TAXATION

GOLDEN NOTES 2011

UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
MANILA
 Academic Year 2011-2012
CIVIL LAW STUDENT COUNCIL

Lester John A. Lomeda President

Wilfredo T. Bonilla, Jr. Vice-President
Raissa S. Saipudin Secretary
Bernadette Faustine C. Balao Treasurer
Marc Mikhaele J. Santos Auditor
Victor Lorenzo L. Villanuea Public Relations Officer

TEAM: BAR-OPS 2011

Diane Camilla R. Borja Chairperson
Carlo Artemus V. Diaz Vice-Chairperson
Mary Grace L. Javier Secretary
Ronn Robby D. Rosales Logistics Committee Head
Mark Arthur M. Catabona Asst. Logistics Committee Head
Angeli P. Albaa Finance Committee Head
Vicente Jan O. Platon III Hotel Accommodations Head
Kimverly A. Ong Asst. Hotel Accommodations Head

The UST GOLDEN NOTES is a student-edited work of the University

of Santo Tomas, Faculty of Civil Law. It is updated annually.
Communications regarding the NOTES should be addressed to the
Academics Committee of the Team: Bar-Ops.

ADDRESS: Team Bar-Ops

Academics Committee
Faculty of Civil Law
University of Santo Tomas
Espaa, Manila 1008
TEL. NO.: (02) 731-4027
(02) 4061611 loc. 8578
 2011 ACADEMICS COMMITTEE
Lester Jay Alan E. Flores II Chairperson
Karen Joy G. Sabugo Vice-Chair for Academics
John Henry C. Mendoza Vice-Chair for Academics
Jeanelle C. Lee Vice-Chair for Administration and Finance
Theena C. Martinez Vice-Chair for Layout and Design
Earl Louie M. Masacayan Vice-Chair for Layout and Design

TAXATION LAW COMMITTEE

Rodolfo N. Ang, Jr. Taxation Law Committee Head
Vannessa Rose S. Hernandez Asst. Taxation Law Committee Head
Edison U. Ortiz Asst. Taxation Law Committee Head
Jose Duke Bagulaya Member
Charles L. Grantoza Member
Christine L. Gutierrez Member
Clarabel Anne R. Lacsina Member
Divine C. Tee Member
Keith S. Valcos Member

ADVISER

Atty. Prudence Angelita A. Kasala

 FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
Academic Year 2011-2012

ACADEMIC OFFICIALS

Atty. NILO T. DIVINA

Dean

Rev. Fr. ISIDRO C. ABAO, O.P.

Regent

Atty. ARTHUR B. CAPILI

Faculty Secretary

Atty. ELGIN MICHAEL C. PEREZ

Legal Counsel
UST Chief Justice Roberto Concepcion Legal Aid Clinic

Judge PHILIP A. AGUINALDO

SWDB Coordinator

LENY G. GADIANA, RGC

Guidance Counselor
 Our deepest appreciation to our
Mentors & Inspiration

Hon. Justice Japar B. Dimaampao

Atty. Prudence Angelita A. Kasala
Atty. Marian Joanne K. Co-Pua

For activating our magnets of curiosity, knowledge and

wisdom and helping us understand the intricate
sphere of Taxation Law.

- Academics Committee 2011

 DISCLAIMER
U U U U U U U U U U U U U U U U U U U U

The risk of use, non-use and misuse of

this material shall be borne solely
by the user.
 TABLE OF CONTENTS

SYLLABUS FOR 2011 BAR EXAMINATIONS

TAXATION

November 6, 2011
(First Sunday, Afternoon)
GENERAL PRINCIPLES 1

DEFINITION AND CONCEPT OF TAXATION........................................ 1

NATURE OF TAXATION.. 1
CHARACTERISTICS OF TAXATION...... 4
POWER OF TAXATION COMPARED WITH OTHER POWERS OF THE STATE 4
PURPOSE OF TAXATION. 4
PRINCIPLES OF SOUND TAX SYSTEM. .5
Fiscal Adequacy 5
Administrative Feasibility. 5
Theoretical Justice. 5
THEORY AND BASIS OF TAXATION. 6
Lifeblood theory.. 6
Necessity theory. 6
Benefits-Protection theory.. 6
DOCTRINES OF TAXATION 7
Prospectivity of tax laws 7
Imprescriptibility. 7
Double taxation 7
Escape from taxation 9
Exemption from taxation.. 11
Compensation and Set-off 12
Compromise 13
Tax amnesty 13
Construction and Interpretation of Tax laws.. 14
SCOPE AND LIMITATION OF TAXATION. 15
Inherent limitations.. 15
Constitutional Limitations. 22
Stages of Taxation.. 33
TAXES. 34
Definition, Nature and Characteristics of Taxes 34
Requisites of valid tax. 34
Tax as distinguished from other forms of exactions.. 35
Kinds of Taxes.. 36

