BO *ccumulated 6arning Tax (I*6T3 ?.3 5assive Incomes (0inal tax3 a. Interest ,BO ,BO exempt 5eso bank deposits 2.?O 2.?O - 0oreign urrency ,BO ,BO Keposit Nnits b. )oyalties c. apital gains from sales of ?O ?O ?O share of stock 6xempt 6xemp 6xempt not traded in ()* t ()* ()* the stock .,.83 .,.83 .,.83 ] 51BBk [ 5 1BBk d. Income of a depository bank under 1BO 1BO 0oreign urrency
Taxes Imposed
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TAX LAW REVIEWER

Keposit Nnits e. apital gains from sale of real property situated in the /O 5hils. (capital assets3 f. Interest on 1BO foreign loan g. Intercorporate exempt dividends
1BO exempt
,BO 1?O
A. Tax &n Do$estic Corporation ISec. 1> of NIRCJ 6xcept as otherwise provided in the Tax ode, Komestic corporations duly organi#ed and existing under the 5hilippine laws shall be subject to the following tax rates based on their gross income derived from sources within or without the 5hils. >?O >8O >>O >,O for 1..2 and prior years effective Eanuary B1, 1..effective Eanuary B1, 1... effective Eanuary B1, ,BBB
(13 Proprietary >,ucational Institutions N non4profit hospitals - 6xcept those income subject to final tax, proprietary educational institutionsL non-profit are taxable with the tax rate of !5P on their gross income. Proprietary Edu&ational nstitution means any private school maintained and administered by private individuals or groups within an issued permit from the K6 S, %6K or T6SK*. Predominan&e Test - Preponderan&e Test means that if the gross income from unrelated trade, business or other activity exceeds ?BO of the total gross income derived by any educational institution or hospital from all sources the normal tax shall be imposed on the entire taxable income. >=nrelated trade4 /usiness or other a&tivityF means any trade business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function.
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TAX LAW REVIEWER

*rticle PIH Sec. 8 (>3 of the onstitution provides that "all revenues and assets of non-stock and non-profit educational institution used actually, directly and exclusively for educational purposes are exempt from taxes and duties.
(,3 Government owne, or controlle, corporations (GOCCs& @ ;9 s, agencies or its instrumentality shall pay applicable corporate income tax rates except! ;SIS, SSS, 5%I , 5 S9 and 5*; 9). .. Tax I$posed on Do$estic corporations I=.J Nor$a! Corporate Inco$e Tax INCITJ -[ the tax rate of >,O (as of Ean. 1, ,BBB3 is imposed on any income derived, within and without the 5hils. 6xcept on those passive income (#ection ($ (A& 8I C& I1.J Gross Inco$e Tax &ption -[ The 5resident upon the recommendation of the Secretary of 0inance may, effective Eanuary 1, ,BBB, allow corporations the option to be taxed at fifteen percent (!%P& of gross income provided that the following conditions are met therein! a. a tax effort ratio of ,BO of ;<5 b. a ratio of 8BO of income tax collection to total tax revenues c. a H*T effort of 8O of ;<5 and d. a B..O ratio of the onsolidated 5ublic Sector 0inal 5osition ( 5S053 to ;ross <ational 5roduct (;<53 The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (??O3. The election of the gross income tax option shall be irrevocable for three (>3 consecutive taxable years during which the corporation is Aualified under the scheme.
Definition of Ter$s a. >1ross n&omeF derived from business shall be eAuivalent to gross sales returns, discounts and allowance and cost of goods. b. >Cost of goods soldF shall include all business expenses directly incurred to produce the merchandi#e to bring them to their present location and use. c. 0or trading and merchandising concern, >Cost of goods soldF shall include the invoice cost of the goods sold, plus import duties freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit.
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TAX LAW REVIEWER

d. 0or manufacturing concern, >Cost of goods manufa&tured and soldF shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. e. In sale of service, "gross income' means gross receipt less sales returns, allowance and discounts. I2.J 9ini$u$ Corporate Inco$e Tax I9CITJ -[ a tax rate of (P is imposed on the gross income of domestic corporations and resident foreign corporations. ationaleF = IT is designed to forestall the prevailing practice of corporation or over-claiming deductions in order to reduce their income tax payments. eAuisitesF a. It is imposed beginning the fourth (8th3 taxable year immediately following the taxable yr. in which such corporation starts its business operation. b. It is imposable only if such corporation has #ero or negative taxable income or whenever the amount of = IT is greater than the <ormal orporate Income Tax (< IT3 due from such corporation. Carr# 8or ard of Excess 9ini$u$ Tax -[ any excess of the minimum corporate income tax (= IT3 over the normal income tax shall be carried forward on an annual basis and credited against the normal income tax for the three (>3 immediately succeeding taxable yrs.
Instances hen 9CIT $a# %e suspended %# the Secretar# of 8inance -[ The Sec. of 0inance, upon recommendation of the ommissioner may suspend the imposition of = IT, upon showing that the corporation suffers losses due to any of the following causes! a. 5rolonged labor dispute (e.g. strikes for more than / months3 b. +egitimate business reverses (e.g. theft3 c. 0orce majeure (e.g. war3 I3.J 8ina! tax on certain Passi(e Inco$e -[ refer to previous note The following corporations are not subject to = IT (1.35roprietary 6ducational Institution if enjoys preferential tax rate (,.3<on-profit hospitals (>.3Kepository banks under expended 0 KN (8.3International carriers (?.39ffshore Ianking Nnits (/.3)9%Ms of resident foreign corp. (2.39ther corporations not subject to the normal tax rate
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TAX LAW REVIEWER

.. TAK &N 8&REIGN C&RP&RATI&NS ISec. 1? of NIRCJ #*.) !esident .oreign Corporation Engaged in Trade or /usiness in the Phils. #!.C) ? 0oreign orporation shall be taxed on income derived from sources "within' the 5hilippines. Tax mposed on !esident .oreign Corporation #!.C)
(1.3 (,.3 (>.3 (8.3
NCIT -[ >,O effective Ean. B1, ,BBB and thereafter Gross Inco$e Tax &ption -[ 1?O tax rate on gross income of )0 is also applicable. 9ini$u$ Corporate Inco$e Tax I9CIT3 -[ ,O based on gross income is also applicable Tax on .ranch Profits Re$ittances -[ subject to 1?O based on the "total profits' applied or earmarked for remittance wLo any deduction for the tax component thereof! ! Those activities registered wL the 56J*C interests dividends, rents and royaltiesC remuneration for technical services, salaries, and wagesC premiums, annuities, emolumentsC capital gains, profit and income.
except
(?.3 8ina! tax on certain Passi(e Inco$e - the same tax rates as imposed to domestic corporation R is also applicable to )0 except! the imposition of capital gain tax (/O3 on sale of real property (capital asset3 located in the 5hils. * different tax rate is imposed on the following )0 s
(a.3 Intl carrier -[ , ZO on ;ross 5hilippine Iilling Int&l air carrier R >1ross Philippine ;illingsF refer to the amount of gross revenue from (a3 carriage of persons, excess baggage cargo and mail originating from the 5hils. in a (b3 continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document. 2aHe noteF 0or a flight wLc originates from the 5hils. but transshipment of passenger takes place at any port outside the 5hils., only the aliAuot portion of the cost of the ticket corresponding to the leg flow from the 5hils. to the point of transshipment shall form part of the ;5I. In International shippin3, >1ross Phil. ;illingF means gross revenue whether for passenger, cargo or mail originating from the 5hils. up to the final destination, regardless of the place of sale or payments of the passage or freight documents.
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TAX LAW REVIEWER

