2010 Taxation Review by Domondon 1

PRIMUS PRE-BAR REVIEW DIVISION
“BAR STAR NOTES”
TAXATION

VER. 2010.08.12
copyrighted 2010
Prepared by Prof. Abelardo T. Domondon
(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.). Lawyer-CPA-Customs Broker, Management
Consultant, Professor of Law and Pre-Bar Reviewer)

How to use the “BAR STAR NOTES.” The “BAR STAR NOTES” in the form of questions and answers as well as
textual discussion were specially prepared by Prof. Domondon for the exclusive use of Bar Reviewees who
attended the 2010 Wrap-Up Lectures on TAXATION conducted by Primus Information, Center, Inc., and the Bar
Reviewees of various law schools and Review Centers where he was invited to lecture on Taxation. Included in the
presentation are doctrines contained in Supreme Court decisions up to April 2010.
The purpose of the „BAR STAR NOTES” is to provide the Bar Reviewee with a handy review material which
serves as “memory-joggers” for the September 12, 2010 Bar Examinations in Taxation. The author tries to second guess
what would be included in the Bar Exams using statistical analysis. The actual Bar questions may not be formulated in
the same manner as the “BAR STAR NOTES”. However, the doctrines tested in the Bar would in all probability be
included in these Notes.
If pressed for time, the author suggests that the reader should focus his attention on the following:
â
Nice to know
ââ
Should know
âââ
Must know and master
It is further suggested that the reader should merely browse those without stars.
The BAR STAR NOTES in TAXATION is the 4th in the series of Bar Star Notes the author has prepared for
all the eight Bar subjects. The other Bar Star Notes may be availed of by enrolling in the 2010 Wrap-Up lectures
conducted by PRIMUS INFORMATION CENTER, INC.Please feel free to call Baby, Tel. No. 816-07-68 or 817-84-49;
Leon, Mobile No. 0917-793-6169; Atty. Celia, Mobile No. 0917-790-8406, or Venny, Mobile No. 0917-337-6479.
WARNING:
These materials are copyrighted and/or based on the writer‟s books on Taxation and future revisions. It is
prohibited to reproduce any part of these Notes in any form or any means, electronic or mechanical, including
photocopying without the written permission of the author. These materials are authorized for the use only of PRIMUS
Reviewees and others who attended the author‟s lectures on Taxation. Unauthorized users shall not be prosecuted
but SHALL BE SUBJECT TO THE LAW OF KARMASUCH THAT THEY WILL NEVER PASS THE BAR OR WOULD
BE UNHAPPY IN LIFE for stealing the intellectual property of the author.
THE BEST OF LUCK AND ADVANCE CONGRATULATIONS
TAXATION
GENERAL PRINCIPLES OF TAXATION
TAXATION, IN GENERAL
â 1.
State briefly and concisely the nature of taxation. Alternatively, define taxation.
SUGGESTED ANSWER: The inherent power of the sovereign exercised through the legislature to impose burdens
upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of
government.
âââ 2.

What is the nature of the State’s power to tax ? Explain briefly.

SUGGESTED ANSWER: The nature of the state‟s power to tax is two-fold. It is both an inherent power and a
legislative power.
It is inherent in nature being an attribute of sovereignty. This is so, because without the
taxes, the state‟s existence would be imperiled. There is thus, no need for a constitutional grant for the state to exercise
this power.
It is a legislative power because
it involves the promulgation of rules. Taxation is a set of rules, how much is the tax to be paid, who pays the tax, to whom
it should be paid, and when the tax should be paid.
â 3.
What is the underlying theory of taxation ? Explain briefly.
SUGGESTED ANSWER: Taxes are the lifeblood of the nation.
Without revenue raised from taxation, the
government will not survive, resulting in detriment to society. Without taxes, the government would be paralyzed for lack
of motive power to activate and operate it. (Commissioner of Internal Revenue v. Algue, Inc. et al., 158 SCRA 8, 16-17)
â 4. Marshall said that, “the power to tax involves the power to destroy.” On the other hand,
Holmes stated
that
“the power
to tax
is
not
the
power to destroy while the court sits.”
Reconcile the
statements.
In the alternative, what are the implications that flow
from the above statements ?
SUGGESTED ANSWERS: Marshall‟s view refers to a
valid tax while the Holmes‟ view refers to an invalid tax.
a.
The imposition of a valid
tax could not be judicially restrained merely because it would prejudice taxpayer‟s property.
b.
An
illegal tax could be judicially declared invalid and should not work to prejudice a taxpayer‟s property.
â 5. Discuss
briefly
the
basis/bases,
or
rationale
of
taxation.
SUGGESTED ANSWER: a.
Reciprocal
duties of protection and support between the state and its citizens and residents. Also called “symbiotic
relation” between the state and its citizens.
b.
Jurisdiction by the state over persons and property within its territory.
â 6. Discuss briefly but comprehensively the objectives or purposes of taxation.
SUGGESTED
ANSWER: The
purposes
or
objectives
of
taxation
are
the
following:
a.
The
primary
purpose:
1)
Revenue
purpose.
b.
The
secondary
purposes
1)
Sumptuary
or
regulatory
purpose.
2)
Compensatory
purpose.
3)
To implement the power of eminent domain.
â 7. Distinguish a tax from a license fee.
SUGGESTED ANSWER: The following are the
distinctions:
a.
Purpose: Tax imposed for revenue while license fee for regulation. Tax for general public
purposes
while
license
fee
for
regulatory
purposes
only.
b.
Basis: Tax imposed under power of taxation
while license fee under police power.
c.
Amount: In
taxation, no limit as to amount while license fee limited to cost of the license and the expenses of police surveillance and
regulation.
d.
Time of payment: Taxes
normally paid after commencement of business while license fee before.
e.
Effect of
payment: Failure to pay a tax does not make the business illegal while failure to pay license fee makes business
illegal.
f.
Surrender: Taxes, being the lifeblood of the state, cannot be surrendered except for lawful
consideration while a license fee may be surrendered with or without consideration. (Cooley on Taxation, pp. 11371138; Pacific Commercial Company v. Romualdez, et al., 49 Phil. 924)
â 8. How may the power to tax be utilized to carry out the social justice program of our government
?
SUGGESTED ANSWER: The compensatory purpose of taxation is to implement the social justice
provisions of the constitution through the progressive system of taxation, which would result to equal distribution of wealth,
etc.
Progressive income taxes alleviate the margin between rich and poor. (Southern Cross Cement Corporation v.
Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)
In recent years, the increasing social challenges of the times expanded the scope of the state activity, and taxation
has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection
of local industries as well as public welfare and similar objectives. (Batangas Power Corporation v. Batangas City, et
al., G. R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City of Cabanatuan, G. R.
No. 149110, April 9, 2003)
9.
Explain the sumptuary purpose of taxation.
SUGGESTED ANSWER: The sumptuary purpose of taxation is to promote the general welfare and to protect the
health, safety or morals of the inhabitants. It is in the joint exercise of the power of taxation and police power where
regulatory taxes are collected.

Taxation may be made the implement of the state‟s police power. The motivation behind many taxation measures is
the implementation of police power goals. [Southern Cross Cement Corporation v. Cement Manufacturers Association of the
Philippines, et al., G. R. No. 158540, August 3, 2005) The reader should note that the August 3, 2005 Southern Cross case is
the decision on the motion for reconsideration of the July 8, 2004 Southern Cross decision.
The so-called “sin taxes” on alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of
these potentially harmful products. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the
Philippines, et al., G. R. No. 158540, August 3, 2005)
10.
Taxation distinguished from police power. Taxation is distinguishable from police power as to the means
employed to implement these public goals. Those doctrines that are unique to taxation arose from peculiar considerations
such as those especially punitive effects (Southern Cross Cement Corporation v. Cement Manufacturers Association of the
Philippines, et al., G. R. No. 158540, August 3, 2005) as the power to tax involves the power to destroy and the belief that
taxes are lifeblood of the state. (Ibid.) taxes being the lifeblood of the government, their prompt and certain availability is of
the essence.”
These considerations necessitated the evolution of taxation as a distinct legal concept from police power. (Ibid.)
11.
How the power of taxation may be used to implement power of eminent domain. Tax measures are
but ”enforced contributions exacted on pain of penal sanctions” and “clearly imposed for public purpose.” In most recent
years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable
distribution of wealth. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16,
2005)
Establishments granting the 20% senior citizens discount may claim the discounts granted to senior citizens as tax
deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be
allowed as deduction from gross income for the same taxable year that the discount is granted. Provided, further, That the
total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales
receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal
Revenue Code, as amended. [M.E. Holding Corporation v. Court of Appeals, et al., G.R. No. 160193, March 3, 2008 citing
Expanded Senior Citizens Act of 2003, Sec. 4 (a)]
â 12. What are the three basic principles of a sound tax system? Explain each
briefly.
SUGGESTED ANSWER: The canons of a sound tax system, also known as the
characteristics or, principles of a sound tax system, are used as a criteria in order to determine whether a tax system is
able to meet the purposes or objectives of taxation. They are:
a.
Fiscal adequacy.
b.
Administrative feasibility.
c.
Theoretical justice.
â 13.
ANSWER:
b.
c.
d.
e.
f.
g.
h.

What

are

the

elements

or

a.

characteristics
of
a
Enforced contribution.

tax

?

SUGGESTED

Generally payable in money.
Proportionate in character.
Levied on persons, property or exercise of a right or privilege.
Levied by the state having jurisdiction.
Levied by the legislature.
Levied for a public purpose.
Paid at regular periods or intervals.

14.
State
the
requisites
of
a
valid
tax.
SUGGESTED
ANSWER:
a.
A valid tax should be within the jurisdiction of the taxing
authority.
b.
That the assessment and collection of certain kinds (The same as the inherent limitations of the power of
taxation) should be for a public purpose.
c.
The rule of taxation should be uniform.
d.
That either the person or property of taxes guarantees against injustice to individuals, especially by
way or notice and opportunity for hearing be provided.
e.
The tax must not impinge on the inherent and Constitutional limitations on the power of
taxation.
â15. What are the classes or kinds of taxes according to the subject matter or object
?
SUGGESTED
ANSWER:
a.
Personal, poll or capitalization – imposed on all
residents, whether citizen or not. Example – Community Tax.

b.
Property
- Imposed
on
property. Example

Real
property
tax.
c.
Excise – imposed upon the
performance of an act, the enjoyment of a privilege or the engaging in an occupation. Example – income tax, estate
tax.
ââ16. What are the kinds of taxes classified as to who bears the burden ? Explain each
briefly.
SUGGESTED ANSWER: Based on the possibility of shifting the incidence of taxation, or as to
who shall bear the burden of taxation, taxes may be classified into:
a.
Direct taxes. Those that are extracted from the very person who, it is intended or desired, should pay
them (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G. R. No. 140230, December
15, 2005); they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in,
(Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, supra) which liability cannot be
shifted or transferred to another. Example – income tax, estate tax, donor‟s tax, etc.
b.
Indirect taxes are those that are demanded in the first instance, from, or are paid by, one person in the
expectation and intention that he can shift the burden to (Commissioner of Internal Revenue v. Philippine Long Distance
Telephone Company, supra) to someone else not as a tax but as part of the purchase price. (Commissioner, of Internal
Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005 citing various
cases and authorities) Example – value added tax (VAT), documentary stamp tax, excise tax, percentage tax, etc.
ââ17. Silkair (Singapore) PTE, Ltd., an international carrier, purchased aviation gas from Petron
Corporation, which it uses for its operations. It now claims for refund or tax credit for the excise taxes it paid
claiming that it is exempt from the payment of excise taxes under the provisions of Sec. 135 of the NIRC of 1997
which provides that petroleum products are exempt from excise taxes when sold to “Exempt entities or agencies
covered by tax treaties, conventions, and other international agreements for their use and consumption: Provided,
however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes
petroleum products sold to Philippine carriers, entities or agencies”
Silkair further anchors its claim on Article 4(2) of the Air Transport Agreement between the Government
of the Republic of the Philippines and the Government of the Republic of Singapore (Air Transport Agreement
between RP and Singapore) which reads: “Fuel, lubricants, spare parts, regular equipment and aircraft stores
introduced into, or taken on board aircraft in the territory of one Contracting party by, or on behalf of, a designated airline
of the other Contracting Party and intended solely for use in the operation of the agreed services shall, with the exception
of charges corresponding to the service performed, be exempt from the same customs duties, inspection fees and other
duties or taxes imposed in the territories of the first Contracting Party , even when these supplies are to be used on the
parts of the journey performed over the territory of the Contracting Party in which they are introduced into or taken on
board. The materials referred to above may be required to be kept under customs supervision and control.”
Silkair likewise argues that it is exempt from indirect taxes because the Air Transport Agreement between
RP and Singapore grants exemption “from the same customs duties, inspection fees and other duties or taxes
imposed in the territory of the first Contracting Party. It invokes Maceda v. Macaraig, Jr., G.R. No. 88291, May 31,
1991, 197 SCRA 771.which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on
the ground that the NPC is exempt even from the payment of indirect taxes.
Is Silkair entitled to the tax refund or credit it seeks ? Reason out your answer.
SUGGESTED ANSWER: Silkair is not entitled to tax refund or credit for the following reasons:
a.
The excise tax on aviation fuel is an indirect tax. The proper party to question, or seek a refund of, an
indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he
shifts the burden thereof to another. (Philippine Geothermal, Inc. v. Commissioner of Internal Revenue, G.R. No. 154028,
July 29, 2005, 465 SCRA 308, 317-318) The NIRC provides that the excise tax should be paid by the manufacturer or
producer before removal of domestic products from place of production. Thus, Petron Corporation, not Silkair, is the
statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air
Transport Agreement between RP and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet
fuel is not a tax but part of the price which Silkair had to pay as a purchaser. [Philippine Acetylene Co., Inc. v.
Commissioner of Internal Revenue, 127 Phil. 461, 470 (1967)]
b.
Silkair could not seek refuge under Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA
771.which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC
is exempt even from the payment of indirect taxes.
In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G.R. No. 140230,
December 15, 2005, 478 SCRA 61 the Supreme Court clarified the ruling in Maceda v. Macaraig, Jr., viz: It may be so
that in Maceda vs. Macaraig, Jr., the Court held that an exemption from “all taxes” granted to the National Power
Corporation (NPC) under its charter includes both direct and indirect taxes.
An exemption from “all taxes” excludes indirect taxes, unless the exempting statute, like NPC‟s charter, is so
couched as to include indirect tax from the exemption. The amendment under Republic Act No. 6395 enumerated the
details covered by NPC‟s exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of

Territoriality. be construed as including indirect taxes. and e. Inequalities resulting from the singling out of one particular class for taxation or exemption infringe no constitutional limitation. among others. Public purpose. Determined at the time of enactment of tax law and not at the time of implementation. but under police power for the general welfare of the community. It succinctly exempts NPC from “all forms of taxes. and if an exemption is found to exist. What are the principles to consider in the determination of whether tax revenues are devoted for a public purpose ? SUGGESTED ANSWER: a. G. The revenues collected from taxation should be devoted to a public purpose. Thus. On the other hand taxation is an act of sovereign. fiscal or revenue – imposed for the purpose of raising public funds for the service of the government. An individual taxpayer need not derive direct benefits from the tax. Only the legislature can exercise the power of taxes unless the same is delegated to some other governmental body by the constitution or through a law which does not violate any provision of the constitution. No. b. The limitations also serve as a standard to measure the validity of a tax law or the act of a taxing authority. it must not be enlarged by construction. LIMITATIONS OR RESTRICTIONS ON THE POWER 1. A violation of the limitations serves to invalidate a tax law or act in the exercise of the power to tax. The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore cannot. Commissioner of Internal Revenue. Recognition of government exemptions. Special or regulatory – imposed primarily for the regulation of useful or non-useful occupation or enterprises and secondarily only for the raising of public funds. h. This would still be for a public purpose. REASON: It is inherent in the power to tax that the legislature is free to select the subjects of taxation.. d. February 6. without a clear showing of legislative intent. Purpose for the limitations on the power of taxation. (Silkair (Singapore) PTE. BASIS: The lifeblood theory. both direct and indirect taxes on all petroleum products used in its operation. d. Tax revenue must not be used for purely private purposes or for the exclusive benefit of private persons.R. What are the different kinds of taxes classified as to purpose ? SUGGESTED ANSWER: a. Areas formerly left to private initiative now lose their boundaries and may be undertaken by the government if it is to meet the increasing social challenges of the times. Some authorities include no double taxation. . Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. b. 2008) â18. ââ 2. Public purpose continually expanding. not so much for revenue purposes. Ltd. c. The tax revenues are for a public purpose if utilized for the benefit of the community in general. The inherent and constitutional limitations to the power of taxation are safeguards which would prevent abuse in the exercise of this otherwise unlimited and plenary power. b. The taxing power should be exercised only within territorial boundaries of the taxing authority. INHERENT LIMITATIONS ââ 1. 173594. Comity is the respect accorded by nations to each other because they are equals. Observance of the principle of comity. duties. fees…” The use of the phrase “all forms” of taxes demonstrates the intention of the law to give NPC all the tax exemptions it has been enjoying before. e. No improper delegation of legislative authority to tax. Presidential Decree No. A tax may be imposed. REASON: The paramount consideration is the welfare of the greater portion of the population. c. f. What are the inherent limitations on the power of taxation ? SUGGESTED ANSWERS: a. Private persons may be benefited but such benefit should be merely incidental as its main object is the benefit of the community in general. v. An alternative meaning is that tax proceeds should be utilized only to attain the objectives of government. the power should be imposed upon equals out of respect. 938 [NPC‟s amended charter] amended the tax exemption by simplifying the same law in general terms.NPC to cover. General. g.