NATIONAL INTERNAL REVENUE CODE.................................................................................................. 37

INCOME TAXATION.37
INCOME TAX SYSTEMS 37
FEATURES OF PHILIPPINE INCOME TAX LAW. 37
CRITERIA IN IMPOSING PHILIPPINE INCOME TAX 37
TYPES OF PHILIPPINE INCOME TAX.. 38
TAXABLE PERIOD.. 39
KINDS OF TAXPAYERS 39
Individual Taxpayers 39
Special Class of Individual Employees. 41
Corporations. 41
Partnerships.. 43
Estates and Trusts. 43
Co-ownerships. 44
INCOME TAXATION. 45
 TABLE OF CONTENTS

INCOME. 46
Definition. 46
Nature 46
When income is taxable 47
Tests in determining whether income is earned for tax purposes.. 47
Realization test.. 47
Claim of right doctrine.. 47
Economic benefit test 47
Severance test 47
GROSS INCOME.. 49
Definition. 49
Concept of income from whatever source derived 49
Gross income vis--vis Net Income vis--vis Taxable Income..50
Classification of Income as to Source 51
Compensation Income 51
Fringe Benefits. 52
Professional Income 53
Income from business. 53
Income from Dealings in Property. 53
Capital Assets 53
Ordinary assets. 54
Types of Gains from dealings in property... 54
Passive Investment Income. 62
Royalty Income. 66
Rental income 67
Annuities.. 68
Prizes and Awards.... 68
Pensions, retirement benefit, separation pay.. 68
Income from any source whatever... 68
Exclusions from Gross Income..69
Rationale for the exclusions. 69
Taxpayers who may avail of the exclusions.. 69
Under the Constitution 69
Under the Tax code 70
Under Tax treaty. 78
Under Special laws. 78
Deductions from Gross Income.. 79
General rules. 79
Itemized deductions.. 80
Expenses.. 80
Interests. 85
Taxes. 86
Losses.... 88
Bad debts. 89
Depreciation.. 90
Charitable and other contributions.. 92
Optional Standard deduction .96
Personal and additional exemption (R.A. 9504) 96
TAXATION OF RESIDENT CITIZENS, NON-RESIDENT CITIZENS AND RESIDENT ALIENS. 100
General rule 103
Taxation on Compensation Income.. 103
Taxation of Domestic Corporations.. 107
Taxation of Resident Foreign Corporations. 110
Taxation of Non-Resident Foreign corporations. 114
Improperly Accumulated Earnings of Corporations. 114
Exemption from tax on corporations. 115
Taxation of Partnerships. 116
Taxation on Estates and trusts 117
 TABLE OF CONTENTS

WITHHOLDING TAX 118

Concept. 118
Kinds 118
Withholding of final tax on certain incomes.. 118
Withholding of creditable tax at source 118
Withholding on wages 119

ESTATE TAX.. 123

BASIC PRINCIPLES.. 123
DEFINITION 124
NATURE 125
PURPOSE OF OBJECT 125
TIME AND TRANSFER OF PROPERTIES. 126
CLASSIFICATION OF DECEDENT 126
GROSS ESTATE VIS--VIS NET ESTATE. 126
DETERMINATION OF GROSS ESTATE AND NET ESTATE...126
COMPOSITION OF GROSS ESTATE..128
ITEMS TO BE INCLUDED IN GROSS ESTATE129
DEDUCTIONS FROM ESTATE133
EXCLUSIONS FROM ESTATE.139
TAX CREDIT FOR ESTATE TAXES PAID IN FOREIGN CURRENCY 140
EXEMPTION OF CERTAIN ACQUISITIONS AND TRANSMISSIONS140
FILING OF NOTICE OF DEATH. 140
ESTATE TAX RETURN. 141