(b3
e3ional N Area Dea,Auarters ( AD;s& -[ tax exempt -[ These are branches established in the 5hils. by a multinational companies but they do not earn or derive income here and their functions are limited to being a supervisory communication and coordinating center for their affiliates. e3ional Operatin3 Dea,Auarters ( OD;s& -[ subject to 1BO tax. -[ these are branches established in the country by multinational companies which are engaged in any of the following! general administration X planningC business planning business development (and the like3 Offshore 9anHin3 =nits authori'e, by 9an3Ho #entral n3 Pilipinas E2CEPT: !$ +'+7.
(c.3
(d.3
(,.3 Non?!esident .oreign Corporations #N!.CNET;) ? are subject to >,O tax rate (effective Ean. 1, ,BBB and thereafter3 on all income derived from sources within the 5hils. except on certain passive income (refer to Table ^13. <)0 s are not entitled to deduction as well as exemption (personal and additional exemption3 TAK SPARING RBLE / CREDIT -[ provides that a final withholding tax at the rate of 1?O shall be imposed for the amount of cash and Lor property dividends received from a domestic corporation by non-resident 0oreign corporation subject to the condition that the country in which the <)0 is domiciled shall allow a credit against the tax due from <)0 taxes deemed to have been paid in the 5hils. eAuivalent to 12O which represents the difference between the regular income tax rate of >,O and the usual corporate rate of 1?O. 2aHe noteF Tax sparing credit applies only when the conditions for its availment are clearly established by the taxpayer. Since the concession is in the nature of a tax exemption. The 1?O reduced tax must actually be paid and the 12O must be deemed paid tax. The 1?O tax on dividends is applicable if the country where the recipient <)6 is domiciled does not imposed any tax on dividend received by said recipient foreign corporation (II) )uling, =arch >B, 1.223
I9PR&PERLO ACCB9BLATED EARNINGS TAK IIAETJ (Sec. ,. <I) 3

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TAX LAW REVIEWER

Nature and Purpose: The improperly accumulated earning tax of 1BO in addition to the regular corporate income tax shall apply to every corporation formed or availed for the purpose of avoiding of any other corporation by permitting earnings and profit to accumulate instead of being divided or distributed. The term > mproperly a&&umulated taxa/le in&omeF means taxable income adjusted by! (13 Income exempt from tax (,3 Income excluded from gross income (>3 Income subject to final tax (83 The amount of <9+ 9 deducted and reduced by the sum of! a. Kividends actually or constructively paid and b. Income tax paid for the Taxable year.
8or$u!a: Taxable income add! Income exempt from tax Income subject to final tax Income excluded from gross income *mount of <9+ 9 deducted +ess! Kividends actually or constructively paid Income tax paid for the yr. Improperly accumulated Taxable Income Improperly Accumulate, >arnin3s 2ax ,oes not apply to the followin3F (1.3 Ianks and other non-banks financial intermediaries (,.3 5ublicly held corporations (>.3 Insurance companies Presumptions of Improper accumulations - There is a "prima facie' evidence of a purpose by a corporation to avoid the tax upon its shareholders or members! (13 $here the corporation is a mere holding company. (,3 $here the corporation is an investment company where more than ?BO of its outstanding stock is owned directlyL indirectly by one person during the taxable year. (>3 $here the corporation permits its earnings or profits to be accumulated "beyond the reasonable needs of the business'. >!easona/le needs of the /usinessF includes the reasonably anticipated needs of the business e.g. investment of corporation&s profits in a business related to taxpayer&s business.
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TAX LAW REVIEWER

PurposeF To compel the corporations to distribute dividends to the stockholders (subject to dividend tax3 Instances of easonable AccumulationsF
(13 It is retained for working capital needed by the business (,3 It is invested in addition to plant property and eAuipment reasonably by the business (>3 In accordance with contract obligations, it is placed to the credit of a sinking fund for the purposes of retiring bonds issued by the corporation. EKE9PTI&NS 8R&9 TAKES &N C&RP&RATI&NS ISec. 2D of NIRCJ: The following shall not be taxed in respect to income received by them! (a.3 +abor, agricultural or horticultural organi#ation not organi#ed principally for profit. (b.3 =utual savings bank not having a capital stock represented by shares and cooperative banks wLo capital stock organi#ed and operated for mutual purposes and without profit. (c.3 * beneficiary society or association operating for exclusive benefit of the members or a mutual aid association or non-stock corporation organi#ed by employees providing benefits exclusively to its members or their dependents. (d.3 emetery company owned and operated for the exclusive benefits of its member (e.3 <on-stock corporation or association organi#ed and operated exclusively for religious, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of it net income or asset shall belong to or inure to the benefit of any member, organi#er, or officer or any specific person (f.3 Iusiness league chamber of commerce, or board of trade not organi#ed for profit and no part of the net income of which inures to the benefit of any private stockholder or individual (g.3 ivic league or association not organi#ed for profit but operated exclusively for the promotion of social welfare (h.3 * non-stock and non-profit educational institution. NOTE: Refer to Artic!e KI: Section 3I2J, =G?> Constitution. (i.3 0armers& fruit growers or like organi#ation organi#ed and operated as sales agent for the purpose of marketing the products of its member. (j.3 0armers& or other mutual typhoon or fire insurance company or like organi#ation of a purely local character, the income of which consists solely of assessment, dues and fees collected from members for the sole purpose of meeting its expenses. (k.3 ;overnment educational institution Income of whatever kind and character of the foregoing organi#ations from any of their properties, real or personal or from any of their activities "conducted for profit' regardless of the disposition made of such income shall be subject to tax.
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TAX LAW REVIEWER

I:.
TAK &N PARTNERSLIP AND C&"&*NERSLIP
PARTNERSLIP is a contract whereby two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves. 0or income tax purposes, partnership may be classified as follows! (1.3 5artnership not su%'ect to income tax, which include the followingC a. ;eneral 5rofessional partnership b. Eoint venture or consortium agreement formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government. (,.3 5artnership su%'ect to income tax L Iusiness 5artnership -[ *ll other partnership except ;55 and Eoint Henture, no matter how created or organi#ed are considered corporation subject to corporate income tax. 2able -. 2ax liability of Partnerships an, the Partners 2axpayers. Tax +iability 5artnership itself 5artners ;55 (5artnership not subject to tax3 - The entity itself is not taxable - The partners share in the net income of the partnershi p shall be taxable to the partners whether Iusiness 5artnership (Subject to tax3 - Taxable like a corporation (>,O3 - 5artners are considered as stockholde rs and the profits distributed to them are considered dividends.
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TAX LAW REVIEWER

5artners share in the net loss of the partnership
5ayment made by a partner to a partner for services rendered
0iling of return
distribute d or not. - may be - not claimed deductible by the partner as a deductible expense in his personal income tax retain - considered considere as d as compensati additional on income share in of the the net partner. income of the partner @ (ordinary business income3 - file a 5artnershi Auarterly p should income tax file an returns. "annual informatio n return' )eason! To furnish the II) of informatio n as to the share of each partner shall be part and include in his personal
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TAX LAW REVIEWER