2005 citing Gonzales v. Cohen. Secretary of Public Works. the case should involve constitutional issues. R. A law was enacted imposing a tax on manufacturers of coconut oil.. August 14. 140835.. et al. v. Some of the manufacturers of coconut oil challenge the validity of the law. contending that the tax is to be used for a private purpose. No.. No. v. . there must be a showing of obvious interest in the validity of the election law in question.. and therefore.. Narvasa. No. 157509. Central Luzon Drug Corporation. voters or legislators to have locus standi to sue. et al. G. 33) or a claim of illegal disbursement of public funds or that the tax measure is unconstitutional. 171396. The following are examples of instances where suits have been brought by parties who have not have been personally injured by the operation of a law or any other government act but by concerned citizens. Requisites for taxpayers..2000. For legislators. G. a. 2006) 5. R. et al. (Santos & Co. modify and/or repeal laws. Jr.. For voters. G. G. can claim any injury from the alleged executive encroachment of the legislative function to amend. R.. concerned citizens.et al. therefore. b. 157509. R. Presidential Commission on Good Government. (David. etc. and public convenience. For concerned citizens.. 392 U. to improve the working conditions in coconut mills and to conduct research on the use of coconut oil for motor fuel. 1047) j. et al. or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law.. . or that public money is being deflected to any improper purpose.etc. G.. such as for example employees who would find themselves subject to disciplinary powers that may be imposed under the questioned Executive Order as they have a direct and specific interest in raising the substantive issue therein (Automotive Industry Workers Alliance (AIWA). R.S. d. there must be a showing: 1) That tax money is “being extracted and spent in violation of specific constitutional protections against abuses of legislative power. Public use is no longer confined to the traditional notion of use by the public but held synonymous with public interest.. Locus standi being merely a matter of procedure. No. transferred or otherwise affected by any personnel action subject o the rule on exhaustion of administrative remedies.” (Flast v. 110 Phil. Narvasa. the sustained growth of which is one of the imperatives of economic growth. the state‟s concern to make it a strong and secure source not only of the livelihood of the significant segment of the population. 2000. Municipality of Meycauayan. May 3. a.. Only those directly affected have locus standi to impugn the alleged encroachment by the executive department into the legislative domain of Congress. President Gloria MacapagalArroyo.etc.. 741) 6. For taxpayers. January 18. 140835. February 14.. 2006) b. et al. No. Inc. there must be a showing that the issues raised are of transcendental importance which must be settled early. et al. No. August 14. etc. 337 SCRA 733.R. (Commissioner of Internal Revenue v. Enriquez. etc. supra) 3) A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed. citing Gonzales v. (Abaya v. v. v. Garcia v. 741) c. (Automotive Industry Workers Alliance (AIWA). Romulo. 2007.. (Automotive Industry Workers Alliance (AIWA). Taxpayer‟s suits to question contracts entered into by the national government or government-owned or controlled corporations allegedly in contravention of the law. 159647. only Congress. (Cocofed v.etc. (David. May 3. It is. There is a presumption of public purpose even if the tax law does not specifically provide for its purpose. e. and if at all. G. 252) ââ 4. 337 SCRA 733. G. R. . 94 Phil. In general.et al. It cannot be denied that the coconut industry is one of the major industries supporting the national economy.R. et al. No. 178 SCRA 236. there must be a claim that the official action complained of infringes upon their prerogatives as legislators. et al. G. v. have been waived in certain instances where a party who is not personally injured may be allowed to bring suit. President Gloria Macapagal-Arroyo. 167919. No. 112655 December 9. Only those who shall be directly affected by such executive encroachment. R. etc.i. Ebdane. SUGGESTED ANSWER: The levy is for a public purpose. taxpayers or voters who actually sue in the public interest: a. the proceeds of which are to be used exclusively for the protection and promotion of the coconut industry. G. Decide with reason. public benefit. 1993. supra. namely. January 18. 83) 2) That public money is being deflected to any improper purpose (Pascual v. 2005) ââ 3. April 16. the law violates the rule that public revenues shall not be appropriated for anything but a public purpose. (Philippine Coconut Producers Federation. public welfare. (David. 2005) or employees who are going to be demoted. but also of export earnings. Moreover. Romulo. 171396. Minute Resolution) A taxpayer‟s suit is properly brought only when there is an exercise of the spending or taxing power of Congress. No.

G. and companion case. 168056. The President cannot set aside the findings of the Secretary of Finance. Delegation to administrative bodies [Abakada Guro Party List (Formerly AASJS). et al. 2005]. c. and what is the scope of his authority. Taxing power of the local government is limited.. 2006. but pursuant to direct authority conferred by Section 5. “the power to tax is [still] primarily vested in the Congress. April 9. While the system of local government taxation has changed with the onset of the 1987 Constitution. G. or that public money is being deflected to any improper purpose. No. v. 484 SCRA 169 in turn referring to Mactan Cebu International Airport Authority. 162015. 2007) â 7. etc. The VAT law provides that. September 1. v. No.) v. Instances of proper delegation: When taxing power could be delegated: Exceptions to the rule on nondelegation: a. April 28.” Was there an invalid delegation of legislative power ? SUGGESTED ANSWER: No. 2005 and companion cases citing various cases]] 8. Ermita. local legislative bodies are now given direct authority to levy taxes. The delegation to the President of the Philippines to enter into executive agreements. This is constitutionally permissible. or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law. ABS-CBN Broadcasting Corporation. G. 9. Section 28 (2).” (People v. Ermita. In this instance. R. fees and other charges pursuant to Article X. 56) 10. Marcos. Delegation to the people at large. No. the basic doctrine on local taxation remains essentially the same. 120082. February 14. No. 167919. There is no undue delegation of legislative power but only of the discretion as to the execution of the law. 261 SCRA 667. of course.. Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution. 1996. 2004 citing National Power Corporation v. The power to tax is no longer vested exclusively on Congress.b. raise the rate of value-added tax to twelve percent (12%) after any of the following conditions have been satisfied. While the power to tax by local governments may be exercised by local legislative bodies. G. “(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or (ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%). section 5 of the 1987 Constitution. but rather as the grant of authority to prescribe local regulations. who is not under the conditions acting as the execute alter ego or subordinate. b. Bayan Telecommunications. . G. They no longer have to wait for a statutory grant of these powers. who must do it. G. City of Cabanatuan.R.168056. No. 149110. to determine and declare the even upon which its expressed will takes place. “is not regarded as a transfer of general legislative power. (Batangas Power Corporation v.. no longer merely by virtue of a valid delegation as before. In the above case the Secretary of Finance becomes merely the agent of the legislative department. R. (Abaya v. 152675. there is a requirement that the law is complete in all aspects so what is delegated is merely the implementation of the law or there exists sufficiently determinate standards to guide the delegate and prevent a total transference of the taxing power. the President. Batangas City. v. d. the power of local government units to tax is still limited. A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed. No. Article VI of the Constitution. et al.R. G. Vera. What it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue. Article X of the Constitution. v. R. Inc. 2003) Local government legislation. according to immemorial practice. March 6. and to ratify treaties which may contain tax exemption provisions subject to the concurrence by the Senate in the ratification made by the President. Further amplification by Bernas of the local government’s power to tax. “What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation.. September 1. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose . No. [Abakada Guro Party List (etc.. The taxing power of local governments is limited in the sense that Congress can enact legislation granting tax exemptions.” (Quezon City. 166408. etc. G. which is referred to as subordinate legislation.. September 11. et al. 680) 11. 2008 citing City Government of Quezon City. Congress does not abdicate its functions or unduly delegate power when it describes what job must be done. R. 65 Phil. “Paradigm shift” from exclusive Congressional power to direct grant of taxing power to local legislative bodies. et al. Ebdane. Delegation of tariff powers by Congress to the President under the flexible tariff clause. shall. to the interposition of the superior in cases of necessity. R. R. upon the recommendation of the Secretary of Finance. No. 2006. et al. October 6. e. effective January 1. subject.

Inc. 2006) ââ 15. ABS-CBN Broadcasting Corporation. (Sec.R. v. and must be within the jurisdiction of the local unit to pass. The local company withheld the amount of P107. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers. A foreign corporation. The Agreement provides that the purchase price will be paid to Ensite Ltd’s bank account in the U. 484 SCRA 169) 12. Juliane a non-resident alien appointed as a commission agent by a domestic corporation with a sales commission of 10% all sales actually concluded and collected through her efforts. The Supreme Court in a series of cases has sustained the power of Congress to grant tax exemptions over and above the power of the local government‟s delegated power to tax. That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker. Ensite Co. Since the activity of securing the sales were in Germany. a Philippine company while the 60% is owned by Fred Corporation. March 6. Ensite. A nonresident citizen is taxable only on income derived from sources within the Philippines. The important factor which determines the source of income of personal services is not the residence of the payor. v. 153793. Baier-Nickel. The negotiations for the buy-out and the signing of the Agreement of Sale were all done in the Philippines. No. must not be confiscatory. and f. 23.. and Susanto Co.000 from her sales commission and remitted the same to the BIR. A citizen of the Philippines residing therein is taxable on all income derived from sourceswithin and without the Philippines. 2006. d. is a Canadian corporation not doing business in the Philippines.S. whether engaged or not in trade or business in the Philippines. 2008 citing City Government of Quezon City. which includes the power to grant tax exemptions. It holds 40% of the shares of Philippine Stamping Plant. October 6. Reconciliation of the local government’s authority to tax and the Congressional general taxing power. No. October 6. A domestic corporation is taxable on all income derived from sources within and without the Philippines. 162015. General principles of income taxation in the Philippines or the source rule of income taxation as provided in the NIRC of 1997. v. decided to sell all its shares in Philippine Stamping Plant. An alien individual. City of Davao] âââ 13. Inc. Henceforth. G.. Bayan Telecommunications. and Susanto Co. R. G. a Filipino-owned Philippine corporation. No. R.. but the place where the services were actually performed. shall be transferred to General Co. On the other hand. G. Inc.. 166408. in Toronto Canada where stock . (Quezon City.R.. doubts must be resolved in favor of municipal corporations. is taxable only onincome derived from sources within the Philippines. G. An individual citizen of the Philippines who is working and deriving income abroad as anoverseas contract worker is taxable only on income from sources within the Philippines: Provided. the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons. (Commissioner of Internal Revenue v. or the place of payment. whether a resident or not of the Philippines. Bayan Telecommunications..” (Quezon City.. then the income did not originate from sources from within the Philippines. No. Inc. group. in interpreting statutory provisions on municipal fiscal powers. e. such as provinces and cities for example Quezon City. 2008 citing City Government of Quezon City. NIRC of 1997.” [Ibid.. It is understood.. also owns 100% of the shares of Susanto Co. 162015. these limitations must be “consistent with the basic policy of local autonomy. March 6... 2006.” The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations. an Indonesian company which has a duly licensed Philippine branch. Ensite Ltd. It must be noted that Section 137 of the LGC does not prohibit grant of future exemptions. referring to Philippine Long Distance Telephone Company. the power of local governments. 166408. R. is taxable only on income derived from sources within the Philippines. G. et al. Ltd. Congress has the inherent power to tax. however. doubts will be resolved in favor of municipal corporations. No. v. (PLDT) vs.. that taxes imposed by local government must be for a public purpose. the City or a province may impose a franchise tax. Inc. a. emphasis supplied) ââ14. pursuant to a declared national policy. August 29. 484 SCRA 16) “Indeed.. c.. Inc. to tax is prescribed by Section 151 in relation to Section 137 of the LGC which expressly provides that notwithstanding any exemption granted by any law or other special law. et al. Due to worldwide restructuring of the Ensite Ltd. Is her contention correct ? SUGGESTED ANSWER: Yes. and that title to the Philippine Stamping Plant.. ABS-CBN Broadcasting Corporation.limitations on municipal powers. She filed a claim for refund alleging that her sales commission is not taxable because the same was a compensation for her services rendered in Germany and therefore considered as income from sources outside the Philippines. b. et al. Moreover. or the place where the contract for service is entered into. uniform within a locality. et al.

. Inc. Inc. 2010 citingCommissioner of Internal Revenue v. Before remitting the dividends to Ensite Ltd. Inc. excess baggage. is a Philippine corporation. Focus your discussion on what is the issue.. Sec. Larry will bring his family to reside in Malaysia and will lease out his residence in the Philippines. allowances and rentals subject to Philippine income tax? Explain briefly. Angeles. Inc. the offline air carrier liable for the 32% (now 30%) tax on its taxable income. Considering that all the activities (sales) occurred within the Philippines. He will also be receiving rental income for the lease of his Philippine residence. Philippine Stamping Plant.. SUGGESTED ANSWER: The payments of the purchase price will be subject to withholding tax.. the income is considered as income from within. if applicable. No. Pampanga. should subject the remittance to withholding tax. Ensite. Philippine Stamping Plant. 180356. L-65773-74.. Larry will sign the contract of employment in the Philippines. both outside the Philippines.. has a subsidiary in Malaysia (Kuala Lumpur Manufacturing. seeks your advice as to whether or not it will subject the payments of the purchase price to withholding tax. In 2009. Inc. will credit the 50% of Larry’s salary to his Philippine bank account... British Overseas Airways Corporation (British Overseas Airways). British Overseas Airways Corporation (BOAC). The ”sale of tickets” in the Philippines is the activity that determines whether such income is taxable in the Philippines. 149 SCRA 395] b. Thus. There is no need to discuss WT rates. Co.. seeks your advice as to whether it will subject the remittance to withholding tax. Inc.” [NIRC of 1997. and are not reflected as assets of the Philippine branch. within the Philippine territory. 149 SCRA 395] Off-line air carriers having general sales agents in the Philippines are engaged in or doing business in the Philippines and their income from sales of passage documents here is income from within the Philippines. hence the dividends are considered as income from within.certificates will be delivered.. has an executive Larry who is a Filipino citizen. [South African Airways v. Since Philippine Stamping Plant. Inc. Philippine Stamping Plant.. Inc. Philippine Stamping Plant. Would it then be subject to any Philippine tax on such sales ? SUGGESTED ANSWER: It would not be subject to any tax. Inc. and not on his income from without. a Philippine corporation. Supposing that Obama.. Inc.. February 16.. The situs of the source of payments is the Philippines. its shares of stock have obtained a business situs in the Philippines. It is not subject to the carrier‟s tax based on gross Philippine billings because there were no lifts that originated from the Philippines.) and will assign Larry for an indefinite period to work full time for Kuala Lumpur Manufacturing. Inc.. Commissioner of Internal Revenue. 28(A)(3)(a)] c. through a general sales agent. planes from the Diosdado Macapagal Intl. subject to Philippine income taxation. sold tickets outside of the Philippines for travelers who are going to picked up by Obama. Ensite. ââ18. subject to income taxes on the sale of the tickets ? SUGGESTED ANSWER: Yes. Philippine Stamping Plant. No. Ltd.. irrespective of the place of sale or issue and the place of payment of the ticket or passage document. General Co. a foreign airline company which does not maintain any flight to and from the Philippines sold air tickets in the Philippines. Ltd. G. ââ 16. SUGGESTED ANSWER: The salaries and allowances of Larry. Obama Airlines. bound for Nairobi.R.. Inc. the flow of wealth proceeded from and occurred. a. should be subject to tax on its income from within. the flow of wealth should share the burden of supporting the government. being a foreign corporation. It is not subject to any income tax because the activity which generated the income (the sale of the tickets) was performed outside of the Philippines. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. also invested directly in 40% of the shares ofstock of Philippine Stamping Plant. April 30.Ensite. SUGGESTED ANSWER: Philippine Stamping Plant. . Explain your advice. then he is to be taxed only on his income derived from within the Philippines such as the rentals on his Philippine residence. These shares are booked in the Head Office of Ensite. Ltd. Ltd. cargo and mail originating from the Philippines in a continuous and uninterrupted flight. a Philippine corporation. while the other 50% plus housing. The salary of Larry will be shouldered 50% by Philippine Stamping Plant.. In consideration of such protection. Are these salaries. relating to the carriage of passengers and cargo between two points. Is Obama... Ltd. Ensite. Kenya ? Reason out your answer. cost of living and educational allowances of Larry’s dependents will be shouldered by Kuala Lumpur Manufacturing. [Commissioner of Internal Revenue v. Inc. Inc. ââ 17. The source of income which is taxable is that “activity” which produced the income. 1987. which has a duly licensed Philippine branch engage in trading activities in the Philippines. “Gross Philippine Billings” refers to the amount of gross revenue derived from carriage of persons. Since Larry is an OCW. being a foreign corporation is to be taxed on its income derived from sources within the Philippines. Inc. declared dividends to its stockholders. Inc. being derived from labor or personal services rendered outside of the Philippines is considered as income from without. South Africa to the Philippines but returns to South Africa without any cargo or passengers. sells tickets outside of the Philippines for passengers it carry from Gold City.. Airport at Clark. enjoying the protection accorded by the Philippine Government. is a Canadian corporation. Would your answer be the same if Obama.