DONORS TAX 144

BASIC PRINCIPLES.. 144
DEFINITION.. 144
NATURE 145
PURPOSE OR OBJECT 145
REQUISITES OF VALID DONATION. 145
TRANSFERS WHICH MAY BE CONSTITUTED AS DONATION 147
TRANSFER FOR LESS THAN ADEQUATE AND FULL CONSIDERATION 147
CLASSIFICATION OF DONOR.. 147
DETERMINATION OF GROSS GIFT. 147
COMPOSITION OF GROSS GIFT 149
VALUATION OF GIFTS MADE IN PROPERTY. 149
TAX CREDIT FOR DONORS TAXES PAID IN A FOREIGN COUNTRY.. 149
EXEMPTIONS OF GIFTS FROM DONORS TAX 149
PERSON LIABLE 153

VALUE-ADDED TAX (VAT)153

CONCEPT 153
CHARACTERISTICS. 155
IMPACT OF TAX.. 155
INCIDENCE OF TAX.. 155
TAX CREDIT METHOD. 155
DESTINATION PRINCIPLE. 155
PERSONS LIABLE 155
VAT ON SALE OF GOODS OR PROPERTIES 157
ZERO-RATED SALES OF GOODS OR PROPERTIES, AND EFFECTIVELY ZERO-RATED SALES
OF GOODS OR PROPERTIES.. 158
TRANSACTIONS DEEMED SALE 162
CHANGE OR CESSATION OF STATUS AS VAT-REGISTERED PERSON.. 162
VAT ON IMPORTATION OF GOODS.. 163
TRANSFER OF GOODS BY TAX EXEMPT PERSONS.. 163
VAT ON SALE OF SERVICE AND USE OR LEASE OF PROPERTIES 165
REQUISITES FOR TAXABILITY. 166
 TABLE OF CONTENTS

ZERO-RATED SALE OF SERVICES.. 166

VAT EXEMPT TRANSACTIONS 166
Vat Exempt Transactions, In General. 166
Exempt Transaction, Enumerate.. 168
INPUT TAX AND OUTPUT TAX, DEFINED 171
SOURCES OF INPUT TAX 171
PERSONS WHO CAN AVAIL OF INPUT TAX CREDIT. 172
DETERMINATION OF OUTPUT/INPUT TAX; VAT PAYABLE; EXCESS INPUT TAX CREDITS. 172
Determination Of Output Tax. 172
Determination Of Input Tax Creditable 172
Allocation Of Input Tax Creditable 172
Determination Of The Output Tax And Vat Payable And Computation
Of Vat Payable Or Excess Tax Credits. 173
SUBSTANTIATION OF INPUT TAX CREDITS.. 173
REFUND OR TAX CREDIT OF EXCESS INPUT TAX. 174
Who May Claim For Refund/ Apply For Issuance Of Tax Credit Certificate. 174
Period To File Claim/Apply For Issuance Of TCC. 174
Manner Of Giving Refund.. 174
INVOICING REQUIREMENTS.. 174
Invoicing Requirements In General. 174
Consequences Of Issuing Erroneous Vat Invoice Or Vat Official Receipt. 175
FILING OF RETURN AND PAYMENT.. 176
WITHHOLDING OF FINAL VAT ON SALES TO GOVERNMENT.. 176

COMPLIANCE REQUIREMENTS (INTERNAL REVENUE TAXES). 177

ADMINISTRATIVE REQUIREMENTS 177
REGISTRATION REQUIREMENTS. 177
PERSONS REQUIRED TO REGISTER FOR VAT 177
SUPPLYING TAXPAYER IDENTIFICATION NUMBER (TIN). 178
ISSUANCE OF RECEIPTS OR SALES OR COMMERCIAL INVOICES 178
Printing of receipts or sales or commercial invoices 178
Invoicing requirements for VAT. 179
Exhibition of certificate of payment at place of business 180
Continuation of business of deceased person. 180
REMOVAL OF BUSINESS TO OTHER LOCATION. 180

TAX RETURNS. 180

INCOME TAX RETURNS 186
Individual Tax Returns. 180
Corporate Returns.. 182
Estate Tax Returns.. 184
Donors Tax Returns.. 185
Vat Returns.. 185
Withholding Tax Returns 186

TAX PAYMENTS. 186

INCOME TAXES 186
ESTATE TAXES . 187
DONORS TAXES. 189
VAT 189

TAX REMEDIES UNDER THE NIRC.. 189

TAXPAYERS REMEDIES.... 190
ASSESSMENT.. 190
CONCEPT OF ASSESSMENT.. 191
Requisites for valid assessment 191
Constructive methods of income determination. 191
Inventory method for income determination. 192
 TABLE OF CONTENTS