5artner&s distributive share in the net income of the partnership
income tax return - subject to - final tax of graduated 1BO income tax rates
.IR RBLING No. =51 7une ==, =G?> * partner&s contribution of real property to the partnership fund is not subject to income tax.
CO?O@NE!S< P -[ it is created whenever the ownership of an undivided thing or right belongs to different persons. G>8. =+>F o-ownership is exempt from income tax because the activities of the coowners are usually limited to the "preservation' of the properties owned in common and the collection of the income therefrom. >?C>P2IO8#F ($hen co-ownership is subject to tax3. (13 $hen the income of the co-ownership is invested by the co-owners in other income-producing properties or income-producing activities, and (,3 $hen there is no attempt to divide inherited property for more than ten (1B3 years and the said property was not under any administration proceedings nor held in trust, an unregistered partnership is deemed to exist. 2ax liability of co4owners -[ The co-owners in exempt co-ownership shall be viable for income tax only in their separate and individual capacity. 7ilin3 of return -[ The owners shall report and include in their respective personal income tax returns their shares of the net income of the co-ownership. H. TAK &N ESTATES AND TRBSTS ISec. 5D. NIRCJ
Estate is the mass of property, rights and obligations left behind by the decedent upon his death. 6states may be classified as follows! 1. 6states not under judicial settlement - are subject to income tax generally as mere co-ownership.
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TAX LAW REVIEWER

- The tax liability on income of the co-ownership levied directly on the co-owners. Thus, the heirs shall include in their respective returns their distributive shares of the net income of the estate. ,. 6states under judicial settlement - are subject to income tax in the same manner as individual. - Income received during the settlement of the estate is taxable to the fiduciary (guardian, executor, trustee, and administrator3. - The return should be filed by executor or administrator of the trust. Trust is an arrangement created by will or co-agreement under which title to property is passed to another for conservation or investment with the income therefrom and ultimately the corpus (principal3 to be distributed in accordance with the directions of the creator as expressed in the governing instrument. 1 Cinds of Trust :
1. Irrevocable Trust -[ is considered as a separate taxpayer. ,. )evocable Trust -[ is one where at anytime the power to revest the title to any part of the corpus of the trust is vested! (a.3 in the grantor (creator of the trust3 either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefromC or (b.3 in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom. <9T6! The tax shall be imposed on taxable income of the grantor. @arious trusts subBect to income tax. (1.3 Trust where income is accumulated for the benefit of certain or uncertain persons or persons with contingent interest. (,.3 Trust where income is accumulated or held for future distribution under the terms of the will or trust. (>.3 Trust where income is to be distributed currently by the fiduciary to the beneficiaries. (8.3 Trust where income collected by a guardian of an infant is held or distributed as the court may direct. (?.3 Trust where income in the discretion of the fiduciary may be either distributed to the beneficiaries or accumulated.
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TAX LAW REVIEWER

Exe$pt Trust -The tax imposed on estate and trust does not apply to E9PL&OERHS TRBST provided that the following conditions are satisfied! (1.3 The employee&s trust forms part of a pensions, stocks, bonus or profit sharing plan of an employer for the benefit of some or all of its employees. (,.3 ontributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the trust and accumulated by the trust in accordance with such plan. (>.3 <o part of the corpus or income shall be used for or diverted to, purpose other than for the exclusive benefit of his employees. Consoli,ation of income in trusts (1.3 If there are two or more trusts created (,.3 The same are created by the same person (grantor3 (>.3 and the beneficiary of such is the same person in each instance. 2aHe note! )ules applicable in the computation of the tax on estates and trusts! (1.3 The same rules in the determination of gross income for individuals are applicable. (,.3 The same deductions allowed to an individual taxpayer are also allowed, in addition of the following deductions! (a.3 amount of its income which is to be distributed currently to the beneficiaries, and (b.3 *mounts of its income for the taxable year which is properly paid or credited during such year to any heir, legatee, or beneficiary, but the amount so allowed as a deduction shall be included in computing the taxable income of the heir, legatee, or beneficiary. (>.3 5ersonal 6xemption of 5,Bk is also applicable (8.3 The graduated rates of tax used for individuals taxpayers are also applicable The deductions mentioned are not available to T)NSTS administered in foreign country.
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TAX LAW REVIEWER

TRANS8ER TAKES Transfer Taxes Defined *re those imposed upon the gratuitous disposition of private property. Nnder our law, they are taxes levied on the transmission of private properties from a prior decedent to his heirs in the case of estate tax, or from a donor to a donee in the case of donor&s tax. Qin,s of 2ransfer 2axes =. Death taxes or duties *re those levied on the gratuitous transfers of property upon one&s death, formerly comprised of the estate and inheritance taxes! Ioth taxes are now integrated into one estate tax. 1. Gift Taxes *re imposed on the gratuitous transfers of property during one&s lifetime, formerly comprised of the donor&s and donee&s gift taxesC both taxes are now integrated into a donor&s tax. Estate Tax Estate tax defined Is a graduated tax imposed on the privilege of the decedent to transmit property at death and is based on the entire net estate, regardless of the number of heirs and relations to the decedent. It is a "transfer' tax not a property tax. The tax on the right to transmit property at death and on certain transfers which are made by the statute the eAuivalent of testamentary dispositions. Nature of Estate Tax It is not a direct tax on property nor is it a capitation tax, that is, the tax is laid neither on the property, nor on the transferee or transferor, but on the right of the decedent to transmit his estate. It is not a property tax but an excise tax. Purpose and 'ustification of estate tax: The following theories have been advanced to justify death taxation! (I)*53
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TAX LAW REVIEWER

a.3
.enefit"Recei(ed Theor# 0or the performance of services rendered by the government in the distribution of the estate of the decedent and other benefits that accrue to the estate and the heirs, the state collects the tax.
%.J Redistri%ution of *ea!th Theor# Is a contributing factor to the ineAualities in wealth and income. The imposition of death tax reduces the property received by the successor bringing about a more eAuitable distribution of wealth in society. c.J A%i!it#"to pa#" theor# The receipt of inheritance places assets in the hands of the heirs and beneficiaries thereby creating an ability to pay the tax and thus to contribute to governmental incomeC and d.J Pri(i!e+e theor# or State Partnership theor# Inheritance is not a right but a privilege granted by the state and large estates have been acAuired only with the protection of the state. The State, as a "passive and silent partner' in the accumulation of property has the right to collect the share which is properly due to it. Incidence or %urden of estate of tax Three views on who is the taxpayer in estate taxation! 1. 5)6K6 6SS9) @ the object of the tax is the property which has been held or accumulated by the deceased and the tax has fallen upon him in the sense it has affected the amount of the property which he could dispose. ,. SN 6SS9) @ the tax is not paid by the predecessor who has no liability till he dies and who is free to ignore the duty if he wishes, while the successor comes into less than he would have, and has no kind of redress. >. <9 56)S9<*+ I< IK6< 68. the estate tax has no personal incidence at all, merely falling upon the estate as such. La app!ica%!e! 6state taxation is governed by the statute in force at the time of the death of the decedent. 9eanin+ of Gross Estate:
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TAX LAW REVIEWER