Equal protection clause. 2010) 19. July 21. Taxation shall be uniform and equitable. impose. 2008) CONSTITUTIONAL LIMITATIONS 1. mosques. churches. Automatic release of local government's just share in national taxes. m. Delegated power of the President to impose tariff rates. irrespective of the place of sale or issue and the place of payment of the ticket or passage document. 2) Three (3) readings on three separate days. d. The specific or direct constitutional limitation. All appropriation. g. Commissioner of Internal Revenue. The Supreme Court's power to review judgments or orders of lower courts in all cases involving the legality of any tax. to general funds. as long as the uplifts of passengers and cargo occur from the Philippines. G. c. assessment or toll or the legality of any penalty imposed in relation to the above. and the grant must be made by the immediate representatives of the people. there it must remain and be exercised. and where the people have laid the power. and all lands. Due process clause. based on the principle that taxes are a grant of the people who are taxed. f. but the veto shall not affect the item or items to which he does not object. penal institutions. Fortune Tobacco Corporation. commutations and pardons and remittal of fines and forfeiture after conviction by final judgment. . (South African Airways v.R. Inc. No tax exemption without the concurrence of majority vote of all members of Congress. 167274-75. c. Freedom of the press.” [NIRC of 1997. Religious freedom. R. f. 28(A)(3)(a)] The place of sale is irrelevant. Presidential power to grant reprieves. j. government orphanage or leprosarium. l. would be subject to the carrier‟s tax based on Gross Philippine Billings. Constitutional limitations on the power of taxation . i. Law-making process: 1) Bill should embrace only one subject expressed in the title thereof. 3. tonnage and wharfage dues: 1) Delegation by Congress 2) through a law 3) subject to Congressional limits and restrictions 4) within the framework of national development program. Nos. The general or indirect constitutional limitations on the power of taxation are: a. g. The President shall have the power to veto any particular item or items in an appropriation. No taking of private property without just compensation. 180356. Money collected on tax levied for a special purpose to be used only for such purpose. revenue. No. balance if any. No improper delegation of legislative authority to tax. No imprisonment for non-payment of a poll tax. import and export quotas. charitable or educational purposes. a. d. revenue or tariff bills shall originate exclusively in the House of Representatives. 3) Printed copies in final form distributed three (3) days before passage. (GPB). e. Authority of local government units to create their own sources of revenue. G. February 16. (Commissioner of Internal Revenue v. to levy taxes. or tariff bill. h.. buildings and improvements of all kinds actually. e. cargo and mail originating from the Philippines in a continuous and uninterrupted flight. This time Obama. The power to tax is inherent in the State.SUGGESTED ANSWER: No more. k. Tax exemption of charitable institutions. h. 2. Non-impairment clause. Sec. fees and other charges subject to guidelines and limitations imposed by Congress consistent with the basic policy of local autonomy. b. parsonages and convents appurtenant thereto. excess baggage. “Gross Philippine Billings” refers to the amount of gross revenue derived from carriage of persons. b. No use of public money or property for religious purposes except if priest is assigned to the armed forces. but the Senate may propose and concur with amendments. such power being inherently legislative. directly and exclusively used for religious. income is included in GPB. Congress shall evolve a progressive system of taxation. The general or indirect constitutional limitations as well as the specific or direct constitutional limitations.

(Kahn v. The standard is satisfied if the classification or distinction is based on a reasonable foundation or rational basis and is not palpably arbitrary. directly and exclusively for educational purposes subject to conditions prescribed by law. August 14. et al. 9. Equal protection does not demand absolute equality. o. No. Government regulation that intentionally discriminates against a “suspect class” such as racial or ethnic minorities. G. [ABAKADA Guro Party List. but not widowers. that it must not be limited to existing conditions only. 366 U. et al. 416 U. If the groupings are characterized by substantial distinctions that make real differences. McGowan v. Tax exemption of grants. donations or contributions used actually. et al. v.” but neither are they judged by the traditional or rational basis test. 173176. 351) . The strict scrutiny (or compelling interest) test. R. Boren. Equal protection of the law clause is subject to reasonable classification. G. Tax exemption of all revenues and assets of proprietary or cooperative educational institutions subject to limitations provided by law including restrictions on dividends and provisions for reinvestment of profits. Natural Carboinic Gas Co. is subject to strict scrutiny and considered to violate the equal protection clause unless found necessary to promote a compelling state interest. they were treated differently. etc. c.” otherwise the classification is presumed to be valid.. The classification must also be germane to the purpose of the law and must apply to all those belonging to the same class. The intermediate level of scrutiny (or quasi-suspect class) test used in order to determine the validity of he classification.. The traditional (or rational basis) test. directly and exclusively for educational purposes. the classification should be based on substantial distinctions which make for real differences. b. A classification is necessary when it is narrowly drawn so that no alternative. Thus.S. (Tiu.. Intentional discriminations against members of a quasi-suspect class violate equal protection unless they are substantially related to important government objectives. No. The recognized tests are: a.S.S. January 20.R. it was held that denial of free public education to the children of illegal aliens imposes an enormous and lasting burden based on a status over which the children have no control is violative of equal protection because there is no showing that such denial furthers a “substantial” state goal. People. 420. 202) 11. Maryland. 2008] 7. The intermediate level of scrutiny (or quasi-suspect class) test. 127410. Fritz. non-profit educational institutions used actually. that it must be germane to the purpose of the law. G. (Santos v. endowments. 5. Court of Appeals. No.220 U. 2008) It is imperative to duly establish that the one invoking equal protection and the person to which she is being compared were indeed similarly situated. under like circumstances and conditions. All that is required of a valid classification is that it be reasonable..S. It merely requires that all persons shall be treated alike. The traditional (or rational basis) test used in order to determine the validity of classification. 166715. one class may be treated and regulated differently from another. c. Classification based on gender or legitimacy are not “suspect. and that they presented similar arguments and evidence in their defense yet. (Craig v. i. etc.S. Tax exemption of all revenues and assets of non-stock.n. 457 U. 449 U. 1999) ââ 6.. v. a state law granting a property tax exemption to widows. Doe.. et al. 190) Thus. which means that a. p. The classification is valid if it is rationally related to a constitutionally permissible state interest. (Santos. August 26. and d. R. that it must apply equally to each member of the class.” or ”capricious. (Plyler v. that they committed identical acts for which they were charged with the violation of the same provisions of the NIRC.” “wholly arbitrary. Tests to determine validity of classification.S. The complainant must prove that the classification is “invidous.. Shevin. both as to the privileges conferred and liabilities enforced. has been held valid for it furthers the state policy of cushioning the financial impact of spousal loss upon the sex for whom that loss usually imposes a heavier burden. less burdensome means is available to accomplish the state interest. Requisites for valid classification. United States Railroad Retirement Board v. 166) 10. b. 429 U. (Lindsley v. Purisima. 61. The strict scrutiny (or compelling interest) test used in order to determine the validity of the classification.e. supra) 8. The United States Supreme Court has established different tests to determine the validity of a classification and compliance with the equal protection clause.

although a violation of the statute. With respect to RA 9335. the classification and treatment accorded to the BIR and the BOC under RA 9335 fully satisfy the demands of equal protection. 2008) â 13. the result would be that the trial of the district attorney for nonfeasance would become an issue in the trial of many persons charged with heinous crimes and the enforcement of law would suffer a complete breakdown. R. Illustration of double taxation in local taxation. R. Coca-Cola Bottlers Philippines. Hence. and (6) of the same kind or character – a local business tax imposed on gross sales or receipts of the business. an erroneous or mistaken performance of the statutory duty. 7794. G. The rewards law to tax collectors does not violate equal protection. No. August 26. is not. Indubitably. 277 SCRA 617) ââ 9. since these are being imposed: (1) on the same subject matter – the privilege of doing business in the City of Manila. Likewise. v. is not without more a denial of the equal protection of the laws. (2) for the same purpose – to make persons conducting business within the City of Manila contribute to city revenues. People. The prosecution of one guilty person while others equally guilty are not prosecuted. (Santos v. Inc. Arguing that the ordinance rewards delinquent tax payers and discriminates against prompt ones. 173176. It is inherent in the power to tax that the State be free to select the subjects of taxation. People. G.. etc. Equality and uniformity of taxation may mean the same as equal protection. 2008) 12. Santos. infringe no constitutional limitation. August 14. the taxing authority has the prerogative to select the subjects and objects of taxation. 166715. (Santos v. customs duties. resulting in its unequal application to those who are entitled to be treated alike. 181845. August 26. There is a valid classification between those who already paid their taxes and those who have not.. While all persons accused of crime are to be treated on a basis of equality before the law. et al. No. Furthermore. R. or it may only be shown by extrinsic evidence showing a discriminatory design over another not to be inferred from the action itself. et al." (Commissioner of Internal Revenue. R. In such a case. Due to a series of typhoons and adverse economic conditions.. a classification that has a reasonable foundation or rational basis and not arbitrary.. The equal protection clause recognizes a valid classification. v. G. It would be unconscionable. Benjie files suit to declare the ordinance void on the ground that it is a class legislation. 2008) 11. There is no class legislation because there is no violation of the equal protection suit. etc. that is. and the condonation of all penalties on fines resulting from late payment. August 4. "inequalities which result from a singling out of one particular class of taxation. v. The unlawful administration by officers of a statute fair on its face. (ABAKADA Guro Party List. Benjie is a law-abiding citizen who pays his real estate taxes promptly. et al. a denial of the equal protection of the laws. (4) within the same taxing jurisdiction – within the territorial jurisdiction of the City of Manila.generation capability and collection of the BIR and the BOC. the terms would mean that all subjects and objects of taxation which are similarly situated shall be subject to the same burdens and granted the same privileges without any discrimination whatsoever. fees and charges. such substantial distinction is germane and intimately related to the purpose of the law. however. 2009) .12. et al.. 173176. or exemption. G. the law concerns only the BIR and the BOC because they have the common distinct primary function of generating revenues for the national government through the collection of taxes. Purisima. by itself.. (3) by the same taxing authority – City of Manila. No. it‟s expressed public policy is the optimization of the revenue-generation capability and collection of the BIR and the BOC. there is indeed double taxation if Coca-Cola is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No.. This may appear on the face of the action taken with respect to a particular class or person. et al. for instance. Since the subject of the law is the revenue. (5) for the same taxing periods – per calendar year. is not a denial of equal protection unless there is shown to be present in it an element of intentional or purposeful discrimination. 13. (The City of Manila. Will his suit prosper ? Explain your answer briefly. Equal protection should not be used to protect commission of crime. an ordinance is passed by Soliman City granting a 50% discount for payment of unpaid real estate taxes for the preceding year and the condonation of all penalties on fines resulting from the late payment. and it has been repeatedly held that. No. The municipal attorney rendered an opinion that Benjie cannot be reimbursed because the ordinance did not provide for such reimbursement. Benjie demands that he be refunded an amount equivalent to one-half of the real property taxes he paid. if the failure of prosecutors to enforce the criminal laws as to some persons should be converted into a defense for others charged with crime. SUGGESTED ANSWER: No. 10. to excuse a defendant guilty of murder because others have murdered with impunity. Moreover. it does not follow that they are to be protected in the commission of crime. including granting a 50% discount in the payment of unpaid real estate taxes. et al. the incentives and/or sanctions provided in the law should logically pertain to the said agencies. Where the official action purports to be in conformity to the statutory classification.

G.. R. v. et al. It is not clear whether the exemption would include both local. September 16.Smart Communications. R. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others. R. 155491. No. The primary reason for the withdrawal of tax exemption privileges granted to government owned and controlled corporations and all other units of government was that such privilege resulted to serious tax base erosion and distortions in the tax treatment of similarly situated enterprises. September 16.. R. fiscal or otherwise. R. G. 235 SCRA 630) 15. 2008) NOTES AND COMMENTS: Philippine Long Distance Telephone Company. 11) It is enough to say that the parties to a contract cannot. No. G... No. “In lieu of all taxes” in the franchise of ABS-CBN does not exempt it from local franchise taxes. October 6. For not only are existing laws read into contracts in order to fix obligations as between parties. v.. No. an instrumentality of the National Government which is exempt from local taxation. R. XII. 166408. 2001) 16. (Smart Communications. The policy of protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace and good order of society. alteration. etc. Philippine Long Distance Telephone Company. (1987 Constitution. The Contract Clause has never been thought as a limitation on the exercise of the State‟s power of taxation save only where a tax exemption has been granted for a valid consideration..) . v. to impose and collect a local franchise tax because the Local Government Code has withdrawn all tax exemptions previously enjoyed by all persons and authorized local government units to impose a tax on business enjoying a franchise tax notwithstanding the grant of tax exemption to them. The City of Davao. a local government unit. whether municipal. and companion cases. et al. et al. Sec. August 22. Secretary of Finance. v. The City of Davao. etc. within the meaning of the constitution. (Philippine Ports Authority v.. but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. v. and national tax. hence resulting in the need for these entities to share in the requirements of development. fetter the exercise of the taxing power of the State.. 115455. Secretary of Finance. ABS-CBN has the burden to prove that it is in fact covered by the exemption so claimed but has failed to do so. 155491. Inc. 2008 is explicit in its holding that Smart is not entitled to a tax exemption.. etc. ABS-CBN Broadcasting Corporation. Inc. G.. 2001. August 22. G.. city or provincial. The withdrawal of a tax exemption should not be construed as prohibiting future grants of exemption from all taxes. v. 2008) citing Tolentino v. R. G. G. G. (Smart Communications. 143867. No. v.. Inc. the uncertainty in the “in lieu of all taxes” provision should be construed against ABS-CBN. R.. 20.. or repeal. September 16. through the exercise of prophetic discernment. et al. July 14. 155491. et al... 155491. No. No. City of Davao. No. No. Inc. A legislative franchise is granted with the express condition that it is subject to amendment. by paying the taxes and other charges due them. R. August 25. 685) The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others) 18. upheld the authority of the City of Davao. et al. et al.. 109791. R. 143867. 2003) 19. 2001 made the observation that since Smart‟s franchise was granted after the effectivity of the Local Government Code that its tax exemption privilege was reinstated. It is thus. et al. A lawful tax on a new subject. City of Davao. 2008. (Tolentino v. etc. etc. It does not expressly provide what kind of taxes ABS-CBN is exempted from. Art. 235 SCRA 630. G. City of Iloilo. The City of Davao.14. As such it is not a private corporation engaged in “business enjoying franchise” Is such contention meritorious ? SUGGESTED ANSWER: No. 143867. No. Verily. Tax exemptions in franchises are always subject to withdrawal.. 2008) NOTES AND COMMENTS: This is practically the same holding in an earlier case involving another telecommunications company Smart Communications. Inc. v. September 16. or an increased tax on an old one. When withdrawal of a tax exemption impairs the obligation of contracts. City of Davao. G. National Power Corporation (NPC) is of the insistence that it is not subject to the payment of franchises taxes imposed by the Province of Isabela because all of its shares are owned by the Republic of the Philippines. et al. does not interfere with a contract or impairs its obligation. (Quezon City. However. â 17. (Philippine Long Distance Telephone Company. Inc. Inc.. 1994. etc. etc. Whether the “in lieu of all taxes provision” would include exemption from local tax is not unequivocal. August 22. The right to exemption from local franchise tax must be clearly established and cannot be made out of inference or implications but must be laid beyond reasonable doubt. The City of Davao.

under the rule on strict construction of tax exemptions. hence violative of the equal protection clause. 155491. taxing the same subject or object twice. If only the 1stelement is present. The City of Davao." Moreover. NOTES AND COMMENTS: a." Also. No. 2008) NOTES AND COMMENTS: This is practically the same holding in an earlier case involving another telecommunications company. Presence of the 2nd element violates the equal protection clause. established or collected by any authority whatsoever. If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to local taxes. “In lieu of all taxes” refers to national internal revenue taxes and not to local taxes. Taxing all of the subjects or objects for the first time without taxing all of them for the second time. imposed under the National Internal Revenue Code. G. Carpio in a similar case involving a demand for exemption from local franchise taxes: [T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes. (Quezon City. 571. v. the “in lieu of all taxes” clause has now become functus officio.. taxing all of the subjects and objects for the first time. 166408. et al. other than income tax. City of Davao. as follows: x x x in lieu of any and all taxes of any kind. The “in lieu of all taxes” clause in the franchise of ABS-CBN has become functus officio with the abolition of the franchise tax on broadcasting companies with yearly gross receipts exceeding Ten Million Pesos. provincial or national. The City of Davao. the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code. v. v. G.. without taxing all for the second time. It cannot apply when what is paid is a tax other than a franchise tax. Inc. The only interpretation. Congress did not expressly exempt Smart from local taxes.â 21. Indirect duplicate taxation is not anathematized by the above constitutional limitations. 22. x x x. Even with respect to national internal revenue taxes. 594 (2003)] NOTES AND COMMENTS: The author opines that the above finds application to all telecommunications companies. this means taxing the same subject or object twice during the same taxable period. from which the grantee is hereby expressly exempted. [Smart Communications. Congress could have used the language in Section 9(b) of Clavecilla's old franchise. No. The clause “in lieu of all taxes” does not pertain to VAT or any other tax. September 16. Congress would have expressly mentioned the exemption from municipal and provincial taxes. The clear intent is for the "in lieu of all taxes" clause to apply only to taxes under the National Internal Revenue Code and not to local taxes. The proviso in the first paragraph of Section 9 of Smart's franchise states that the grantee shall "continue to be liable for income taxes payable under Title II of the National Internal Revenue Code. If any of the elements are absent then there is indirect duplicate taxation which is not prohibited by the constitution. the "in lieu of all taxes" clause does not apply to income tax. nature or description levied. October 6. ââ 24. Congress used the "in lieu of all taxes" clause only in reference to national internal revenue taxes. . September 16. In its particular sense. R. The “in lieu of all taxes” clause applies only to national internal revenue taxes and not to local taxes.. which is prohibited under the constitution because it violates the concept of equal protection. the same paragraph declares that the tax returns "shall be subject to audit by the Bureau of Internal Revenue. R. results to discrimination among subjects and objects that are similarly situated. is that the "in lieu of all taxes" clause in Smart's franchise refers only to national and not to local taxes." Nothing is mentioned in Section 9 about local taxes.) ââ 23. etc. municipal. uniformity and equitableness of taxation. As appropriately pointed out in the separate opinion of Justice Antonio T. ABS-CBN Broadcasting Corporation. However. by the same taxing authority. 2008 citing Philippine Long Distance Telephone Company. v.. 2008. Since the franchise tax on the broadcasting companies with yearly gross receipts exceeding ten million pesos has been abolished. Inc.. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others. 155491. Inc. The "in lieu of all taxes" clause does not apply to local taxes. et al. et al. Double taxation in its generic sense. (Emphasis supplied). Elements of direct duplicate taxation: a. R. 447 Phil. Same 1) Subject or object is taxed twice 2) by the same taxing authority 3) for the same taxing purpose 4) during the same taxable period b. No. etc. Smart Communications. rendered inoperative. it may mean direct duplicate taxation.. G. there is no violation of the equal protection clause because all subjects and objects that are similarly situated are subject to the same burdens and granted the same privileges without any discrimination whatsoever. etc. The presence of the 2nd element.