1ross estate Is the total value of all property, whether real or personal, tangible or intangible belonging to the decedent at the time of his death, situated within or outside the 5hilippines, where such decedent was a resident or citi#en of the 5hilippines. In the case of a nonresident alien decedent, it shall include only property situated in the 5hilippines. 5roperty Included in the ;ross 6state! In case of resi,ent citi'ens, nonresi,ent citi'ens an, resi,ent aliens! 1. )eal 5roperty within and without the 5hilippinesC ,. Tangible personal property within and without the 5hilippinesC and >. Intangible personal property within and without the 5hilippines. In cases of nonresi,ent aliensF 1. )eal property within the 5hilippinesC ,. Tangible personal property within the 5hilippines andC >. Intangible personal property within the 5hilippines, unless there is reciprocity in which case, it is not taxable. 9eanin+ of RECIPR&CITON 2here is reciprocity if the forei3n country of which the ,ece,ent was a citi'en or resi,ent at the time of his ,eathF !.& Kid not impose an estate taxC or ,.3 allowed a similar exemption from estate tax with respect to intangible personal property owned by 0ilipino citi#ens not residing in that foreign country. Note! !. eciprocity applies only whenF A.&2he property is an intan3ible< an, 9.&2he ,ece,ent is a nonresi,ent alien (. 2he followin3 intan3ibles are ,eeme, locate, in the PhilippinesF 1.3 0ranchises which must be exercised in the 5hilippinesC ,.3 Shares, obligations or bonds issued by any corporation or sociedad anonima organi#ed or constituted in the 5hilippines in accordance with its lawsC >.3 Shares, obligations or bonds issued by any foreign corporation -?O of the business of which is located in the 5hilippinesC 8.3 Shares, obligations or bonds issued by any foreign corporation if such shares obligations or bonds have acAuired a business situs in the 5hilippinesC and ?.3 Shares or rights in any partnership, business, or industry established in the 5hilippines.
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TAX LAW REVIEWER

Inter :i(os Transfers Su%'ect to Estate Tax The gross estate extends to gratuitous transfers made by the decedent during his lifetime which are treated by the law as substitutes for testamentary dispositions. They are transfers inter vivos in form but mortis causa in substance. Rationa!e for taxa%i!it#! To reach such transfers which are really substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax. These transfers are! a.3 transfers in contemplation of death (sec.-? b3C b.3 transfers with retention or reservation of certain rights (sec.-? b3C c.3 revocable transfers (sec.-? c3 d.3 transfers of property arising under a general power of appointment ( sec.-? d3C and e.3 transfers for insufficient consideration (sec.-? g3 Note: Transfers by virtue of a bonafide sale of property for an adeAuate and full consideration in money or money&s worth are excluded and not taxable.
n&lusions in the 1ross Estate ICR1IG DIP3 *) Transfer in &ontemplation of death * transfer with the thought of death. The term "in contemplation of death' means that the impelling or controlling motive is the thought of death, regardless of whether the transferor is near the possibility of death or not, which induces the disposition of the property for the purpose of avoiding the tax. 6xample! donation was made concurrently with the execution of a will (Hidal de )oces vs.5osadas, ?5hil 1B-3 The following circumstances are taken into account in determining in whether the transfer was made in contemplation of death! *.3 *ge and state of health of the decedent at the time of the giftC I.3 +ength of time between the gift and the date of deathC and .3 oncurrent making of a will or making a will within a short time after the transfer. The following are examples of motives precluding the category of a transfer in contemplation of death! a.3 To relieve the donor from the burden of managementC b.3 To save income or property taxesC
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TAX LAW REVIEWER

c.3 To settle family litigated and unlitigated disputesC d.3 To provide independent income for dependentsC e.3 To see the children enjoy the property while the donor is alive. f.3 To protect the family from ha#ards of business operationsC and g.3 To reward services rendered. Note: The TLREE I2J OEAR PRESB9PTI&N provides that any transfer of a material part of his property in the nature of a final disposition or distribution thereof made by the decedent within three years prior to his death without such adeAuate and full consideration shall , unless shown to the contrary, be deemed to be have been made in contemplation of death. This provision, however, has been already deleted in Sec. 1BB (b3 now sec. -? (I3 of the Tax ode by 5K <o. 12B?. Nnder II) )uling <o. ,/1 September ,, 1.-2, the law does not specify the number of years prior to a decedent&s death within which a transfer can be considered in contemplation of death. ,.3 Transfer with retention or reservation of &ertain rights This contemplates the instances where the owner transfers his property during life but still retains economic benefits (the possession or enjoyment of the property or the power to designate the person who may exercise such rights3. It includes! *. Transfer without retention of interest but intended to take effect at or after the decedents death. 6xample! donations mortis causa. I. Transfer with retention of interest in respect to! The possession or enjoyment of or the right to the income from the propertyC or The right either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom. *nd such interest is retained by the decedent for his life or for any period which does not in fact end before his death. . Transfer with reversionary interest, wherein there is a possibility that the transferred property may return to the decedent or his estate or that it may become subject to a power of disposition by the decedent. Illustration! * transfers his property to I in naked ownership and to in usufruct throughout &s lifetime subject to the condition that if predeceases *, the property shall return to *. If * dies during &s lifetime, the value of the reversionary interest of * at death is included in his gross estate. E.) !evo&a/le transfer * transfer where!
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a.3 The decedent or in conjunction with any other person has reserved the right to alter, amend, revoke, or terminateC or b.3 *ny such power is relinAuished in contemplation of the decedent&s death. The power to alter, amend or revoke shall be considered to exist on the date of the decedent&s death even though! a.3 the exercise of the power is subject to a precedent giving of noticeC or b.3 The alteration, amendment or revocation takes effect only upon the expiration of a stated period after the exercise of the power. If the notice has not been given or the power has not been exercised on or before the decedent&s death, such notice or the power shall be considered to have been given or exercised on the date of the decedent&s death.(sec.-? .,3 <I) 7.) Transfer of property under a general power of appointment * transfer where the donor of the power of appointment authori#es the donee of such power to designate any person he chooses to be given the right over the appointed property. Genera! po er of appoint$ent (s. specia! po er of appoint$ent: *.3* power is +enera!, when it authori#es the donee of the power to appoint any person he pleases including himself, thus having a full dominion over the property as if he owned it. I.3It is specia! when, the donee can appoint only among a restricted or designated class of persons other than himself. Note: If the power of appointment is general, it makes the appointed property a part of the donee&s property. =n,er a general power of appointment, title to the property is le3ally transferre, to the ,onee. 2herefore the property shall form part of the 3ross estate of the ,onee. 4.J Transfer for insufficient consideration * transfer that is not a bona fide sale of property for an adeAuate and full consideration in money or money&s worth. The excess of the fair market value at the time of death over the value of the consideration received by the decedent shall form part of his gross estate. (Sec. -?, <I) 3 %owever, if the purported absolute sale inter vivos by the decedent is shown to be fictitious, then the total value of the property transferred is subject to inclusion in the taxable estate. 5.J Proceeds of !ife insurance
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5roceeds of life insurance taken by the decedent on his own life shall be included in the gross estate if the beneficiary! *.3 Is the estate of the decedent, his executor, or administrator (regardless whether the designation is revocable or irrevocable3C or I.3 Third person other than the estate, executor, administrator but the designation of the beneficiary is revocable. >.J Prior Interest 6xcept as otherwise specifically provided therein, subsections (I3, ( 3, (63 of section -? referring to transfer in contemplation of death, revocable transfer and proceeds of life insurance respectively shall apply to the transfers, trusts, estates, interests, rights, powers and relinAuishment of powers as severally enumerated and described therein, whether made, created, arising, existing, exercised or relinAuished before or after the effectivity of the T)5. N&TE: In most of these transfers the property remains substantially that of the transferor during his lifetime notwithstanding the transfer since he still retain either the "beneficial ownership' or "naked title' to the property. ?.J DecedentHs Interest To the extent of the interest therein of the decedent at the time of his death. (Sec. -? *3 <I) Exc!usions fro$ Gross Estate The following properties are ex&luded from gross estate: 13 *mount receivable by any beneficiary irrevocably designated in the policy of insurance by the insured. ,3 5roceeds of a group insurance policy taken out by a company for its employees. >3 5roceeds of insurance policies issued by the ;SIS to government officials and employees. 83 Ienefits accruing under the Social Security *ct. ?3 5roceeds of life insurance payable to the heirs of deceased members of the military personnel of the Nnited States *rmy or 5hilippine *rmy under laws administered by the Nnited State veterans *dministration. /3 *ccident insurance proceeds. Note: Items 1 @ / are proceeds of insurance not includible in the gross estate of the decedent.
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TAX LAW REVIEWER