A tax credit reduces the tax due. would have been prohibited with the proclamation of the constitutional provision. OTHER CONCEPTS ââ1. Methods for avoiding double taxation (indirect duplicate taxation). 1999) ââ 27. No. Revenues and assets of proprietary educational institutions. 2005 and companion cases citing Tolentino v. June 25. 28. Allowing foreign taxes as a deduction from gross income. including –whenever applicable – the income tax that is determined after applying the corresponding tax rates to taxable income. inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax. SUGGESTED ANSWER: No. Central Luzon Drug Corporation. an allowance against the tax itself.) v. other the exemptions granted to cooperatives. Ermita. and including the amendments introduced only by Senate Bill No. 1994. et al.. c. there was a violation of the constitutional mandate that revenue bills shall originate exclusively from the House of Representatives. Tax credit generally refers to an amount that is subtracted directly from one‟s total tax liability. a. etc. August 25. Tax treaties which exempts foreign nationals from local taxation and local nationals from foreign taxation under the principle of reciprocity. sales taxes which perhaps are the oldest form of indirect taxes. The Bicameral Conference Committee merely exercised the judicially recognized long-standing legislative practice of giving said conference committee ample latitude for compromising differences between the Senate and the House. b. et al. deleting entirely the no pass-on provisions found in both the House and Senate Bills. No.. TAX DEBT . [Abakada Guro Party List (etc. etc.. September 1. (Commissioner of Internal Revenue v. this would be known as international juridical double taxation which is the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical grounds. 2005) â 30. 115455. April 15. 235 SCRA 630] 32. or a deduction from what is owned. Sales taxes are also regressive.C. G. 2005) 29. 1950 regarding other kinds of taxes in addition to the value-added tax. Do you agree ? The mandate to Congress is not to prescribe but to evolve a progressive system of taxation. may be entitled to exemptions subject to limitations provided by law including restrictions on dividends and provisions for reinvestments. et al. 168056.. 159647. No. G. including those which are cooperatively owned. . R. (Commissioner of Internal Revenue v. No. G. 127105. G. Distinguish tax from debt. 26. et al. G. 168056. There was no grave abuse of discretion because all the changes and modifications made by the Bicameral Conference Committee were germane to subjects of the provisions referred to it for reconciliation. Central Luzon Drug Corporation. No. non-profit educational institutions that are actually. Tax credits where foreign taxes are allowed as deductions from local taxes that are due to be paid. Thus. S. Are the contentions of such weight as to constitute grave abuse of discretion which may invalidate the law ? Explain briefly. There is no law at the present which grants exemptions.. No. R. 33. A tax deduction reduces the income that is subject to tax in order to arrive at taxable income. Ermita. The petitioners allege that the R-VAT law is constitutional because the Bicameral Conference Committed has exceeded its authority in including provisions which were never included in the versions of both the House and Senate such as inserting the stand-by authority to the President to increase the VAT from 10% to 12%. Otherwise. directly and exclusively used for educational purposes shall be exempt from taxation.25. Johnson and Son. R.. or an amount that is allowed by law to reduce income prior to the application of the tax rate to compute the amount of tax which is due. Secretary of Finance. R. The VAT while regressive is NOT violative of the mandate to evolve a progressive system of taxation.R. Double taxation a valid defense against the legality of a tax measure if the double taxation is direct duplicate taxation.. because it would violate the equal protection clause of the constitution. When an item of income is taxed in the Philippines and the same income is taxed in another country. April 15. 2005 and companion cases] 31. September 1.) v. A tax deduction is defined as a subtraction fro income for tax purposes. (Commissioner of Internal Revenue v. 159647. All revenues and assets of non-stock. G. [Abakada Guro Party List (etc. Inc. R.

Taxes are not contractual obligations but arise out of a duty to.The Supreme Court upheld the validity of a set-off between the taxpayer and the government. Intermediate Appellate Court) ââ4. where the government and the taxpayer are in their own right reciprocally debtors and creditors of each other. While judgment should be rendered in favor of Republic for unpaid taxes. Compensation takes place by operation of law. REASON: Solutio indebeti. and that the debts are both due and demandable. Thus. In fact. (Commissioner of Internal Revenue v. judgment ought at the same time to issue for Sampaguita Pictures commanding payment to the latter by the Republic of the value of the backpay certificates which the Republic received. 1279 of the Civil Code. (Domingo v. The claims were certain since there were no doubts or disputes as to their refundability. (Republic v.. the BIR‟s obligation to refund or off-set arises from the moment the tax was paid. SUGGESTED ANSWER: As a general rule. where the local government and the taxpayer are in their own right reciprocally debtors and creditors of each other. v. Garlitos. The judgment has become final although execution has not issued. In case of a tax overpayment. it is correct to say that the offsetting of a taxpayer‟s tax refund with its alleged tax deficiency is unavailing under Art. 172 SCRA 364) d. Mambulao Lumber Co. Compensation takes place by operation of law under Art. 2. in consequence of Articles 1278 and 1279 of the Civil Code. demand. and that the debts are both due and demandable. Inc. b. Esso Standard Eastern. Inc. 180356. (Commissioner of Internal Revenue v. there could be no compensation or set-off between a tax and a debt for the following reasons: a. In both cases.R. Upon receiving an assessment for municipal sales taxes from the Municipal Treasurer.. Esso Standard Eastern. This is in consequence of Article 1278 and 1279 of the Civil Code. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt. which applied Francia v. May there be compensation or set-off between a national tax and a debt ? Reason out your answer. 4 SCRA 622) c. 1279 and 1290 all of the Civil Code. Inc 172 SCRA 364) e. Ericta. the government admitted the fact of over-payment. (South African Airways v. 8 SCRA 443) b. 8 SCRA 443) c. Garlitos. (Domingo v. Commissioner of Internal Revenue. G.(Republic v. Exceptions: When set-off or compensation allowed for local taxes. to the making and enforcing of which the personal consent of the individual taxpayer is not required.Basis based on law Failure to Pay may result in imprisonment generally payable in money not assignable unless it becomes a debt is not subject to compensation or set-off does not draw interest unless delinquent imposed by public authority Prescriptive periods for tax under NIRC Mode of Payment Assignability Payment Interest Authority Prescription based on contract or judgment no imprisonment payable in money. property or service assignable may be a subject draws interest if stipulated or delayed can be imposed by private individuals debt under the Civil Code WARNING: Do not use the above arrangement in answering Bar questions. Gilbert executed a partial assignment of his judgment sufficient to cover the assessment in favor of the Municipality. 1200 in relation to Arts. Commission on Audit. Where both claims already become overdue and demandable as well as fully liquidated. the claims of the taxpayers therein were certain and liquidated. and are the positive acts of government. February 16. Gilbert obtained a judgment for a sum of money against the municipality of Camiling. No. . Garlitos. a. 172 SCRA 623) ââ 5. 8 SCRA 443) ââ 3. Compensation takes place by operation of law. 2010 reiterating Caltex Philippines. contract or judgment as is allowed to be set-off. Lifeblood theory. May the Municipal Treasurer validly accept the assignment? Why? . (Domingo v.

v. They must be expressed in the clearest and most unambiguous language and not left to mere implications. as burdens which must be endured by the taxpayer. (Quezon City. Thus. G. 2008 citing CIR v. 120082. 453 SCRA 668) 8. G. expressly.R. demandable and fully liquidated. A claim of tax exemption must be clearly shown and based on language in law too plain to be mistaken. taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax laws. the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. where the BIR’s obligation to refund or set-off arises from the moment the tax was paid under the principle of solutio indebeti. Esso Standard Eastern. March 18. (Quezon City.. a case decided by the Supreme Court whose factual antecedents are similar to the problem.. They are the lifeblood of the nation. July 6. Inc. 293 SCRA 92. G. G. (Quezon City. taxation is the rule. 302) 10.. is not the similar doctrine as that applied to tax exemptions. 172 SRCA 364) 12. 99) 7... compensation takes place by operation of law. 13. In case of doubt. There is parity between tax refund and tax exemption only when the former is based either on a tax exemption statute or a tax refund statute. should not be presumed to go beyond what the law expressly and clearly declares. v. Inc. et al. 2008 citing Mactan Cebu International Airport Authority v.R. (Quezon City. In other words. 8 SCRA 443. Court of Appeals. The basis for the rule on strict construction to statutory provisions granting tax exemptions or deductions is to minimize differential treatment and foster impartiality. R. October 6. July 21.. Strict interpretation of tax exemption laws. 11. Rationale for strict interpretation of tax exemption laws. 134114. For exemptions from taxation are not favored in law. R. But note Nestle Phil.. Such was the holding in Domingo v. Court of Appeals. The parties in this case are mutually debtors and creditors of each other. G. 2003 ed. citing CIR v. (Ibid. 2003 ed. 2008) He who claims an exemption from his share of common burden must justify his claim that the legislature intended to exempt him by unmistakable terms. G. the intention to make an exemption ought to be expressed in clear and unambiguous terms. 141658. fairness and equality of treatment among taxpayers. 261 SCRA 667. No. 301) 9. et al.E. Unless shown otherwise. R. The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it does so clearly. and since both of the claims became overdue. Accordingly. 166408. No. p. Strict interpretation of a tax refund that partakes of the nature of a tax does not apply to tax refund based on erroneous payment or where there is no law that authorizes collection of the tax. R. (Commissioner of Internal Revenue v. ABS-CBN Broadcasting Corporation. statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority. Statutory Construction. 322.. 338 Phil. Garlitos. Fortune Tobacco Corporation. It has been held that “exemptions are never presumed the burden is on the claimant to establish clearly his right to exemption and cannot be made out of inference or implications but must be laid beyond reasonable doubt.E. No. (Lincoln Philippine Life Insurance Company. Philippine American Accident Insurance Company.. Court of Appeals.. p. Inc. Fortune Tobacco Corporation. etc. and unambiguously. September 11. 167274-75. [Commissioner of Internal Revenue v. In answering the question of who is subject to tax statutes. 680) The burden of proof rests upon the party claiming the exemption to prove that it is in fact covered by the exemption so claimed. v. 330-331 (1997)] As burdens. Marcos. July 21.R. v. In case of a tax overpayment. 2008) . the disputable presumption of regularity of performance of duty lies in favor of the Collector of Customs.SUGGESTED ANSWER: Yes. Why are tax exemptions are strictly construed against the taxpayer and liberally in favor of the State ? SUGGESTED ANSWER: Taxes are necessary for the continued existence of the State. Otherwise stated. et al. Nos. ABS-CBN Broadcasting Corporation. it is basic that in case of doubt. Statutory Construction. Nos. such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import. 1996. 6. (Commissioner of Internal Revenue v. No. R. since taxation is the rule and exemption the exception. supra citing Agpalo. 166408. No. 2005.. Interpretation in the imposition of taxes. A tax cannot be imposed without clear and express words for that purpose.. October 6. supra citing Agpalo. et al. G. 2001which held that in order for the rule on solutio indebeti to apply it is an essential condition that the petitioner must first show that its payment of the customs duties was in excess of what was required by the law at the time the subject 16 importations of milk and milk products were made. Taxes are what civilized people pay for civilized society. nor are they presumed. R. tax laws must be construed strictly against the State and liberally in favor of the taxpayer because taxes. 167274-75. exemption is the exception.

Philex Mining Corp. Court of Appeals. The taxpayer must show that the legislature intended to exempt him from the tax by words too plain to be mistaken. a freedom from a charge or burden to which others are subjected.. 33. the rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption. 579 (1999). a claim for tax refund necessitates only preponderance of evidence for its approbation like in any other ordinary civil case. Fireman’s Fund Insurance Co.. Commissioner of Internal Revenue. (Commissioner. L-46881. A tax amnesty. etc. July 21. v.. a legislative grace. Commissioner of Internal Revenue. . supra citing Phil. supra citing AB Leasing and Finance Corporation v.R. Ramie Textiles. 357-358. It is an immunity or privilege. The purpose of tax amnesty is to a. v. Arts. which cannot be allowed unless granted in the most explicit and categorical language. 220. supra at 338) If the State expects its taxpayers to observe fairness and honesty in paying their taxes. No. must be construed strictly against the taxpayer and liberally in favor of the taxing authority.. supra) Indeed. 2142. Inc. the taxpayer expects fair dealing from the Government. v. (Commissioner. 67 SCRA 351. supra.. 178 Phil. Commissioner of Internal Revenue and Court of Tax Appeals. et al. 228 (1995)] 15. (Florer v.. 2000) 18. Commissioner of Internal Revenue. Inc. 891-892 (1998). Tax exemption is a result of legislative grace. 293 SCRA 92. Tax amnesty distinguished from tax exemption. A reversal of a BIR ruling favorable to a taxpayer would not necessarily create a perpetual exemption in his favor. for after all the government is never estopped from collecting taxes because of mistakes or errors on the part of its agents.. et al. supra citingCommissioner of Internal Revenue v. on the other hand. G. September 15. [Commissioner. Commissioner of Internal Revenue. [Commissioner of Internal Revenue v. [Commissioner. January 30. 1988) WHILE a tax exemption is an immunity from civil liability only. (Banas. (Philippine Banking Corporation. 22 October 1975.R. v. L-29987. 137 Ind. Ltd. and to b. Jr. Tokyo Shipping Co. City of Manila. February 10. 148 SCRA 315. Court of Appeals. G. Effect of a BIR reversal of a previous ruling interpreting a law as exempting a taxpayer. Mathay. et al. 510. 324-325. 354 Phil. v. supraciting Commissioner of Internal Revenue v. are not founded principally on legislative grace but on the legal principle which underlies all quasi-contracts abhorring a person‟s unjust enrichment at the expense of another. Surigao Consolidated Mining Co. etc. Inc. 170574. v. 518 (2000)] And so.. 99) 16. G. v. give tax evaders who wish to relent a chance to start a clean slate. Vera. Castaneda. 2154 and 2155) The Government is not exempt from the application of solutio indebiti.G. Tokyo Shipping Co. 461. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. supra citing CIVIL CODE. 2008 citing Surigao Consolidated Mining Co. And he who claims an exemption from the burden of taxation must justify his claim by showing that the legislature intended to exempt him by words too plain to be mistaken. Puyat & Sons v. The grant of a tax amnesty. 985 (1963)] The dynamic of erroneous payment of tax fits to a tee the prototypic quasi-contract. 102967. 167274-75. In such case. similar to a tax exemption. Inc. 119 Phil. Fortune Tobacco Corporation. give the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case. (Lincoln Philippine Life Insurance Company.R. 453 Phil. Tax refunds premised upon a tax exemption strictly construed. 36 NE 365) . 314 Phil. Mathay. No. 297 in turn citing BPI-Family Savings Bank. CIR. much like a tax exemption. R. G. [Commissioner. civil and administrative liabilities arising from nonpayment of taxes (People v. v. and the latter has the duty to refund without any unreasonable delay what it has erroneously collected.. a. Inc. Nos. 2009) 17. No. No. A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or a tax law. supra] A claim for tax refund may be based on statutes granting tax exemption or tax refund.. 572. Commissioner of Internal Revenue v. is never favored nor presumed in law.R. Sheridan. 28. Hon. it must hold itself against the same standard in refunding excess (or erroneous) payments of such taxes. City of Manila. Court of Appeals. It should not unjustly enrich itself at the expense of taxpayers. 117 Phil. 9 March 1987. Inc. Gonzales Puyat & Sons v. R. solutio indebiti. given its essence. v. 330 SCRA 507. (Commissioner. et al. 365 Phil. No.Tax refunds (or tax credits). Sr. 127 Phil. L-30644. Tax amnesty is an immunity from all criminal. supra) 14. 472 (1967). 37 (1963)] The rule is that tax exemptions must be strictly construed such that the exemption will not be held to be conferred unless the terms under which it is granted clearly and distinctly show that such was the intention. Commission of Internal Revenue. supra at 732-733.. G. [Commissioner.. Davao Gulf Lumber Corp. v. Inc. Commissioner of Internal Revenue. supra with a note to see Surigao Consolidated Mining Co. v. v. supra citing Ramie Textiles. Manila Electric Company v. (Commissioner. which covers not only mistake in fact but also mistake in law. 482 (1979). Acetylene Co.

Tax amnesty applies only to past tax periods. the payment of less than that known by the taxpayer to be legally due. Act No. 24 (B) of the NIRC of 1997] . Venice H. Tax evasion warrants the imposition of civil. a decedent to determine his gross estate. 2008) 3 . Tax Treaties: Trick or treat ?. in effect. Klaus on Double Taxation Conventions. 22. Jr. etc. Tax evasion connotes the integration of three factors: a. among others.b. . the Bank Deposits Secrecy Law prohibits inquiry into bank deposits. As exceptions to Rep. as if no reduction has been made. Fortune Tobacco Corporation. a. medium and low-priced based on their net retail price and accordingly graduating tax rates. [Sec. Rep.e. R. p. 1405. b. The end to be achieved. i. or the non-payment of tax when it is shown that a tax is due.. the need for the tax sparing provision. b. NIRC of 1997] c. or insurance companies. (Vogel. Purpose of the NIRC of 1997. 2008) TAX ON INCOME 1. Tax avoidance distinguished from tax evasion. C5) There may be instances where a particular income is exempt from taxation in order to encourage foreign investments which may lead to economic development. into high. 2002. G. p. R. Toda.) Thus. any taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity to pay his tax liability. joint accounts (cuentas en participacion). 1405. an accompanying state of mind which is described as being “evil” on “bad faith. and c. Consequently. 2. Tax avoidance is legal while tax evasion is illegal.” or ”deliberate and not accidental”. Third Edition. Philippine Daily Inquirer. (Commissioner of Internal Revenue v. 16727475. (Ibid. Revenue generation has undoubtedly been a major consideration in the passage of the Tax Code. 2004) âââ21. The Estate of Benigno P. The Tax Code has included under the term “corporation” partnerships. the Commissioner of Internal Revenue is only authorized to inquire into the bank deposits of: a. there would be no more tax to credit since there is no more tax to credit as a result of the tax exemption. G. 20. administrative and criminal penalties while tax avoidance does not. 147188. The shift from the ad valorem system to the specific tax system is likewise meant to promote fair competition among the players in the industries concerned. December 6. Act No. Fortune Tobacco Corporation. no matter how created or organized.” “willful. A taxpayer who authorizes the Commissioner to inquire into his bank deposits. such incentives are siphoned off since. joint-stock companies. September 14. associations. July 21. 24 now Sec. to ensure an equitable distribution of the tax burden and to simplify tax administration by classifying cigarettes. 167274-75. the tax benefits are cancelled out. 5 (F). and b.. [Sec. Purpose of shift from ad valorem system to specific tax system in taxation of cigarettes. If the tax credit method is used. 19. G.. (Commissioner of Internal Revenue v.supra) WHILE tax exemption has prospective application. Tax avoidance is the use of legally permissible means to reduce the tax while tax evasion is the use of illegal means to escape the payment of taxes. Tax sparing is a provision in some tax treaties which provides that the state of residence allows as credit the amount that would have been paid. Nos.1255 cited in Segarra. July 21. No. when the tax method credit method is applied to these items of income. hence of retroactive application (Castaneda. a course of action or failure of action which is unlawful. The objective of tax avoidance in most instances is merely to reduce the tax that is due while is tax evasion the object is to entirely escape the payment of taxes. NATIONAL INTERNAL REVENUE CODE ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE 1. c. R. (Commissioner of Internal Revenue v. Nos.

Sec. without becoming partners. authorized for such types of income by the Tax Code or other special laws. 363. 43 Fd 327 CCA 10th) income from the cancellation or 12. Jr. pursuant to an operation or consortium agreement under a service contract with the Government. from labor or from both combined. 139 SCRA 436) b. Commissioner of Internal Revenue.R. joint venture or other unincorporated organization. 74 cited in Pascual v. 166 SCRA 560) 6. (Commissioner of Internal Revenue v. merely continuing the dedication of the property to the use to which it had been put by their forebears. [1st sentence. 11. (Sec. The income from the rental of the house. and therefore not subject to tax as corporations. The sharing of gross returns does not of itself establish a partnership. b. An insolvent debtor does not realize taxable forgiveness. geothermal.. Commissioner of Internal Revenue. or venture is carried on. cited in Pascual v. (b) gift. BIRC of 1997] ââ 4. but who severally retain the title to their respective contribution. 166 SCRA 560) 5. and other energy operations.. include: a. shall be treated as the income of an unregistered partnership to be taxable as a corporation because of the clear intention of the brothers to join together in a venture for making money out of rentals. There must be an unmistakable intention to form a partnership or joint venture. the transaction has the effect of payment of a dividend. 14. coal. Collector. 140. v. Commissioner of Internal Revenue. (Commissioner v. p. No.. are not thereby rendered partners. General professional partnerships. (Sec. NIRC of 1997) 9. 1999) 8. No. and no community of interest as principal proprietors in the business itself from which the proceeds were derived. or to a (c) capital transaction depending upon the circumstances. Income is gain derived and severed from capital. 102 Phil. If a creditor merely desires to benefit a debtor and without any consideration therefor cancels the amount of the debt it is a gift from the creditor to the debtor and need not be included in the latter’s income. group. the Supreme Court held citing Mertens that the term partnership includes a syndicate. Rev. 7. The common ownership of property does not itself create a partnership between the owners. 108576. v. through or by means of which any business. Regs. Joint venture or consortium formed for the purpose of undertaking construction projects engaging in petroleum.. if any. and they may.. The term taxable income means the pertinent items of gross income specified in the Tax Code. For example. In Evangelista v. et al. bought from the earnings of co-owned properties. G. (Spurlock v.. Co-heirs who own inherited properties which produce income should not automatically be considered as partners of an unregistered corporation subject to income tax for the following reasons: a.2. 142 S. though they may use it for purpose of making gains. Certain business organizations do not fall under the category of “corporations” under the Tax Code. 83.W. 160 No. 2) . are among themselves as to the management and use of such property and the application of the proceeds therefrom. to tax a stock dividend would be to tax a capital increase rather than the income. (Lakeland Grocery Co. If a corporation to which a stockholder is indebted forgives the debt. There is no contribution or investment of additional capital to increase or expand the inherited properties. If an individual performs services for a creditor who. pool.) c. whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. cancels the debt. Court of Appeals. Persons who contribute property or funds to a common enterprise and agree to share the gross returns of that enterprise in proportion to their contribution. The insolvent debtor realizes income resulting from the cancellation or forgiveness of indebtedness when he becomes solvent. in consideration thereof. Sec. 14. They have no common stock capital. Mechem. 22 (B). Wilson. 31. Simmons Gin Co. 50. 2nd Ed. The cancellation and forgiveness of indebtedness may amount to (a) payment of income. financial operation. 3. Commissioner 36 BTA (F) 289) 13. less the deductions and/or personal and additional exemptions. (Elements of the Law of Partnership by Floyd R. (Ibid. it is income to the extent of the amount realized by the debtor as compensation for his services. App. 10. January 20. (Obillos.

although taxes are the lifeblood of the government. R. NIRC] He is allowed to avail of the itemized deductions including the personal and additional exemptions subject to the rule on reciprocity. for length of service or safety achievement. h. American Express International. he shall be subject to income tax on his income derived from sources from within the Philippines.00 per annum. Section 2 of Article XIII of the Constitution states that the promotion of social justice shall include the commitment to create economic opportunities based on freedom of initiative and self-reliance. 20.000. is considered as having been earned at the place where the activity or service was performed. 16.000 ceiling of “other benefits” provided under Section 32 (B)(7)(e) of the Code. including their members. 2010) In closing. A non-resident alien. What are considered as de minimis benefits not subject to withholding tax on compensation income of both managerial and rank and file employees ? SUGGESTED ANSWER: a. The Schedular system of income taxation is a system employed where the income tax treatment varies and is made to depend on the kind or category of taxable income of the taxpayer.. In relation thereto. marriage. To borrow the words of Justice Isagani A. No. e. Payment for services. is not absolute and may be subordinated to the demands of social justice. (Tan v. 237 SCRA 324. Laundry allowance not exceeding P300 per month.00 received by an employee under an established written plan which does not discriminate in favor of highly paid employees. cooperatives.000. the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the P30. Under the National Internal Revenue Code the global system is applicable to taxable corporations and the schedular to individuals.00 per employee per semester or P125 per month. birth of a baby..000 per employee per annum.” (Ibid. which must be in the form of a tangible persona property other than cash or gift certificate. 21. f. However. if the employer pays more than the ceiling prescribed by these regulations. At the same time. (Dumaguete Cathedral Credit Coopertive [DCCC)] etc. and j. provided. g. No less than our Constitution guarantees the protection of cooperatives. b.. Inc.00. i. G. Actual yearly medical benefits not exceeding P10. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage. e. Gifts given during Christmas and major anniversary celebrations not exceeding P5.g.15. Jr. other than compensation income. e. who has stayed in the Philippines for an aggregate period of more than 180 days during any calendar year. del Rosario. Compensation income is considered as having been earned in the place where the service was rendered and not considered as sourced from the place of origin of the money. Rice subsidy of P1. Bearing in mind the foregoing provisions. Uniforms and clothing allowance not exceeding P3. ââ 22.. deserve a preferential tax treatment because of the vital role they play in the attainment of economic development and social justice. that any amount given by the employer as benefits to its . v. 331) 17. 500 Phil. (Tan v. 25 (A) (1).00 or one (1) sack of 50-kg.00 ceiling. Section 15. fruits. Thus.000. 586 (2005). Consequently.00 per annum. the State‟s power to tax must give way to foster the creation and growth of cooperatives.000. citing Commissioner of Internal Revenue v. Medical cash allowance to dependents of employees not exceeding P750. etc. Members of cooperatives not subject to tax on the interest earned from their deposits with the cooperative. Flowers. on account of illness. Section 10 of Article II of the Constitution declares that it is a policy of the State to promote social justice in all phases of national development. 182722. while indispensable. 19. c. further. Commissioner of Internal Revenue. [Sec.000. or similar items given to employees under special circumstances. with an annual monetary value not exceeding P10. Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year. 237 SCRA 324. we find that an interpretation exempting the members of cooperatives from the imposition of the final tax under Section 24(B)(1) of the NIRC (tax on interest earned by deposits) is more in keeping with the letter and spirit of our Constitution. 331) 18. Jr.000. d. rice per month amounting to not more than P1.g. del Rosario. shall be considered as a non-resident alien doing business in the Philippines.. January 22. The Global system of income taxation is a system employed where the tax system views indifferently the tax base and generally treats in common all categories of taxable income of the individual. (Philippine Branch). Employees achievement awards. The amount of de minimis benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30. books. Cruz: “The power of taxation. Article XII of the Constitution considers cooperatives as instruments for social justice and economic development.

No.1 (A) (3). ââ 25. b. due to the following reasons: (1) It is exempted by the fundamental law. employee or by his heirs. Any amount received by an official. Sec. No. NIRC of 1997] The retiring official or employee should not have previously availed of the privilege under the retirement plan of the same or another employer. USVA benefits.78 (B).78 (B) (1). The payor of the income withholds the tax and remits it to the government as a final settlement of the income tax as a final settlement of the income tax due on said income. 32 (B) (6) (b). Regs.employees. and an example of a deduction are losses. redundancy and cessation of business. whether classified asde minimis benefits or fringe benefits. plus the amounts of any damages received on whether by suit or agreement on account of such injuries or sickness. Retirement benefits received under Republic Act No. Amounts received by the insured as a return of premiums paid by him under life insurance. (2) It is exempted by statute. through accident or health insurance or Workmen‟s Compensation Acts as compensation for personal injuries or sickness. etc. 7641. shall constitute as deductible expense upon such employer. Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured whether in a single sum or otherwise. hence tax-exempt SUGGESTED ANSWER: a. Income subject to “final tax” refers to an income collected through the withholding tax system. No. Rev. 2) Not less than fifty (50) years of age at time of retirement. or at maturity of the term mentioned in the contract. in accordance with the employer‟s reasonable private benefit plan approved by the BIR. What kind of separation (retirement) pay is excluded from gross income. Rev. Distinguish exclusions from deductions. ? âââ 26. e. Sec. An example of an exclusion from gross income are life insurance proceeds. SSS benefits and GSIS benefits. and (3) It does not come within the definition of income (Sec. sickness or other physical disability. 7641 and those received by officials and employees of private firms.. or 2) For any cause beyond the control of said official or employee [Sec. 8-2000] 23. Retirement benefits received under Republic Act No. Retirement received from reasonable private benefit plan after compliance with certain conditions. Rev. Amounts received for beyond control separation. What are the Itemized deductions from gross income and who may avail of them ? . 2-98 as amended by Rev. f. From the employer c. c. pensions. (1) (b). The recipient is no longer required to include the income subjected to a final tax as part of his gross income in his income tax return. such as retrenchment. As a consequence of separation of such official or employee from the service of the employer because of 1) Death. 32 (B) (6) (a). or descent. SUGGESTED ANSWER: a. Retiring official or employee 1) In the service of the same employer for at least ten (10) years. 2. [1st par. retirement gratuities. Foreign social security. 2) WHILE deductions are the amounts which the law allows to be subtracted from gross income in order to arrive at net income. devise. 2-98] ââ 27. Value of property acquired by gift. Exclusions pertain to the computation of gross income WHILE deductions pertain to the computation of net income. Regs. endowment or annuity contracts either during the term. Regs. Amounts received.78. Exclusions are something received or earned by the taxpayer which do not form part of gross income WHILE deductions are something spent or paid in earning gross income. 2. hence tax-exempt ? SUGGESTED ANSWER: a. ââ 24. 3) Availed of the benefit of exclusion only once. What are the conditions for excluding retirement benefits from gross income. No. Rev. Exclusions from gross income refer to a flow of wealth to the taxpayer which are not treated as part of gross income for purposes of computing the taxpayer‟s taxable income. Regs. NIRC of 1997].. 61. or upon surrender of the contract. 2. c. b. [Sec. whether individual or corporate. [1st par. [Sec. b. b. Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines. Regs. What are excluded from gross income ? SUGGESTED ANSWER: a. 2-98] 28. d. bequest.

Domestic corporations. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. resident alien individuals and nonresident alien individuals who are engaged in trade and business. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Domestic corporations.a. Domestic corporations. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. resident alien individuals and nonresident alien individuals who are engaged in trade and business. Domestic corporations. and net operating losses. on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations. trade or business. Resident citizens. b. i. Domestic corporations. estates and trusts may also deduct this expense. The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer‟s profession. on their gross incomes other from compensation income are allowed to deduct these expenses. âââ e. f. Resident citizens. trade or business. âââ d. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. on their gross incomes other from compensation income are allowed to deduct these expenses. losses from casualty. Bad debts due to the taxpayer. estates and trusts may also deduct this expense. on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations. not deducted as expenses and chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. actually ascertained to be worthless and charged off within the taxable year. estates and trusts may also deduct this expense. on their gross incomes other from compensation income are allowed to deduct these expenses. estates and trusts may also deduct this expense. . business or professional expenses. on their gross incomes other from compensation income are allowed to deduct these expenses. Resident citizens. resident alien individuals and nonresident alien individuals who are engaged in trade and business. g. Ordinary losses. âââ h. estates and trusts may also deduct this expense. on their gross incomes other from compensation income are allowed to deduct these expenses. Resident citizens. wear and tear (including reasonable allowance for obsolescence) of property used in trade or business. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. c. Resident citizens. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Depreciation or a reasonable allowance for the exhaustion. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. estates and trusts may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. usually a natural resource. Resident citizens. resident alien individuals and nonresident alien individuals who are engaged in trade and business. Domestic corporations. resident alien individuals and nonresident alien individuals who are engaged in trade and business. resident alien individuals and nonresident alien individuals who are engaged in trade and business. on their gross incomes other from compensation income are allowed to deduct these expenses. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. not sustained between related parties. resident alien individuals and nonresident alien individuals who are engaged in trade and business. Ordinary and necessary trade. theft or embezzlement. business or profession. Charitable and other contributions. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Resident citizens. estates and trusts may also deduct this expense. Taxes paid or incurred within the taxable year in connection with the taxpayer‟s profession. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. Research and development expenditures treated as deferred expenses paid or incurred by the taxpayer in connection with his trade. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Resident citizens. estates and trusts may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. Depletion or deduction arising from the exhaustion of a non-replaceable asset. resident alien individuals and nonresident alien individuals who are engaged in trade and business. connected with profession. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense.