23 Separate property of the surviving spouse. Note! In the determination of the gross estate, the nature of the property, whether common property of the spouses, separate or exclusive property either of the deceased or of the surviving spouse, becomes of vital importance. $hat regime of property relations shall govern the spouses_ Nnder the ivil ode, the husband and wife who got married before *ugust >, 1.-are governed by the onjugal 5artnership of ;ains, while those who got married on or after *ugust >, 1.-- are governed by the *bsolute ommunity of 5roperty, unless a different regime was agreed upon in the marriage settlement. Exe$ption fro$ Estate Tax A. The first 5,BB, BBB.BB value of the estate (sec. -8 <I) 3 .. The merger of the usufruct in the owner of the naked title. C. The transmission from the first heir, legatee, or donee in favor of another beneficiary in accordance with the desire of the predecessor. D. *ll beAuest, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inured to the benefit of any individual and provided that not more than >BO of the said beAuest, etc shall be used by such institution for administration purposes. E. Intangible personal property of non-resident aliens under the principle of reciprocity. 8. )etirement benefits of employees of private firms from private pension plans approved by the II). G. *mount received for war damages. L. ;rants and donations to the Intramuros administration. A!!o a%!e Deductions fro$ the Gross Estate The following are the expenses, losses, indebtedness and taxes that may be allowed as deductions from the gross estate! A.J If decedent is a resident decedent: &RDINARO DEDBCTI&NS: =J 8unera! Expenses The amount deductible is eAual to ?O of the gross estate or the amount of the actual funeral expenses whichever is lower, but in no case to exceed 5,BB, BBBC "*ctual funeral expenses' are those which were actually incurred in connection with the interment or burial of the deceased and paid for from the estate of said deceased. 0uneral expenses include! a3 osts of coffin, tombstone, mausoleum, and burial lotC b3 0uneral parlor feesC
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c3 =ourning clothing of the surviving spouse and the unmarried minor childrenC d3 osts of obituary noticesC and e3 6xpenses during the wake. The following cannot be deducted under funeral expenses! a3 ash advances of the surviving spouse and the heirsC b3 6xpenses paid by the relatives and friendsC and c3 6xpenses after the burial. 1J 9edica! expenses 5rovided, that the following reAuisites are met! a. =ust be incurred by the decedent within one (13 year prior to his death b. =ust be duly substantiated by receiptsC and c. =ust not exceed 5?BB, BBB.BB. 2J 7udicia! expenses of the testa$entar# or intestate proceedin+s Include "administration expenses' to those actually incurred in the administration of the estate. 6xamples! a3 fees of the executor or administratorC b3 attorney&s feesC c3 accountant&s feesC d3 court feesC e3 salaries of employeesC and f3 *ll other expense related to the administration of the estate. Note: 6xpenses not essential to the proper settlement of the estate but incurred for the individual benefit of the heirs, legatees, or devisees are not allowed as deductions. 7) Claims against the de&edentBs estate :ebts or obli3ations of the ,ece,ent that is enforceable a3ainst the estate provi,e, that the followin3 reAuisites are metF a.& 2hey were contracte, in 3oo, faith an, for an a,eAuate an, full consi,eration in money or moneys worth. b.3They must be existing against the estate. c.3 They must be legally enforceable obligations of the decedent and ought to be enforced by the claimants. d.3They must be reasonably certain in amountC andC e.3*t the time the indebtedness was incurred, the debt instrument was duly notari#ed and if the loan was contracted within three (>3 years before the death of the
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decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan. 4J C!ai$s a+ainst the inso!(ent persons !e5uisites for dedu&ti/ility: *. The amount of said claims has been initially included as part of the gross estateC and I. The incapacity of the debtors to pay their obligations is proven and not merely alleged. 5J Bnpaid $ort+a+es inde%tedness !e5uisites for dedu&ti/ility: *. The fair market value of the property mortgaged without deducting the mortgage indebtedness has been initially included as part of his gross estateC and I. The mortgage indebtedness was contracted in good faith and for an adeAuate and full consideration in money or money&s worth. >J Casua!t# Losses They include all losses incurred during the settlement of the estate arising from fires, storms, shipwreck or other casualties or from robbery, theft or embe##lement. 5rovided, that the following reAuisites are metF a.& +osses not compensated by an insurance or otherwiseC b.3 +osses not have been claimed as a deduction for income tax purposesC and c.3 +osses incurred not later than the last day for payment of the estate tax (/ months from death3. ?J Bnpaid Taxes Nnpaid income tax on income due or received before death of the decedent, and real property taxes, which have accrued prior to the death of the decedent (real property taxes accrued at the beginning of the year but may be paid before or at the end of each Auarter3 are deductible. Income taxes upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate tax cannot be deducted because they are chargeable to the income of the estate. GJ :anishin+ deduction Ipropert# ) pre(ious!# taxedJ Is an amount allowed to reduce the taxable estate of a decedent where the property! a. received by him from prior decedent by gift, beAuest, devise or inheritance, or b. transferred to him by gift, has been the object of previous transfer deduction.
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TAX LAW REVIEWER

It is so-called a vanishing deduction because the rate of deduction gradually diminishes and entirely vanishes depending upon the time interval between the two (,3 successive transfers. There are two (,3 factors necessary in vanishing deduction, these areC a. There are two (,3 deceased persons and the first is the transferor or there is donation and the donee subseAuently diesC b. The second decedent dies within five (?3 years after the death of the prior decedent or in the case of gifts the decedent @ donee dies within the same period after the date of the gift. Rationa!e! The deduction operates to ease the harshness of successive taxation of the same property within a relatively short period of time. Re,uisites for deducti%i!it#: !. 2he present ,ece,ent must have acAuire, the property by inheritance or by ,onation. ,. The property must have been acAuired within five (?3 years prior to the death of the present decedent >. The property must have formed part of the gross estate of the prior decedent if acAuired by inheritance, or the taxable gift of the donor if acAuired by donation. 8. The estate tax or the donor&s tax, as the case may be, must have been paid on the previous transfer. ?. The property must be identified as the one received from the prior decedent or from the donor, as the case may beC and /. The estate of the prior decedent must not have previously availed of the vanishing deduction on the subject property. Procedure in co$putin+ (anishin+ deductions: 1. Halue taken of property previously taxed +ess!=ortgage paid by the present decedent on property previously mortgaged by prior decedent L donor, if any (Ist deduction3 R Initial basis ,. Initial basis P 6xpenses, etc and transfer for public purpose value of the gross estate of present decedent O(n,,e,uction >. Initial Iasis +ess! ,nd deduction 0inal Iasis =ultiplied by rate deduction (sec.-/ (*.,3, <I) 3
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TAX LAW REVIEWER