Personal and additional exemptions. and resident alien on their gross incomes and from compensation income are allowed to deduct these premiums. ââ 31. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. Nonresident citizens on their gross incomes from within may also deduct this expense. G. R. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct these premiums. Nonresident citizens and nonresident alien individual engaged in trade or business in the Philippine on their gross incomes from within may also deduct these premiums. and the (b) cash method. February 12. Compliance with the substantiation test. estates and trusts may also deduct this expense. Resident citizens. R. Resident citizens. records or other pertinent papers. on their gross incomes other from compensation income are allowed to deduct these expenses. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. 4) Must not be bribes. Isabela Cultural Corporation. Contributions to pension trusts. ââ 29. . ââ 30. Resident citizens. R. 172231. What are the requisites for the deductibility of business expenses ? SUGGESTED ANSWER: The following are the requisites for deductibility of business expenses: a. Nonresident alien individuals engaged in trade or business in the Philippines are allowed to deduct these exemptions under reciprocity. (Commissioner of Internal Revenue v. The BIR disallowed the deduction ? Who is correct. 172231. resident alien individuals and nonresident alien individuals who are engaged in trade and business. February 12. kickbacks or other illegal expenditures b. k. In 2005 XYZ Law Firm and ABC Auditing Firm rendered various services which were billed by these firms only during the following year 2006. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. b. No. TMG or BIR ? Explain. (Commissioner of Internal Revenue v. on their gross incomes other from compensation income are allowed to deduct these expenses. February 12. 3) Must be paid or incurred in carrying on a trade or business. SUGGESTED ANSWER: Ordinary expenses are those which are common to incur in the trade or business of the taxpayer WHILE capital expenditures are those incurred to improve assets and benefits for more than one taxable year. TMG deducted the same from its 2006 gross income. 2) Must be paid or incurred within the taxable year. c. (Commissioner of Internal Revenue v. or professional expenses. 2007) NOTES AND COMMENTS: a. Necessary expenses are those which are appropriate or helpful to the business. Isabela cultural Corporation. Since the bills for legal and auditing services were received only in 2006 and paid in the same year. it must have been paid or incurred during the taxable year dependent upon the method of accounting upon the basis of which the net income is computed. resident alien individuals and nonresident alien individuals who are engaged in trade and business. Isabela cultural Corporation. What are the requisites for the deductibility of ordinary and necessary trade. Proof by evidence or records of the deductions allowed by law including compliance with the business test. the expense must be ordinary and necessary. TMG Corporation is issuing the accrual method of accounting.j. No. 2007) âââ 32. Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. it must be supported by receipts. Domestic corporations. Distinguish ordinary expenses from capital expenditures. TMG should have deducted the professional and legal fees in the year they were incurred in 2005 and not in 2006 because at the time the services were rendered in 2005. like expenses paid for legal and auditing services ? SUGGESTED ANSWER: a. G. Compliance with the business test: 1) Must be ordinary and necessary. there was already an obligation to pay them. Insurance premiums for health and hospitalization. business. 172231. Ordinary expenses are usually incurred during a taxable year and benefits such taxable year. l. 2007) The two (2) principal accounting methods for recognition of income are the (a) accrual method. G. No. SUGGESTED ANSWER: The BIR is correct.

income is recognized only upon actual receipt of the cash payment but no deductions are allowed from the cash income unless actually disbursed through an actual payment in cash. 2007) d.. No. Rev. d. except rank and file employees. All-events test. Expense account. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. and f. or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees). 2.. Under the cash method income is to be construed as income for tax purposes only upon actual receipt of the cash payment. such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. e. insurance and hospitalization benefit plans. Regs. h. or b. The fringe benefits tax is a final withholding tax imposed on the grossed-up monetary value of fringe benefits furnished. g. driver and others. 1st par. 2. where there is created an enforceable liability. and j. This test requires: 1) fixing of a right to income or liability to pay. The propriety of an accrual must be judged by the fact that a taxpayer knew. 32(A). Contributions of the employer for the benefit of the employee to retirement. 2. Expenses for foreign travel. within the taxable year. fringe benefit means any good. Sec. Recognition of income and expenses under the accrual method of accounting.33 (A). R. it must be determined with “reasonable accuracy” implies something less than an exact or completely accurate amount. Isabela cultural Corporation. No.. Rev. f. [1st par. February 12. What is meant by “fringe benefit” for purposes of taxation ? SUGGESTED ANSWER: For purposes of taxation. d. G. Fringe benefits which are authorized and exempted from income tax under the Tax Code or under any special law. NIRC of 1997. granted or paid by the employer to the employee. Holiday and vacation expenses. Isabela cultural Corporation. 2. Regs. are incurred when fixed and determinable in nature without regard to indeterminacy merely of time of payment. Vehicle of any kind. The amount of liability does not have to be determined exactly. Membership fees. When the fringe benefit is for the convenience or advantage of the employer. Regs. b. Benefits given to the rank and file employees. 3-98] . Housing. Amounts of income accrue where the right to receive them becomes fixed. Sec. such as but not limited to: a. It is also referred to as the “cash receipts and disbursements method” because both the receipt and disbursements are considered. NIRC of 1997. 3-98] ââ 34.) c. 172231.. G. No. Rev. i. or could reasonably be expected to have known. Accrual method of accounting presents largely a question of fact. (Commissioner of Internal Revenue v. 33 (B). business or profession of the employer. 32 (C). [Sec.33 (A). Sec. 2007) The accrual of income and expense is permitted when the all-events test has been met. Rev. 3-98] 35. 172231. Liabilities. the test is satisfied where a computation may be unknown. The all-events test is satisfied where computation remains uncertain. Fringe benefits that are not subject to the fringe benefits tax: a. February 12. De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue. service. at the closing of its books for the taxable year. or necessary to the trade. only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. Household personnel. 3-98] c. [1st par. whether granted under a collective bargaining agreement or not...33 (B). No. but is not as much as unknowable. and 2) the availability of the reasonable accurate determination of such income or liability. The test does not demand that the amount of such income or liability be known absolutely. No. Thus.b. (Commissioner of Internal Revenue v. No.33 (C). Sec. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted. c. 1st par. (Ibid. When the fringe benefit is required by the nature of. dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations. if its basis is unchangeable. Regs. 33. [Sec. e. NIRC of 1997. Sec. Educational assistance to the employee or his dependents. such as maid. R.

(Sec. Regs. A grantor and a fiduciary of any trust. d. Members of the same family. 5-99) ââ 39. Declining balance method.78. 2. They are not considered as compensation subject to income tax and consequently to withholding tax.a. [Sec. 17-71) âââ 38. b. What is the “tax benefit” rule ? SUGGESTED ANSWER: The “tax benefit rule” posits that the recovery of bad debts previously allowed as deduction in the preceding year or years shall be included as part of the taxpayer‟s gross income in the year of such recovery to the extent of the income tax benefit of said deduction. The debt must be actually ascertained to be worthless and uncollectible during the taxable year. NIRC of 1997. where the result of his business operation was a net loss even without deduction of the bad debts written-off). by or for such individual.. ancestors. Must have been reported as receivables in the income tax return of the current or prior years. The methods of depreciation are the following: Straight line method. arising from money lent or from uncollectible amounts of income from goods sold or services rendered. furnished or offered by an employer to his employees. c. medical services.ââ36. directly or indirectly. d. and e. Rev. Two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned. Regs. Depreciation is the gradual diminution in the useful value of tangible property resulting from ordinary wear and tear and from normal obsolescence. (Sec. Rev. 8-2000] â 37. f. and lineal descendants. No. The same must not be sustained in a transaction entered into between related parties. or e. (Revenue Memorandum Circular No. 34 (E) (1). [Sec. [Sec. 2-98 as amended by Rev. The debts are uncollectible despite diligent effort exerted by the taxpayer. NIRC of 1997] ââ 40. No. or so-called “courtesy discounts” on purchases). 43. An individual and a corporation more than fifty percent (50%) in value of the outstanding stock of which is owned. 5-99) 42. 103. by or for the same individual. .e. If in the year the taxpayer claimed deduction of bad debts written-off. The family of an individual shall include only his brothers and sisters (whether by the whole or half-blood). A fiduciary of a trust and a beneficiary of such. The same must be connected with the taxpayer‟s trade. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable. 256 SCRA 667] g. 3. NOTES AND COMMENTS: a. Rev. a. The term is also applied to amortization of the value of intangible assets the use of which in the trade or business is definitely limited in duration. No. Regs. Regs. Rev. Regs. Preferred shares are considered capital regardless of the conditions under which such shares are issued and dividends or “interests” paid thereon are not allowed as deductions from the gross income of corporations. 25-2002. Regs. De minimis benefits are facilities and privileges (such as entertainment. contentment. spouse. of amounts due the taxpayer by others. in whole or in part. Regs. 2) : ââ 41. Regs. Philippine Refining Corporation v. (Sec. et al. The fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust. 2. hence. Court of Appeals. b. No. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year. Rev.1 (A) (3). Sec. then his subsequent recovery thereof shall be treated as a mere recovery or a return of capital. b. If the said taxpayer did not benefit from the deduction of the said bad debt written-off because it did not result to any reduction of his income tax in the year of such deduction (i. if such facilities are offered or furnished by the employer merely as a means of promoting the health. or f. 4. Who are related parties ? SUGGESTED ANSWER: The following are related parties: a. he realized a reduction of the income tax due from him on account of the said deduction. Bad debts are those which result from the worthlessness or uncollectibility. c. 4. 5-99) b. (Sec. or efficiency of his employees. 5-99 reiterated in Rev. What are the requisites for valid deduction of bad debts from gross income ? SUGGESTED ANSWER: a. business or practice of profession. his subsequent recovery thereof from his debtor shall be treated as a receipt of realized taxable income. Rev. 36 (B). goodwill. not treated as receipt of realized taxable income. directly or indirectly.

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

Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. Rev. and as validated from the existing available records of the Bureau of Internal Revenue.” (last sentence. shall be treated as capital asset. in case of condominium unit. BUT DOES NOT INCLUDE: a. and therefore considered as capital asset. Paintings.. drainage and lighting systems converts the property to an ordinary asset. (Tuazon. Sec. f. The tractors. Rev.Code insofar as having dependents are concerned. and which are not included among the real properties considered as ordinary assets. d. hence an ordinary asset. “Real property. Rev. Regs. 58 SCRA 170) f. or condominium unit.a. Sec. glue. then sold to tenants. (Sec. Property used in the trade or business. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets. or d. Regs. The wood. The condominium building owned by a realty company the units of which are for rent or for sale. namely: a. b... managing. and the heir was not a stranger to the real estate business. owned by an individual engaged in business. annual sales income from the sales was considerable. 3. No.. NIRC of 1997. b. 72003) The term “capital assets” means property held by the taxpayer (whether or not connected with his trade or business). or b. Jewelry not used for trade and business. Rep. Regs. c. or d. Examples of capital assets: a. L-25043. Court of Tax Appeals. 5 (a). which are the raw materials of a furniture factory. townhouse. of a character which is subject to the allowance for depreciation. Jr. sales made with frequency and continuity. 2. objects of arts which are not used in trade or business. shall not be considered used for business purposes. 7-2003) h. Stock and securities held by taxpayers other than dealers in securities. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of a taxpayer if on hand at the close of the taxable year. Regs. 672) ââ51. (Calasanz v. (Sec. buildings and/or improvements). Rev. or b. e. The machinery and equipment of a manufacturing concern subject to depreciation. The property forms part of the stock in trade of the owner.” (last par. 3rd par. v. or c.b. 2. 3. Inherited large tracts of agricultural land which were subdivided pursuant to the government mandate under land reform. No. or real property used in the trade or business of the taxpayer. concrete gutters. 39 (A) (1). etc. (Roxas v. e. 2. Inherited parcels of land of substantial areas located in the heart of Metro Manila. nails. April 26. or c. Sec. which were subdivided into smaller lots then sold on installment basis after introducing comparatively valuable improvements not for the purpose of simply liquidating the estate but to make them more saleable . townhouse or apartment. paint. Capital assets shall refer to all real properties held by a taxpayer. This is so. c. numbering and arrangement supplied. whether single detached. Lingad. as the owner is now engaged in the business of subdividing real estate. not used in trade or business as evidenced by a certification from the Barangay Chairman or from the head of administration. whether or not connected with his trade or business. 7432. Commissioner of Internal Revenue. capitalized words. Tax treatment of real properties that have been transferred. No. “Real property used by an exempt corporation in its exempt operations. as amended by Rep. 7-2003) ââ49. trailers and trucks of a hauling company. No. administering and selling the lots.e. 7-2003) ââ 50. Sec.a. Inherited agricultural property improved by introduction of good roads.b. Act 9257. 7-2003] ââ48. Regs. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. Real property used in trade or business (i. Other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year. b. 1968) g. Rev. varnish. sculptures. Automobiles not used in trade and business. 144 SCRA at p. etc. d. Real property used in trade or business of the taxpayer. Examples of ordinary assets hence not capital assets: a. Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the buyer/transferee. The classification of such property in the hands of the buyer/transferee shall be determined in accordance with the following rules: . Residential houses and lands owned and used as such. “The Expanded Senior Citizens Act of 2003”] ââ47. of a character which is subject to the allowance for depreciation. the employment of an attorney-in-fact for the purpose of developing. Act No. such as a corporation included in the enumeration of Section 30 of the Code. [Sec. [last par. Stock in trade of the taxpayer. No. stamp collections.

]. if any. It is the transaction that is taxed not the gain. “ Sale. NIRC of 1997]. Transactions covered by the presumed capital gains tax on real property: a. c. 24 (D) (1). or other disposition of real property located in the Philippines. as amended by Act No. 7-2003) ââ 52. Holding period not applied to the taxation of the presumed capital gains derived from the sale of real property considered as capital assets. b. otherwise known as the „Civil Code of the Philippines. Real property transferred through succession or donation to the heir or donee who is not engaged in the real estate business with respect to the real property inherited or donated. The tax liability. on gains from sales or other dispositions of real property. NIRC of 1997. sale. 24 (D) (1`). ââ 58. 3. classified as capital assets. 2) Resident alien [Ibid. to the government or any of its political subdivisions or agencies or to government owned or controlled corporations shall be determined.c. 24 (A) (1). No. The tax is “imposed upon capital gains presumed to have been realized from the sale. The basis for the final presumed capital gains tax of six per cent (6%) is whichever is the higher of the a. 861) 54. and who does not subsequently use such property in trade or business. b. an individual [Sec. including pacto de retro sales and other forms of conditional sales. 6 (E). 4118. 2. [Sec. Regs. c. or to a taxpayer who. both of the NIRC of 1997] 59. 7-2003 has defined real property as having “the same meaning attributed to that term under Article 415 of Republic Act No. Regs. [Sec.’ (Sec. . no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. (Gutierrez v. classified as a capital asset. classified as capital assets. Regs. numbering and arrangement supplied] d. No. NIRC of 1997] Revenue Regulations No. In case of non-redemption of the property sold upon a foreclosure of mortgage sale. 713. No. exchange. Rev. both of the NIRC of 1997] or the final presumed capital gains tax of six percent (6%). The seller of the real property. Court of Tax Appeals. Real property received as dividend by stockholders who are not engaged in the real estate business and who not subsequently use such real property in trade or business shall be treated as capital assets in the hands of the recipient even if the corporation which declared the real property dividend is engaged in real estate business. Regs. 24 (D) (1). 3 (2). or other disposition” includes taking by the government through condemnation proceedings. 24 (D) (1).f. Rev. (Sec. 3) Nonresident alien engaged in trade or business in the Philippines [Sec. 499] 55. will use in business the property received in the exchange. 6 of Act No. et al. 24 (D) (1) in relation to Sec. The real property received in an exchange shall be treated as ordinary asset in the hands of the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business. and shall be paid within thirty (30) days from the expiration of the said one-year redemption period. Rev.. of individual taxpayers (not corporate). exchange. or b. 24 (D) (1). 121 Phil. 3135.a. et al.. or other disposition. 4-99] ââ 56. 3 (1). 101 Phil. 25 (A) (3) in relation to Sec.]. No. In case the mortgagor exercises his right of redemption within one (1) year from the issuance of the certificate of sale. whether resident or not [Ibid. shall be considered as a capital asset in the hands of the heir or donee. 6 (E). 24 (D) (1) in relation to Sec. based on the bid price of the highest bidder but only upon the expiration of the one year period of redemption provided for under Sec. then to the schedular tax [Sec. Rev. [Sec. by including the proceeds as part of gross income to be subjected to the allowable deductions and/or personal and additional exemptions. at the option of the taxpayer. or 2) the fair market value as shown in the schedule of values of the Provincial and City Assessors. in relation to Sec. 57. gross selling price. 72003) ââ 53. [Sec. Court of Tax Appeals. both of the NIRC of 1997].. [Sec. the current fair market value as determined below: 1) the fair market value or real properties located in each zone or area as determined by the Commissioner of Internal Revenue after consultation with competent appraisers both from the private and public sectors. exchange. pays the presumed capital gains tax whether: a. both of the NIRC of 1997] It does not matter whether there was an actual gain or loss because the tax is a “presumed” capital gains tax. 386. the presumed capital gains tax shall be imposed.” [Sec. Gonzales v. in a foreclosure of mortgage sale of real property. even if not engaged in real estate business. 1) Citizen.

27 (E) (1). a domestic corporation. [Sec. No. The MCIT and when should be imposed and the four (4) year grace period. No. 1998 as it did not close its business operations in 1987 but merely suspended the same. August 26. On June 23. 4-95) Clearly then. 1999 when it was authorized by the BSP to operate as a thrift bank before the MCIT should be applied to it. x x x” (Rev. August 26. MBC filed a petition for review with the CTA. Commissioner of Internal Revenue. NIRC of 1997] 61. Thus. NIRC of 1997] The date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board. 24 (D) (1). 25 (B) in relation to Sec. it ceased operations that year by reason of insolvency and its assets and liabilities were placed under the charge of a government-appointed receiver. Regs. 2006 did not apply Rev. 9-98 because Rev. No. is hereby imposed on a corporation taxable under this Title. b. the corporate existence was never affected. The intent of Congress relative to the MCIT is to grant a four (43) – year suspension of tax payment to newly organized corporations. Excepted from the payment of the presumed capital gains tax are those presumed to have been realized from the disposition by natural persons of their principal place of residence a. It does not come as a surprise then when many companies reported losses in their initial years of operations.4) Nonresident alien not engaged in trade or business in the Philippines [Sec. 2006) ESTATE TAXES . The MCIT shall be imposed beginning in the fourth taxable year immediately following the year in which the corporation commenced its business operations. “(5) Specific rules for determining the period when a corporation becomes subject to the MCIT (minimum corporate income tax) For purposes of the MCIT. whichever comes later. (Manila Banking Corporation v. 4-95 specifically refers to thrift banks. 6. the BSP authorized MBC to operate as a thrift bank. R. both of the NIRC of 1997]. 27 (E) (1). Due to the BIR’s inaction. it falls under the category of an existing corporation recommencing its banking operations. No. 9-98) Manila Banking Corporation v.” [Sec. NIRC of 1997] ââ 60. Commissioner of Internal Revenue. as defined herein. c. 168118. Commissioner of Internal Revenue. It sought the BIR’s ruling on whether it is entitled to the four (4) year grace period for paying on the basis of MCIT reckoned from 1999. BIR then ruled that cessation of business activities as a result of being placed under involuntary receivership may be an economic reason for suspending the imposition of the MCIT. an estate or trust (Ibid. 2006) NOTES AND COMMENTS: a. Regs. No. 27 (D) (5). b. In 2000. Period when a corporation becomes subject to the MCIT. the BIR Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption. G. It filed its tax return for the year 1999 paying the amount of P33 million computed in accordance with the minimum corporate income tax (MCIT). the proceeds of which is fully utilized in acquiring or constructing a new principal residence. Thus. Regs.G. 168118. 1987. As a result of the ruling MBC filed an application for refund of the P33 million. In a volte facie the BIR now maintains that MBC should pay the MCIT beginning January 1. R. within eighteen (18) calendar months from the date of sale or disposition c. [Sec. R. (Manila Banking Corporation v. 24 (D) (2). in order to allow new corporations to grow and develop at the initial stages of their operations. G. (Sec. Rev. 168118. and d. On May 22. the lawmaking body saw the need to provide a grace period of four years from their registration before they pay their minimum corporate income tax. The CTA denied the petition on the ground that MBC is not a newly organized corporation. August 26. Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January 1. “A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year. the taxable year in which business operations commenced shall be the year in which the domestic corporation registered with the Bureau of Internal Revenue (BIR). the said tax exemption can only be availed of once every ten (10) years. Should the refund be granted ? SUGGESTED ANSWER: Yes. Corporations still starting their business operations have to stabilize their venture in order to obtain a stronghold in the industry.). No. Regs. beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations. Purpose of the four (4) year grace period.) c. 1998. [Sec. MBC was incorporated in 1961 and engaged in commercial banking operations since 1987. NIRC of 1997] b. Even if placed under receivership. MBC is entitled to the grace period of four years from June 23. when the minimum corporate income tax is greater than the tax computed under Subsection (A) of this section for the taxable year. 1999. No.

decedent: a. intangible or mixed. all his personal property. NIRC of 1997) NOTES AND COMMENTS: The beneficiary must not be the decedent‟s estate. situated in the Philippines. indebtedness and taxes. NIRC of 1997] . OR 2) The amounts are receivable by any beneficiary designated in the policy of insurance as revocable beneficiary. Proceeds of life insurance includible in a decedent’s gross estate. the proceeds are receivable by a beneficiary designated as irrevocable. 85 (E).00. claims. [Sec. Act Mo. tangible. or c) administrator 2) irrespective of whether or not the insured retained the power of revocation. a. his executor or administrator. What assets shall be included in the Estate Tax Return to be filed with the BIR ? SUGGESTED ANSWER: All of the assets should be included in the Estate Tax Return to be filed with the BIR. all of the properties enumerated in the problem irrespective of where they are situated are includible in the gross estate of Smith. Net share of the surviving spouse in the conjugal partnership.000 shares of San Miguel Corporation. (Ibid. The decedent takes the insurance policy on his own life 1) The amounts are receivable by a) the decedent‟s estate. ââ 2. b) his executor. an American citizen. to the extent of his interest existing therein at the time of his death. He died in San Francisco. The decedent takes the insurance policy on his own life.” [Sec. One. 4917. tangible. executor or administrator. was a permanent resident of the Philippines. wherever situated. tangible. all his personal property. Consequently. Standard deduction of P1 million.ââ1. Transfers for public use. Smith. wherever situated. what constitutes gross estate ? SUGGESTED ANSWER: Yes. a resident alien. to the extent of the interest that Smith has at the time of his death. c. intangible or mixed. because the proceeds are includible as part of gross estate whether or not the decedent retained the power of revocation. Where the insurance was NOT taken by the decedent upon his own life and the beneficiary is not the decedent‟s estate. and b. h. The gross estate of a Filipino citizen or a resident alien comprises all his real property. situated in the Philippines. Florida. In determining the gross estate of a decedent. [Sec. 5. intangible or mixed. losses. a. The Family Home up to a value not exceeding P1 million. The gross estate of a non-resident alien comprises all his real property. wherever situated. Items deductible from the gross estate of a resident or nonresident Filipino decedent or resident alien Expenses. There is no transfer in contemplation of death if there is no showing that the transferor “retained for his life or for any period which does not in fact end before his death: (1) the possession or enjoyment of. for Philippine estate tax purposes. 4. 85 (E). other than the decedent takes the insurance policy on the life of the decedent 1) The amounts are receivable by a) the decedent‟s estate. e. He left 10. b) his executor. an American citizen and a permanent resident of the Philippines is considered. to designate the person who shall possess or enjoy the property or the income therefrom. f. Property previously taxed. Amount of exempt retirement received by the heirs under Rep. d. Metro Manila and a house and lot in Miami. and more particularly. if the decedent is a Filipino citizen or a resident alien. b. the assets to be included in the Estate Tax Return to be filed with the BIR should be all property. or the right to the income from the property.) c. ââ 3. or c) administrator irrespective of whether or not the insured retained the power of revocation. to the extent of his interest existing therein at the time of his death. Medical expenses not exceeding P500. real or personal. NIRC of 1997] b.000. 85 (B). William Smith. g. either alone or in conjunction with any person. Proceeds of life insurance NOT included in a decedent’s gross estate. or (2) the right. Thus. are his properties abroad to be included. ââ 4. a condominium unit at the Twin Towers Building at Pasig. California.

and 20% of the value if the prior decedent died more than four years but not more than five yearsprior to the death of the decedent. Court of Appeals. What is the donor’s tax rate if the donee is a stranger ? SUGGESTED ANSWER: When the donee or beneficiary is a stranger. Brother. has in the property formerly held by the decedent. ââ 7. a. 40% of the value if the prior decedent died more than three years but not more than four yearsprior to the death of the decedent.No. Sec. are considered as strangers.” [Sec. Relative by consanguinity in the collateral line within the fourth degree of relationship. devise. then the net gift is measured by deducting from the fair market value of the property the amount of the mortgage assumed. or from such prior decedent by gift. or a claim against the estate as such. what is meant by “net gifts ?” SUGGESTED ANSWER: The net economic benefit from the transfer that accrues to the donee. 1997] ââ 2. 99 (A). The tax assessment having become final. II v. or of a nonresident alien decedent.2-2003) 5. of a resident alien decedent. if a mortgaged property is transferred as a gift. Where such property can be identified as having been received by the decedent from the donor by gift. legatee. numbering. Accordingly. defined. devisee. Any property forming a part of the gross estate situated in the Philippines c Of any person who died within five years prior to the death of the decedent. NIRC of 1997) . 273 SCRA 47) DONOR’S TAXES ââ 1. or if the property was transferred to him by gift within the same period prior to his death. arrangement and underlining supplied] ââ 8. How are gifts of personal property to be valued for donor’s tax purposes ? SUGGESTED ANSWER: The market value of the personal property at the time of the gift shall be considered the amount of the gift. the tax payable by the donor shall be 30% of the net gifts. or if the property was transferred to him by gift within the same period prior to his death. or transferred to the decedent by gift within five years prior to his death. sister (whether by whole or half-blood).ââ 6. or b. [Sec. 60% of the value if the prior decedent died more than two years but not more than three yearsprior to the death of the decedent. but is against the interest or property right which the heir. 11. resident aliens and nonresident estates for properties which were previously subject to donor‟s or estate taxes. [Sec. 80% of the value if the prior decedent died more than one year but not more than two yearsprior to the death of the decedent. The probate court is determining issues which are not against the property of the decedent. but imposing upon the donee the obligation to pay the mortgage liability. The deduction is called a vanishing deduction because the deduction allowed diminishes over a period of five (5) years. For purposes of the donor’s tax who is a stranger ? SUGGESTED ANSWER: A stranger is a is person who is not a: a. 102. the same can no longer be contested by means of a disguised protest. An amount equal to the value specified below of b. d. (Marcos. ancestor and lineal descendant. Rev.. executory and enforceable. (Sec. The deduction allowed from the gross estates of citizens. irrespective of the degree. or if the property was transferred to him by gift within the same period prior to his death. For purposes of the donor’s tax. NIRC of 1997] 4. 3. NIRC of 1997. whether resident or not. It is also known as a deduction for property previously taxed. Vanishing deduction (deduction for property previously taxed). et al. The notices of levy were regularly issued within the prescriptive period. What is the tax base for donations ? SUGGESTED ANSWER: The net gifts made during the calendar year. or if the property was transferred to him by gift within the same period prior to his death. Vanishing deduction (property previously taxed) allowed as a deduction from the gross estate of a Filipino citizen. NIRC of NOTES AND COMMENTS: All relatives by affinity. Which can be identified as having been acquired in exchange for property so received: 100% of the value if the prior decedent died within one year prior to the death of the decedent. 86 (A) (2) and (B) (2). spouse. or as a settlement tribunal over the estate of the deceased is not a mandatory requirement for the collection of the estate. or if the property was transferred to him by gift within the same period prior to his death. or e. (last par. 99 (B).. etc. The approval of the court sitting in probate. or inheritance. Regs. bequest.

No. a. In 2008 Leon was thinking of donating a P200. his first cousin. Rep. Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by residents who are parents to each of their legitimate. numbering and arrangement supplied] g.9) d. Regs.00 net gifts for each calendar year. which should have been subject to tax was made by nonresident aliens and took place outside of the Philippines. The general renunciation by an heir. Political contributions made by a resident or non-resident individual if registered with the COMELEC irrespective of whether donated to a political party or individual.000. of her share in the hereditary estate left by the decedent is not subject to donor‟s tax. However. (4th par. If you are the BIR examiner assigned to review the sale. Leon would be enjoying the exemption for the first P100. However. including the surviving spouse.00 net donation during a calendar year is exempt from donor‟s tax [Sec. ââ10.000 donation over two (2) calendar years. Sec. would you issue a tax assessment on the transaction ? Explain your answer briefly. donating P100. Is the renunciation subject to donor’s tax ? Explain. If he donated the P200.00 would be subject to donor‟s tax If Leon spreads the P200. Y and Z. Since B does not want to participate in the distribution of the estate.000. Gifts made by residents or non residents in favor of an educational and/or charitable. or adopted children to the extent of the first ten thousand pesos (P10. ââ 9. (Corp. or to any political subdivisions of the said Government. What is the concept of donation or gift splitting ? Illustrate. The donation by a resident or non-resident of a prize to an athlete in an international sports tournament held abroad and sanctioned by the national sports association is exempt from donor‟s tax (Sec. SUGGESTED ANSWER: No. b. Act No. e. and three minor children.. 22003) âââ 8. (4th par. the other co-heirs in the hereditary estate. Regs. the fair market value as determined by the Commissioner of Internal Revenue (zonal valuation) or b.000.00)..00 on December 30. The transaction. the fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. 88 (B) both of the NIRC of 1997] â 7. institution. A died leaving as his only heirs. 36. 2009 the transaction would be exempt from donor‟s tax. B renounced her hereditary share in A’s estate to X who is a special child.00 is the totality of the net gifts for 2008.00 to Miklos. cultural or social welfare corporation. Rev. Title IV. she renounced her hereditary share in the estate. The P200. Give some donations that are exempt from donor’s tax. Gifts made by residents or non-residents to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit. foundation. Rev.000. would your answer be the same ? Explain.000 would be exempt and the remaining P50.00 on January 1. The first P100. 7549) c.000. Supposing that instead of a general renunciation. .000. recognized natural. however. SUGGESTED ANSWER: Donation or gift splitting is spreading the gift over numerous calendar years in order to avail of lower donor‟s taxes. Code.6. b. SUGGESTED ANSWER: Donor‟s taxes would be due on the insufficiency of consideration.00 in 2008 the first P100. [Sec. The proper VAT on the sale was paid. No. as in the case B. This is so even if the donation is separated only by two days because the basis is the calendar year. f. What is the valuation of donated real property for donor’s tax purposes ? SUGGESTED ANSWER: The real property shall be appraised at its fair market value as of the time of the gift.000. NIRC of 1997] made by a resident or non resident. the Corporation Code prohibits corporations from making political contributions. Sec. NIRC of 1997. The renunciation in favor of X would be subject to donor‟s tax. his surviving spouse B. 2008 and the remaining P100. SUGGESTED ANSWER: My answer would be different.000. in relation to Sec. 99 (A). This is so because the renunciation was specifically and categorically done in favor of X and identified heir to the exclusion or disadvantage of Y and Z. That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. 101 (A). 11. Gifts made by non-resident aliens outside of the Philippines to Philippine residents are exempt from donor‟s taxes because taxation is basically territorial. Sec. religious. 1. 102. A. SUGGESTED ANSWER: a. 2-2003) This is so because the general renunciation by B was not specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate. who is engaged in the car “buy and sell” business sold to B P7 million Jaguar for only P4 million. [Sec. 11. the appraised value of the real property at the time of the gift shall be whichever is the higher of: a. X. trust or philanthropic organization or research institution or organization: Provided.000.

For example the services rendered by a local firm to its foreign client are performed or successfully completed upon its sending to a foreign client the drafts and bills it has gathered from service establishments here. Such facilitation service has no physical existence. leases. Regs. [Commissioner of Internal Revenue v. 2007] b. G. Illustration of the meaning of consumption as used under the VAT system. (Quezon City. is transferred for less than an adequate and full consideration in money or money‟s worth. usually resulting in the performer's release from any past or future liability x x x" Unlike goods. are therefore also consumed in the Philippines. Its services. âââ7. Further. 153866. 2008) âââ3. Seagate Technology (Philippines). February 11. having been performed in the Philippines. properties or services. Considering the limited period of time. G. the reader is advised to focus on areas marked with stars and just browse the unmarked areas. No.). June 8. The seller is still exempt because it could pass on the burden of paying the tax to the purchaser.Where property. Inc. services cannot be physically used in or bound for a specific place when their destination is determined. Consumption is "the use of a thing in a way that thereby exhausts it. Inc. the VAT is an indirect tax and can be passed on to the buyer. ABS-CBN Broadcasting Corporation. properties or services.. Any person who. No. REASON: The VAT is a tax on consumption. The tax base of the VAT is limited only to the value added to such goods. exchanges. Placer Dome Technical Services (Phils. Effect of exemptions from VAT which is an indirect tax. [Commissioner of Internal Revenue v. properties or services. 2007] 6. renders services. Meaning of consumption as used under the VAT system. This area is probably the most difficult area to forecast because there are no statistically perceived patterns. October 6. âââ1. R. G." Applied to services. 153866." [Commissioner of Internal Revenue v. As such. goods or properties. Rev. The author has retained the “Stars System” for VAT. directly liable for its payment. [Commissioner of Internal Revenue v. The purchaser is subject to VAT because the VAT is merely added as part of the purchase price and not as a tax because the burden is merely shifted. and therefore upon consumption. The VAT is a tax on consumption. barters. yet takes place upon rendition. other than real property that has been subjected to the final capital gains tax. âââ2. and shall be included in computing the amount of gifts made during the calendar year. Seagate Technology (Philippines). et al. it should be understood not in the context of the person or entity that is primarily.. who in the course of trade or business. or . sells. No. A VAT exempt seller sells to a non-VAT exempt purchaser. 1) Sells. 164365. exchanges or leases goods or 2) renders services. or services by the seller. No. (5th par. 2005 citing various authorities} VAT is a percentage tax imposed on any person whether or not a franchise grantee. No. Who are liable for the value-added tax. Placer Dome Technical Services (Phils. 164365. then the amount by which the fair market value of the property at the time of the execution of the Contract to Sell or execution of the Deed of Sale which is not preceded by a Contract to Sell exceeded the value of the agreed or actual consideration or selling price shall be deemed a gift. and any person who imports goods xxx properties. a. It is also levied on every importation of goods whether or not in the course of trade or business. 22003) VALUE-ADDED TAXES (VAT) WARNING !!! Approximately 10% of the total questions asked in the Bar Examination are sourced from VAT and its concepts. June 8. and not on the total value of the goods or services being sold or rendered. in the course of his trade or business. VAT is an indirect tax that may be shifted or passed on to the buyer. transferee or lessee of the goods. the term means the performance or "successful completion of a contractual duty. barters. Instead.). 5. R. but in terms of its nature as a tax on consumption. G. 2005) 4. the purchase transaction is not exempt. in the Philippines. but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers. R. merit or importance of goods. No. R. G. Sec. the amount of which may be shifted or passed on by the seller to the purchaser of the goods. transferor or lessor. v. Value-added tax (VAT) is a tax which is imposed only on the increase in the worth. 166408. properties. If a special law merely exempts a party as a seller from its direct liability for payment of the VAT. Nature of VAT. there can only be a "predetermined end of a course" when determining the service "location or position x x x for legal purposes. 11. R. February 11. Illustration of effects of exemptions from VAT which is an indirect tax.

the presumptive input tax xxx. Output VAT less Input VAT = VAT due on the increase in worth. Regs. (Rev. Prior to the enactment of multi-stage sales taxation. any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes. and in manufacturing refined sugar. The right to credit the input tax be limited by legislation because it is a mere creation of law. Input tax is the value-added tax due on or paid by a VAT-registered person on importation of good or local purchases of goods or services. et al. an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases. G. This continued with the Expanded VAT Law (R. arrangement and numbering supplied] 15. It is when the output taxes exceed the input taxes that the excess has to be paid. The right to credit input tax as against the output tax is clearly a privilege created by law. mackerel. This is a single-stage tax which is payable only by the original sellers. R. And 2nd par.111-1. b. properties or services by any VAT-registered person. cooking oil and packed noodle-based instant meals. 4.000.However. 168207.00) shall be entitled to a transitional input tax on the inventory on hand as of the effectivity of their VAT registration. 153866. (a). Regs. etc. it was only then that the crediting of the input tax paid on purchase or importation of goods and services by VAT-registered persons against the output tax was established. (Abakada Guro Party List (etc. Persons or firms engaged in the processing of sardines.R. Seagate Technology (Philippines). d. No. Concept of presumptive input tax credits. Various VAT methods and systems. 7716). goods and supplies for use in the course of the taxpayer‟s trade or business as a VAT-registered person. 4. 2nd sentence. et al.4. It should be stressed that a person has no vested right in statutory privileges. Regs..) v. c. No. September 1. Concept of transitional input tax credits on beginning inventories. Ermita.00 (except franchise grantees of radio and television broadcasting whose threshold is P10. paraphrasing supplied) âââ8. 168056. 10. 2005] If at the end of a taxable period. 16-2005.00 in any 12-month period. in the case of importation of taxable goods. (Rev. whether an individual or corporation and whether or not made in the course of his trade or business. 8424). 1st par. or who voluntarily register even if their turnover does not exceed P1. February 11. If however. No. 2005 and companion cases) This was subsequently modified and a mixture of “cost deduction method” and “tax credit method” was used to determine the value-added tax payable. [Commissioner of Internal Revenue v. No. the excess shall be carried over to the succeeding quarter or quarters. G. and companion cases. inputs and imports.500.000. paraphrasing.105-1.110-1. It includes c. the transitional input tax and b.000.. no payment is required.A. R. 4.) 9.. Should the input taxes result from zero-rated or effectively zero-rated transactions or from acquisition of capital goods. 2005. in the course of his trade or business. 16-2005. No..A. materials purchased for further processing. arrangement and numbering supplied ) 14. the input taxes exceed the output taxes. Output tax is the value-added tax due on the sale or lease or taxable goods. October 15. a. Sec. No. goods in process for sale. âââ12. shall be . on the motion for reconsideration) âââ11. How the VAT is imposed on the increase in worth. No. Regs. and The Tax Reform Act of 1997 (R. 1st par.) b. and milk. Ermita. 273 imposing a 10% multi-stage tax on all sales. on the following: a. No.500. or e. (Ibid. merit or improvement f the goods or services. (ABAKADA Guro Party List.Sec. [Rev. the sales taxes paid at every level of distribution are not recoverable from the taxes payable.110-1. This method relies on invoices. With the advent of Executive Order No. G. but which have not yet undergone processing. No. the importer. goods which have been manufactured by the taxpayer. Tax credit method. etc.. Taxpayers who become VATregistered persons upon exceeding the minimum turnover of P1. vs. a. Cost deduction method. (Ibid. 1st par. shall be liable to VAT xxx. The VAT utilizes the concept of the output and input taxes. goods purchased for resale in their present condition.) 13. (Rev.000. merit or improvement of the goods or services. Included in the input tax. the output taxes charged by a seller are equal to the input taxes passed on by the suppliers. a privilege that also the law can limit.. input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. including lease or use of properties.