H*<IS%I<; K6KN TI9< =DJ Transfer for pu%!ic use Re,uisites: 1. The disposition must be testamentary in character. ,. To take effect after death. >. In favor of the government of the 5hilippines, or any political subdivision thereof. 1. 6xclusively for public purpose. ==J 8a$i!# ho$e )efers to the dwelling house, including the land on which it is situate,, where the husban, an, wife, or an unmarrie, person who is the hea, of the family an, members of their imme,iate family resi,es as certifie, by the 9aran3ay Captain of the locality. 0or the purpose of availing of a family home deduction to the extent provided by law, a person may constitute only one family home. The amount deductible is eAuivalent to the current fair market value of the decedent&s family home if said current fair market value exceeds P=, DDD,DDD.DD., the excess shall be subject to estate tax. Re,uisites to %e deducti%!e: a. The family home must be the actual residential home of the decedent and his family at the time of his death as certified by the barangay aptain of the locality where the family is situated. b. The total value of the family home must be included in the gross estate of the decedent. c. The allowable deduction must be in an amount eAuivalent to the current fair market value of the family home as declared or included in the gross estate not exceeding 51, BBB,BBB.BB. =1J Standard deduction e,ui(a!ent to P=, DDD,DDD.DD (does not include the 5 ,BB,BBB.BB exemption3. =2J A$ounts recei(ed %# heirs under RA N&.3G=> fro$ the decedentHs e$p!o#er as a conse,uence of the death of the decedent )e$p!o#ee pro(ided that such a$ount is inc!uded in the +ross estate of the decedent. =3J Net share of the sur(i(in+ spouse in the con'u+a! / co$$unit# propert#. =4J Tax credit for estate tax paid to a forei+n countr#. ..J If decedent is a non ) resident a!ien.
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TAX LAW REVIEWER

The deductions allowed to citi#ens or residents of the 5hilippines are also extended to a non-resident alien decedent with respect to his estates situated in the 5hilippines at the time of his death. In case of deductions for expenses, losses, indebtedness and taxes, the amount of the allowable deduction is limited only to the proportion of such deductions with the value of such part of his gross estate which at the time of his death, is situated in the 5hilippines, bears to the value of his entire gross estate wherever situated. (Sec. -/ (I33 8or$u!a: Phi!ippine Gross Estate Entire Gross estate x Deductions C!ai$ed
R allowable deduction of non-resident estate *s a prereAuisite to the deduction, it must be included in the return reAuired to be filed the value at the time of his death, of that part of the gross estate of the non-resident not situated in the 5hilippines, to determine the ratable portion of the deduction for expenses allowable. Tax Credit The estate tax imposed by the tax code shall be credited with the amount of any estate tax paid to a foreign country.
Li$itations on credit! *.3The tax credit limit for estate taxes paid to one foreign country is determined by the following! Kecedent&s <et 6state situated in a foreign country x 5hil. 6state tax 6ntire net estate R T*P )6KIT +I=IT I.3 The tax credit limit for estate taxes paid to two or more countries is determined as follows! Kecedent&s net estate situated outside of the 5hil P 5hil. 6state tax 6ntire net 6state RTax redit limit
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Note: 1.3 Nnder limitation * the allowable tax credit is the lower amount between the tax cre,it limit an, the estate tax pai, to the forei3n country. ,.3 under limitation I the allowable tax credit is the lower amount between the tax cre,it limit compute, un,er (A& an, that compute, un,er (9& :a!uation of Propert# The estate shall be appraised at its 8AIR 9ARCET :ALBE AT TLE TI9E &8 DEATL of the decedent (sec.--, <I) 3 This is regardless of any subseAuent contingency affecting the estate. (+oren'o vs. Posa,as, -. Phil. "%"& Transfers Exe$pt fro$ Estate Tax 1.3 The merger or usufruct in the owner of the naked title. ,.3 The transmission or delivery of the inheritance or legacy of the fiduciary heir or legatee to the feideicomissary. >.3 The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the will of the predecessor. 8.3 *ll beAuests, devices, legacies or transfer to social welfare, cultural and charitable institutions no part of the net income pf which inures to the benefit of any individual. 5rovided, that not more than >BO of the said beAuests, legacies or transfers shall be used by such institutions for administration purposes. 8i!in+ of Notice of Death $here the gross value of the estate exceeds twenty thousand pesos (5 ,B,BBB.BB3 although exempt, the executor, administrator, or any of the legal heirs shall give, within two (,3 months after the decedent&s death or within like period after the executor or administrator Aualifies as such, a written notice thereof, to the ommissioner of Internal )evenue.(sec. -., <I) 3 8i!in+ of Return and Pa#$ent of Tax !.& 9y whomR *n estate tax return under oath is reAuired by law to be filed by the executor, administrator, or any of the legal heirsC a.3 $here the gross value of the estate exceeds p,BB, BBB.BB though exempt from the estate taxC or b.3 )egardless of the gross value of the estate, where the said estate consists of registered or registrable real property, such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the Iureau of Internal )evenue is reAuired as a condition precedent for the transfer of ownership thereof in the name of the transferee. (.& Ehen to fileR The return shall be filed within six (/3 months from the decedent&s death.
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TAX LAW REVIEWER

The ommissioner shall have the authority to grant, in meritorious cases, a reasonable extension not exceeding thirty (>B3 days for filing the return. The executor or the administrator, or any of the legal heirs, as the case may be, is reAuired to give a written notice of death to the commissioner within two (,3 months after the decedent&s death or after Aualifying as such executor or administrator. >.3 Ehere to fileR 6xcept in cases where the ommissioner of the Internal )evenue otherwise permits, the return shall be filed with an authori#ed agent bank or the )evenue Kistrict 9fficer, )evenue ollection 9fficer, or duly authori#ed treasurer of the city or municipality where the decedent was domiciled at the time of his death, or if there be no legal residence in the 5hilippines, with the 9ffice of the ommissioner of Internal )evenue. ..&CopiesF The return shall be filed in triplicate, two (,3 for the II) and one (13 copy for the taxpayer. Lia%i!it# for Pa#$ent of Estate Tax The estate tax shall be paid by the executor or administrator who is primarily liable to pay it. (Commissioner vs. Gon'ales, !) #C A $%$& before delivery to any beneficiary of his distributive shares. (sec. .1 (c3, <I) 3. *fter due payment, the executor or administrator shall be discharged from personal liability. (Collector vs. /c Grath ! #C A -")& The beneficiary shall, to the extent of his distributive share, be subsidiarily liable for the portion of the estate tax as his distributive share bears to the value of the total net estate. (sec..1 (c3, <I) 3 9easures to Insure Pa#$ent of Estate Tax a. In judicial settlement of estates, the court is reAuired to furnish the commissioner of Internal )evenue a certified copy of the schedule of participation and the court order approving the same within >B days after its promulgation. (sec. .1(b33C b. The estate tax shall be paid by the executor or administrator before delivery to any beneficiary his distributive share of the estate (sec. .1 (c33. %e may be discharged from personal liability for deficiency in the estate tax only after written application to the commissioner and upon determination that no such deficiency appears. (sec. .,3 c. <o judge shall authori#e the executor or judicial administrator to deliver a distributive share to any party interested in the estate unless a certification from the ommissioner that the estate tax has been paid as shown. (sec..83
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TAX LAW REVIEWER