et al. The bid was made by Magsaysay Lines. As used in this paragraph. G. Regs. 2) whether or not the business is continued by the new owner or successor. Change of ownership of the business. Transactions considered retirement or cessation of business “deemed sale” subject to VAT. to the NMC.. Inc. decided to sell to private enterprise all of its shares in its wholly-owned subsidiary the National Marine Corporation (NMC). a. creditable against the output tax. but all the time. xxx [Rev.4. "Course of business" is what is usually done in the management of trade or business. (b)] 16. It should be emphasized that the normal VAT-registered activity of NDC is leasing personal property. 16-2005. Is the sale subject to VAT ? SUGGESTED ANSWER: No. but means conducting. The term "carrying on business" does not mean the performance of a single disconnected act.. although a fixed amount is not imposed for the exercise of a privilege but only for the purpose of defraying part of the cost of registration.(Commissioner of Internal Revenue v. Magsaysay Lines. but all the time. the vessels were transferred and leased. also its wholly-owned subsidiary. The registration fee is thus more of an administrative fee. The VAT registration fee imposed on non-VAT enterprises which includes among others. or 1) the proprietor of a single proprietorship sells his entire business. the term processing shall mean pasteurization. 2006) âââ18. It does not include isolated transactions. "Course of business" or "doing business" connotes regularity of activity.. [Rev. which are 3. The term "doing business" or “course of business” conveys the idea of business being done. supplies or materials as of the date of such retirement. with respect to all goods on hand. and FIM Limited of the Marden Group based in Hongkong . 16-2005. The vessels were constructed for the NDC between 1981 and 1984. G. 2006) âââ19. . prosecuting and continuing business by performing progressively all the acts normally incident thereof. 235 SCRA 630) 17. much less a constitutional right. The VAT is also imposed on certain transactions “deemed sales” which include: a. a VAT-registered entity created for the purpose of selling real property." Magsaysay Lines. then initially leased to Luzon Stevedoring Company. R. Distribution or transfer to: 1) Shareholders or investors as share in the profits of the VAT. No.. the sale was an isolated transaction. use or consumption not in the course of business or properties originally intended for sale or for use in the course of business. xxx or 2) Creditors in payment of debt or obligation c. (Tolentino v. et al. (Commissioner of Internal Revenue v.. This finding is confirmed by the Revised Charter of the NDC which bears no indication that the NDC was created for the primary purpose of selling real property. Secretary of Finance. July 28. 1) whether capital goods. 4. xxx b. or exchange or goods and services.registered person. No. d. July 28. "Kloeckner" type vessels. Inc. not from time to time. religious sects which sells and distributes religious literature is not violative of religious freedom. Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned. and a Notice of Award was issued to Magsaysay Lines. equivalent to four percent (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production. Baliwag Navigation. et al. stock-in-trade. while "doing business" conveys the idea of business being done. not from time to time. The NMC shares and the vessels were offered for public bidding. Consigned goods returned by the consignee within the 60-day period are not deemed sold. Under the Value Added Tax (VAT). the tax is imposed on sales. Regs.allowed a presumptive input tax. In the instant case. NDC..000. The NDC decided to sell in one lot its NMC shares and five (5) of its ships. Sec. Pursuant to a government program of privatization. canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such a manner as to prepare it for special use to which it could not have been put in its original form or condition. arrangement and numbering supplied] 20. Magsaysay Lines. Inc. No.111-1.. barter. The VAT registration fee does NOT violate religious freedom.106-7. Retirement from or cessation of business. The bid was approved by the Committee on Privatization. 146984. one not imposed on the exercise of a privilege. paraphrasing. Transfer. No. and companion cases. on a bareboat basis. 146984. Subsequently. Among the stipulated terms and conditions for the public auction was that the winning bidder was to pay "a value added tax of 10% on the value of the vessels. R. offered to buy the shares and the vessels for P168. purportedly for a new company still to be formed composed of itself.700 DWT Tween-Decker.00.000. or cessation. Interpretation of the term “In the Course of Trade or Business” as used in the VAT system. The sale which was involuntary and made pursuant to the declared policy of Government for privatization could no longer be repeated or carried on with regularity. Inc. Sec. There is change in the ownership of the business where a single proprietorship incorporates.

whether covered by one or separate Deed of Conveyance. âââ23. 162005. dealers in securities. real estate. lessors of property. 7279. proprietors or operators of restaurants.00. c. xxx xxx xxx c. The following sales of real properties are exempt from VAT. as published by the National Statistics Office (NSO). i. otherwise known as the “Urban and Development Housing Act of 1992” and other related laws. persons engaged in warehousing services e. g. Inc. c. XYZ. 12% on the gross selling price because the sale was made in the ordinary course of trade of business of X. 2005. Sale of residential lot valued at One Million Five Hundred Thousand Pesos (P1. operators or keepers of hotels. including clubs and caterers. 1st par. Only real estate dealers are subject to VAT. No. commercial.500. Dissolution of a partnership and creation of a new partnership which takes over the business. “Sale or exchange of services”. No. 2009. 4. k.. 9337. common carriers by air and sea relative to their transport of passengers. 7835 and RA No.b.000. arrangement and numbering supplied] 25. On September 4. further. If two or more adjacent residential lots are sold or disposed in favor of one buyer.as amended by R. assessed. or house & lot and other residential dwellings valued at Two Million Give Hundred Thousand Pesos (P2. The term “sale or exchange of services” means the performance of all kinds of services in the Philippines for others for a fee.000. goods or cargoes from one place in the Philippines to another place in . capital transactions of individuals are not subject to VAT. Regs. and movie houses. for the purpose of utilizing the lots as one residential lot. although covered by separate titles and/or separate tax declarations.106-7 (a).106-3. [Rev. and other related laws wherein the price ceiling per unit is P225. when sold or disposed of to one and the same buyer.500. 8763. pension houses. b. proprietors. including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes. processing. (Rev.00. Sale of real properties utilized for low-cost housing as defined by RA No.) Thus. Regs. l. whether in kind or in cash. Is the sale subject to the value-added tax (VAT)? If so. lending investors. construction and service contractors. defined. the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed P1. b. remuneration or consideration. No. resorts. cafes and other eating places. that such adjustment shall be published through revenue regulations to be issued not later than March 31 of each year. (p).00) and below where the instrument of sale/transfer/disposition was executed on or after November 1. Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business. 2009 and every three (3) years thereafter. That not later than January 31. lessors or distributors of cinematographic films.00 or as may from time to time be determined by the HUDCC and the NEDA and other related laws. SUGGESTED ANSWER: Yes. whether personal or real. xxx xxx xxx d. inns. Sale of real properties utilized for socialized housing as defined under RA No. provided.500. such as RA No.000.000. customs and immigration brokers. [NIRC of 1997.000. Sec. the amounts stated herein shall be adjusted to its present value using the Consumer Price Index. There shall be levied. transportation contractors on their transport of goods or cargoes.109-1 (B). motels. arrangement and numbering supplied] 21. provided.000. rest-houses. 108 (A). 4. 22. j. namely: a. b. Sec. persons engaged in milling. shall be presumed as a sale of one residential lot. how much? Explain. 16-2005. sold a building for P10. Regs. and collected. refreshment parlors. f. paraphrasing and numbering supplied] 24.00) and below. d. Sale of real properties primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT. Sec. a value-added tax equivalent to twelve percent (12%) of gross receipts derived from the sale or exchange of services.A. 4. a domestic corporation engaged in the real estate business. theaters. a domestic corporation engaged in the real estate business. 7279. 1) including the use or lease of properties. manufacturing or repacking goods for others. Adjacent residential lots. [Rev. h. Sale of or lease of real properties subject to VAT. No. VAT on services and lease of properties. (4) paraphrasing. stock. including those performed or rendered by the following: a. a.

as amended by R.108-2. such rate obviously results in no tax chargeable against the purchaser. project of scheme. industrial or commercial undertaking. indemnity and bonding companies. and p. technical. Destination principle under the VAT System.000. machinery or other apparatus purchased from such nonresident person. Regs. a. The tax rate is set at zero. transmission. No. venture. The lease or the use of. 108 (A). television. 152609. design or model. However. the service is necessarily subject to its jurisdiction for the State necessarily has to have a “substantial connection” to it in order to enforce a zero rate.the Philippines. si milar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties.G.108-2. 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. The supply of services by a non-resident person or his employee in connection with the use of property or rights belonging to. 2nd par. 16-2005. g. No. 2005) âââ30. 1st par. sales of electricity by generation companies. Goods and services are taxed only in the country where they are consumed. R. the input tax on the purchases of goods.00). Regs. telephone and telegraph. (Commissioner of Internal Revenue v. satellite transmission and cable television time. June 29. Sec. or the right to use any industrial. franchise grantees of electric utilities. American Express International. (Rev. The lease or the use of or the right to use radio. assistance or services rendered in connection with technical management or administration of any scientific. Sec. Seagate Technology (Philippines). R. c. n. 16-2005. 16-2005. The tax paid or withheld is not deducted from the tax base. and franchise grantees of gas and water utilities. f. 16-2005. (Rev. June 29. trade brand or other like property or right. The supply of technical advice. and/or distribution companies. 4. secret formula or process. 152609. 2005 citing various cases) 29. 2005] Under a zero-rating scheme. No. No. February 11.. 1st par. Concept of VAT zero-rating. When applied to the tax base. non-life insurance companies (except their crop insurances). 9337. while imports are taxed. patent. of Internal Revenue v. The seller of such transactions charges no output tax. This is so because the law neither makes a qualification nor adds a condition in determining the tax situs of a zerorated service. but can claim a refund or a tax credit certificate for the VAT previously charged by suppliers.000. Zero-rated Sales of Goods or Properties. Also included in the phrase “sale or exchange of services. o. by way of a refund or as an input tax credit. The lease or the use of or the right or privilege to use any copyright. Sec. or right as is mentioned in subparagraph (2) hereof or any such knowledge or information as is mentioned in subparagraph (3) hereof. because the seller is entitled to recover. properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with Rev. 4.) âââ28. or e. Thus.A. m. film tapes and discs. the tax that is included in the cost of purchases attributable to the sale or exchange. the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. [Commissioner of Internal Revenue v. plan. This is also known as the “Cross Border Doctrine. The place where the service is rendered determines the jurisdiction to impose the VAT Performed in the Philippines. goodwill. Rev. (Philippine Branch). exports are zero-rated. Situs of taxation of zero-rated VAT services such as facilitating the collection of receivables from credit card members situated in the Philippines and payment to service establishments in the Philippines. The lease of motion picture films. As a general rule. The place of payment is immaterial much less is the place where the output of the service will be further or ultimately used. No. industrial or commercial knowledge or information. (Philipppine Branch). A zero-rated sale of goods or properties by a sale by a VAT-registered person is a taxable transaction for VAT purposes but the sale does not result in any output tax. The supply of scientific. Inc. (Commissioner. Regs. including surety. commercial or scientific equipment. Inc. R. No. arrangement and numbering supplied] 26. G. G. [NIRC of 1997.” . No. d. or the installation or operation of any brand. b.) âââ27. Regulations No. trademark. American Express International. the sale or exchange of a particular service is completely freed from the VAT. radio and television broadcasting and all other franchise grantees except franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P10. h. fidelity. 153866.

" âââ32. Notably. G. for a zero percent VAT rate for services that are performed in the Philippines. Considered export sales under Executive Order No. Zero rating is primarily intended to be enjoyed by the seller. Manila Mining Corporation. Zero-rated sale distinguished from exempt transactions: a. Regs. "paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [BSP]. Inc. or attenuated. b. and not at random. Inc. defined. commercial.. Such service is commercial in nature. The Philippine VAT system adheres to the Cross Border Doctrine. b. Toshiba Information Equipment (Phils. defined. and d. 2nd par. Sales to ecozone. Service performed by American Express in facilitating the collection of receivables from credit card members situated in the Philippines and payment to service establishments in the Philippines in behalf of its Hong-Kong based client is subject to VAT but zero-rated. Regs. No. R. 4. on a significant scale with a reasonable degree of frequency. Sale of gold to the Central Bank considered as export sales.). 4. but shall not result in any output tax. Regs. August 9.. actual or constructive export of goods and services from the Philippines to a foreign country must be zero-rated for VAT. The input tax on the purchases of a VAT registered person who has zero-rated sales may be allowed as tax credits or refunded WHILE the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt.. while. A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT purposes. 149671. 224. while an ecozone is geographically within the Philippines. fortuitous. 153204. carried on over a sustained period of time. 2005] âââ38. no tax is chargeable to it as purchaser. As export sales. Sec. G. [Commissioner of Internal Revenue v. words in italics supplied) âââ39. Hence. banking.. export processing zones (EPZs). properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with Rev. considered export-sale.). An ECOZONE or a Special Economic Zone has been described as – [S]elected areas with highly developed or which have the potential to be developed into agro-industrial. No. no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. An ECOZONE may contain any or all of the following: industrial estates (IEs). which charges no output VAT but can claim a refund of or a tax credit certificate for the input VAT previously charged to it by suppliers. free trade zones and tourist/recreational centers. Sec. 2005) 36.106-5. This is so because it meets all the requirements for VAT imposition. those destined for use or consumption within the Philippines shall be imposed the twelve percent (12%) VAT. 2005] The “Cross Border Doctrine” is also known as the destination principle. that is. Zero-rated sales by VAT-registered persons. b. R. Zero-rated sale of service. No. 16-2005. Sec. it is deemed a separate customs territory and is regarded in law as foreign soil. the sale of gold to the Central Bank is zero-rated. according to which. tourist. as follows: a.. such as PEZA. recreational. Foreign currency denominated sale. It regularly renders in the Philippines the service of facilitating the collection and payment of receivables belonging to a foreign company that is a clearly separate and distinct entity.108-5 (a). [Rev. A zero-rated sale is a taxable transaction but does not result in an output tax WHILE an exempt transaction is not subject to the output tax. Persons engaged in transactions which are zero rated being subject to VAT are required to register WHILE registration is optional for VAT-exempt persons. No. The law clearly provides for an exception to the destination principle. G. Sales to persons or entities deemed tax-exempt under special law or international agreement. No. (Commissioner of Internal Revenue v. (Commissioner of Internal Revenue v. “Ecozone”. investment and financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations. the input tax on purchases of goods. The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: a. G. Exception to the destination principle. However. c. 150154. 16-2005. No. Rationale for zero-rating of exports. Inc. 16-2005.âââ31. hence. Toshiba Information Equipment (Phils. c. (Rev. industrial. These sales are zero-rated or subject to a tax rate of zero percent. No. Export sales. âââ33. August 9. Sekisui Jushi Philippines. . 150154. [Commissioner of Internal Revenue v. Sales by suppliers from outside the borders of the ecozone to this separate customs territory are deemed as exports and treated as export sales.R. July 21. R. The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the Customs Territory. paraphrasing supplied) 35.. August 31. âââ34. 2006 citing various authorities) 37.

Its services. The BIR could not change the law. R. Inc. of Internal Revenue v. American Express renders assistance to its foreign clients by receiving the bills of service establishments located in the country and forwarding them to their clients abroad.c. The service is performed in the Philippines. The services are performed or successfully completed upon send to its foreign clients the drafts and bills it has gathered from service establishments here. No. among which are the following: a. The services are within the categories provided for under the Tax Code. and BIR Revenue Regulations that alter the legal requirements for zero-rating are ultra vires and invalid. its services are exempt from the destination principle and are zero-rated. (Philippine Branch). The VAT system uses the destination principle which posits that the goods and services are taxed only in the country where they are consumed. 2005] . d. 2005) 40. it definitely receives consideration in foreign currency that is accounted for in conformity with law. R. No. and c. For this service. having been performed in the Philippines are therefore also consumed in the Philippines. It is not an entity exempt under any of our laws or international agreements. G. Thus. [Commissioner. 152609. (Philippine Branch). (Commissioner. the law itself provides for clear exceptions under which the supply of services shall be zero-rated. G. However. It is paid for in acceptable foreign currency of the Bangko Sentral ng Pilipinas. b. 152609. Inc. June 29. June 29. of Internal Revenue v. American Express International. While the service performed by American Express is subject to VAT it is zero-rated. American Express International.