d. )egisters of Keeds shall not register in the )egistry of property any document transferring real property any document transferring real property or real right therein or any chattel mortgage, by way of gift inter vivos or mortis causa, legacy or inheritance, unless certification from the commissioner that the tax has been paid and the y shall immediately notify the ommissioner, )egional Kirector, )evenue Kistrict 9fficer, or )evenue collection 9fficer or treasurer of the city or municipality where their officer are located, of the non-payment of the tax discovered by them. e. *ny lawyer notary public, or any ;overnment 9fficer who, by reason of his official duties, intervenes in the preparation or acknowledgement of documents regarding partition or disposal of donation inter vivos or mortis causa, legacy or inheritance, shall have the duty of furnishing the ommissioner, etc., with copies of such documents and any information whatsoever, which may facilitate the collection of the aforementioned tax. f .<either shall a debtor of a deceased pay his debts to the heirs, legatees, executor or administrator of his creditor, unless a certification of the ommissioner that the tax fixed has been paid is shownC but he may pay the executor or judicial administrator without said certification if the credit is included in the inventory of the estate of the deceased. g. orporations, sociedad anonima, partnerships, business or industry organi#ed in the 5hilippines shall not transfer in their books any shares obligations, bonds or rights by way of gift inter vivos or mortis causa, legacy or inheritance to the new owner unless a certification from the ommissioner that the taxes fixed and due thereon have been is shownC and h. If a bank has knowledge of the death of a person who maintained a bank deposit account alone or jointly with another, it shall not allow any withdrawal from the said joint deposit account unless the ommissioner has certified that the estate taxes imposed thereon have been paid. %owever, the administrator of the estate or any of the heirs of the decedent may, upon authori#ation by the ommissioner of Internal )evenue withdraw an amount not exceeding twenty thousand pesos (5 ,B,BB.BB3 without the said certification . 0or this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any on e of the joint depositors and such statement shall be under oath. i. The estate tax together with interest, penalties, and costs that may accrue in addition thereto constitutes a lien upon all property and rights to property belonging to the taxpayer. The lien attaches when the taxpayer neglects or refuses to pay after demand. (sec. ,1.3
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TAX LAW REVIEWER

Procedure for Co$putin+ Net Estate and Estate Tax 8&R9BLA! ;ross 6state +6SS! *llowable deductions 6state after allowable deductions +6SS! Z net share of surviving spouse on conjugal or community property (if applicable3 0amily home allowance (if applicable3 R <et estate of decedent +6SS! 5,BB, BBB.BB exemptions R Taxable net estate P Tax )ate in section -8 R *mount of estate tax due *LEN TLE GR&SS ESTATE EKCEEDS P 1,DDD,DDD.DD, TLE ESTATE TAK RETBRN SLALL .E ACC&9PANIED .O A STATE9ENT, *LICL IS CERTI8IED .O AN INDEPENDENT PB.LIC ACC&BNTANT STATING: 1. The itemi#ed assets of the decedent with its corresponding gross value at the time of his death or in the case of a non-resident, not citi#en of the 5hilippines that part of his gross estate situated in the 5hilippines. ,. The itemi#ed deductions from the gross estate. >. The amount of tax due, whether paid or still due and outstanding. Pa#$ent of the Estate Tax: The estate tax shall be paid at the time when the estate tax return is filed. $hen the ommissioner finds that the payment of the estate tax on the due date would impose undue hardships upon the estate, or any heirC *.3The payment of the estate tax may be extended for a period not to exceed five years, if there is a judicial settlement of the estateC or b.3 The payment of the estate tax may be extended for a period not to exceed two years if there is an extra-judicial settlement of the estate. Conditions for Extension of Ti$e Pa#$ent: *.3 The taxpayer is not guilty of negligence, intentional disregard of rules and regulations, or fraudC otherwise, no extension maybe grantedC and I.3 The executor, administrator, or beneficiary may be reAuired to furnish a performance bond in an amount not exceeding double the amount of the tax due.
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TAX LAW REVIEWER

KISTI< TI9< I6T$66< K9<9)&S T*P *<K 6ST*T6 T*P K9<9)&S T*P 6ST*T6 T*P Tax on the privilege Tax on the privilege to transmit property to transmit property during the lifetime of upon one&s death the donor Tax rates are lower Tax rates are higher 6xemption is only 5 Tax exemption is 1BB,BBB.BB 5,BB,BBB.BB <otice of donation is <otice of death is not reAuired reAuired 6xtension of payment 6xtension of payment is not provided may be granted by the ommissioner of Internal )evenue 5ayable within >B 5ayable within / days from the date of months from the date gift of death Imposed on the net Imposed on the net gift estate 9eanin+ of donation or +ift. Is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it. 0or tax purposes, the term has a much wider meaning, it includes! *. any transfer of property by gift, except in forced sales and in the sale of real property which is a capital asset, for less than and adeAuate and full consideration in money or money&s worth. (sec. 1BB3 I. ondonation or remission of debt, where the creditor merely desires to benefit a debtor and without any consideration therefore cancels the debt. PARTIES T& A D&NATI&N! "onor The 5erson who disposes of his property or right. Donee The 5erson who receives the property or right. @<$T M$G;E "ON$TE"H T%I<; or )I;%T
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TAX LAW REVIEWER

CINDS &8 D&NATI&NS: Accordin+ to its date of effecti(it#: =.J Donation nter vivos If made between living persons to take effect during the lifetime of the donor. 1.J Donation Mortis Causa If made in the nature of a testamentary disposition that is it shall take effect at the time of death of the donor. D&NATI&NS N&T SB.7ECT T& D&N&RHS TAK 9nly donations inter vivos are subject to donor&s tax. 1. Konations mortis causa Is subject to estate tax. The laws on succession govern them. ,. Konation Inter vivos 9f the amount of 51BB, BBB.BB or less and those declared exempt by the tax code and special laws are also not subject to Konor&s tax. 9eanin+ of +ift tax :onors tax is a tax imposed on the transfer without the consideration of property between two or more persons who are living at the time the transfer is made. CINDS &8 GI8T TAKES: They are! 1.3 Konor&s tax or tax levied on the act of givingC it supplements the estate taxC and ,.3 Konee&s tax or tax levied on the act of receivingC it was formerly the counterpart of the inheritance tax, which has been integrated into an estate tax. Note: Ioth taxes have been integrated into a donor&s tax. 8A2= > O7 GI72 2A? It is an excise (privilege3 tax, imposed on the privilege of the donor to give or on the privilege of the donee to receive. It is not a tax on the property as such because its imposition does not rest upon general ownership. The tax is imposed without reference to the death of the donor unlike in the case of estate tax.
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TAX LAW REVIEWER

P= PO#> O7 GI72 2A? 1.3 The gift tax was enacted originally to supplement the estate and inheritance taxes by preventing their avoidance through the taxation of gifts inter vivos. ,.3 The donor&s tax is also intended to prevent the avoidance of income tax through the device of splitting income among numerousLdifferent donees with the donor thereby escaping the effect of the progressive rates of income taxation. PR&PERTO INCLBDED IN TLE TER9 >1 .TF IAJ. In the case of resident citi<ens, non"resident citi<ens and resident a!iens: 1. )eal property within and without the 5hilippines. ,. Tangible personal property within and without the 5hilippinesC and >. Intangible personal property within and without the 5hilippines. I..J In the case of non"resident a!iens! 1. )eal property within the 5hilippines. ,. Tangible personal property within the 5hilippines. >. Intangible personal property within the 5hilippines, unless there is reciprocity in which case, it is not taxable!
Note: The specific items includible in the E+ross estateF are applicable to and are embraced by the term E+iftF. TRANS8ERS SB.7ECT T& D&N&RHS TAK: Konor&s tax shall apply! *. whether the transfer is in trust or otherwiseC I. whether the gift is direct or indirect (remissionLcondonation of debt3 . whether the property is real or personal, tangible or intangible. Note: It includes not only the transfer of ownership in the fullest sense but also the transfer of any right or interest in property but less than title. RE0BISITES &8 A TAKA.LE GI8T: 1.3 ,.3 >.3 8.3 CAPACITO of the donor to make the donationC D&NATI:E INTENT or INTENT on the part of the donor to make a giftC DELI:ERO, whether actual or constructive, of the giftC and ACCEPTANCE of the gift by the donee.
Note:
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*. the donee, unlike the donor need not be capacitated. I. donor&s tax applies now to both natural and judicial persons. . donative intent must be present in direct gift but with respect to indirect gift, e.g. transfer of property for less than an adeAuate and full consideration, donative intent is superfluous. Thus, donative intent is not always essential to constitute a gift. LA* APPLICA.LE: The law in force at the ti$e of the perfection / co$p!etion of the donation shall govern the imposition of donor&s tax. #2 A8G> * person who is not a brother, sister, spouse, ancestor and lineal descendant or of a relative by consanguinity in the collateral within the 8th civil degree. TAK PAOA.LE *LEN TLE D&N&R IS A STRANGER: $hen the donee is a stranger, the tax payable by the donor shall be 2DQ of the net gifts. Note: If the beneficiary is not a stranger, the applicable rate is that provided in sec..., <I) . P&LITICAL C&NTRI.BTI&NS *ny contribution in cash or in kind to any candidate, political party, or coalition of parties for campaign purposes, shall be governed by the 6lection code. 9EANING &8 NET GI8T Net +ift =eans the total amount of gifts less the allowable deductions and specific exemptions. The donor&s tax is computed on the basis of the total net gifts made during the calendar year. ALL&*A.LE DEDBCTI&NS: Gifts 9ade %# a Resident! a.J Kowries or gifts made on account of marriage before its celebration or within one year thereafter by parents to each of their legitimate, illegitimate or adopted children to the extent of the first 51B,BBB.BB. Re,uisites:
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1. The donation must be given on account of marriage. ,. The parent must give it to his child. >. The child must be either the legitimate, recogni#ed natural or legally adopted child of the donor, andC 8. It must be given within one year before or after the celebration of the marriage. %.J ;ifts made to or for the use of the <ational ;overnment or any of its agencies which is not conducted for profit, or to any political subdivision of the said government. c.J ;ifts in favor of educational, charitable, religious, cultural or social welfare corporation, institutions, foundations, trust or philanthropic organi#ation, research institution or organi#ation, or accredited non-government organi#ation. 5rovided, that no more than >BO of said gifts shall be used by such donee for administration purposes. Note: 0or purposes of exemption, a non-profit educational andLor charitable corporation, institution, accredited non-government organi#ation, trust or philanthropic organi#ation is defined as! school, trust or university andL or charitable corporation, foundation trust or philanthropic organi#ation andL or research institution or organi#ation incorporated as a non-stock entity! paying no dividends. governed by trustees who receives no compensationC and devoting all its income to the accomplishment and promotion of the purposes enumerated in its articles of incorporation. d.J 6ncumbrances on the property donated if assumed by the doneeC and e.J Those specifically provided by the donee as a diminution of the property donated. f.J The first 51BB, BBB.BB value of the gift (exemption3. +.J Tax credit for donor&s tax paid to a foreign country. 1ifts made /y a Non?!esident not a CitiDen of the Philippines *.3 ;ifts made to or for the use of the <ational ;overnment or any entity created by of its agencies which is not conducted for profit, or to any political subdivision of the said government. I.3 ;ifts in favor of educational, charitable, religious, cultural or social welfare corporation, institution, foundations trust or philanthropic organi#ation, research organi#ation or institution or accredited <;9. 5rovided, that no more than >BO of said gifts shall be used by such donee for administration purposes. .3 0irst 51BB, BBB.BB of the gift. (6xemption3
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Note: 1. Intangible personal property in the gross gift of a N&N"RESIDENT ALIEN donor shall be taxable in the 5hilippines, if the PRINCIPLE &8 RECIPR&CITO is not cogni#able. ,. Intangible personal properties considered situated in the 5hilippines. 0ranchise which must be exercised in the 5hilippines Shares of stocks issued by any corporation or sociedad anonima organi#ed or constituted in the 5hilippines in accordance with its laws. Shares of stocks issued by any foreign corporation -?O of the business of which is situated in the 5hilippines. Shares of stock issued by a foreign corporation, if such shares, obligations, or bonds, have acAuired a business situs in the 5hilippinesC and Shares or rights in any partnership, business or industry established in the 5hilippines. >. :&ID D&NATI&NS ARE N&T SB.7ECT T& D&N&RHS TAK Such as! Ietween husband and wife, even if the relationship has not been solemni#ed. Ietween persons guilty of adultery or concubinage. Ietween those found guilty of the same criminal offenses. Ietween those made to a public officer or his wife, descendants, ascendants by reason of his office.
8. )enunciation of inheritance in favor of a co-heir is not subject to donor&s tax but, if it is renounced in favor of a third person it shall be subject to donor&s tax. T$2 C!E" T .O! "ONO!BS T$2ES P$ " TO $ .O!E 1N CO=NT!G 1.3 Konor was a 0ilipino citi#en or resident alien, at the time of foreign donation ,.3 Konor&s taxes of any character and description are imposed and paid by the authority of a foreign country. Li$itations: *.3 0or donor&s tax paid to one forei+n countr#N The amount of tax credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which credit is taken which the net gifts situated within such country taxable under the <ational Internal )evenue ode bears to his entire net gift, and I.3 0or donor&s tax paid to t o or $ore forei+n countries:
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The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the donor&s net gift situated outside the 5hilippines taxable under the <ational Internal )evenue ode bears to his entire net gift. 8&R9BLA: 1. Konor&s Tax 5aid to 1 0oreign ountry <et gift situated in a foreign country P 5hil. Konor&s Tax R Tax redit +imit 6ntire net gifts ,. Konor&s Taxes paid to , or more 0oreign ountries <et gifts outside the 5hilippines P 5hil. Konor&s Tax R Tax redit +imit 6ntire net gifts Note: Nnder limitation * the allowable tax credit limit is the L&*ER A9&BNT between the tax credit limit and the gift tax paid to the foreign country. Nnder limitation I the allowable tax credit is the L&*ER A9&BNT between the tax creditsC limit computed under * and that computed Nnder I.

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General Principles & NIRC 2004backup2

General Principles & NIRC 2004backup2

b. <on)esident alien (<)3 1. <on )esident lien