Jeopardy assessment.. 193

Tax delinquency and tax deficiency 193
POWER OF THE COMMISSIONER TO MAKE ASSESSMENTS AND
PRESCRIBE ADDITIONAL REQUIREMENTS FOR TAX ADMINISTRATION
AND ENFORCEMENT... 194
Power of the Commissioner to obtain information, and
to summon/examine, and take testimony of persons.. 195
WHEN ASSESSMENT IS MADE.195
Prescriptive period for assessment. 196
Suspension of running of statute of limitations. 198
ASSESSMENT PROCESS.. 199
Tax audit. 199
Notice of informal conference.. 199
Notice of informal conference.. 200
Issuance of preliminary assessment notice (PAN) 200
Exceptions to Issuance of PAN 201
Reply to PAN 201
Issuance of formal letter of demand and assessment
notice/final assessment notice.. 201
Disputed assessment. 202
Administrative decision on a disputed assessment. 202
Protesting assessment. 202
Rendition of decision by Commissioner 204
COLLECTION 206
Requisites. 206
Prescriptive period.. 206
REFUND 208
GOVERNMENT REMEDIES. 214
ADMINISTRATIVE REMEDIES. 215
DISTRAINT AND LEVY.. 215
LEVY AND SALE OF REAL PROPERTY 217
FORFEITURE OF REAL PROPERTY TO THE GOVERNMENT FOR WANT OF BIDDER.. 219
FURTHER DISTRAINT AND LEVY. 220
TAX LIEN. 220
JUDICIAL REMEDIES. 225
STATUTORY OFFENSES AND PENALTIES.. 229
Civil penalties. 229
Surcharge 229
Interest.. 231
In General 231
Deficiency interest 231
Delinquency interest 231
Interest on extended payment 231
COMPROMISE AND ABATEMENT OF TAXES 220

ORGANIZATION AND FUNCTION OF BUREAU OF INTERNAL REVENUE.. 231

RULE MAKING AUTHORITY OF THE SEC. OF FINANCE. 233
AUTHORITY OF SEC. OF FINANCE TO PROMULGATE RULES AND REGULATIONS. 233
SPECIFIC PROVISIONS TO BE CONTAINED IN RULES AND REGULATIONS.. 233
NON-RETROACTIVITY OF RULINGS 235
POWER OF THE COMMISSIONER TO SUSPEND BUSINESS OPERATIONS OF
A TAXPAYER 235

LOCAL GOVERNMENT CODE OF 1991, AS AMENDED. 236

LOCAL GOVERNMENT TAXATION 236

FUNDAMENTAL PRINCIPLES.. 236
 TABLE OF CONTENTS

NATURE AND SOURCE OF TAXING POWER.. 236

Grant of local taxing power under the Local Government Code. 236
Authority to prescribe penalties for tax violations.. 238
Authority to grant local tax exemptions 238
Withdrawal of exemptions. 239
Authority to adjust local tax rates. 240
Residual taxing power of local governments. 240
Authority to issue local tax ordinances.. 240
LOCAL TAXING AUTHORITY. 240
Power to create revenues exercised thru LGUs.. 240
Procedure for approval and effectivity of tax ordinance.. 241
SCOPE OF TAXING POWER.. 241
SPECIFIC TAXING POWER OF LOCAL GOVERNMENT UNITS. 242
Taxing powers of provinces.. 243
Taxing powers of cities.. 246
Taxing powers of municipalities. 246
Tax on various types of businesses.. 247
Ceiling on business tax impossible on municipalities within
Metro Manila.. 249
Tax on retirement on business 249
Rules on payment of business tax 249
Fees and charges for regulation & licensing.. 249
Situs of tax collected.. 250
Taxing powers of barangays. 251
Common revenue raising powers. 251
Service fees and charges.. 251
Public utility charges.. 251
Toll fess or charges.. 251
Community tax 252
COMMON LIMITATIONS ON THE TAXING POWERS OF LGUS 253
COLLECTION OF BUSINESS TAX.. 254
Tax period and manner of payment. 255
Accrual of tax. 255
Time of payment.. 255
Penalties on unpaid taxes, fees or charges 255
Authority of treasurer in collection and inspection of books 255
TAXPAYERS REMEDIES.. . 256
Periods of assessment and collection of local taxes, fees or charges. 257
Protest of assessment.. 258
Claim for refund of tax credit for erroneously or illegally collected tax, fee
or charge... 259
CIVIL REMEDIES BY THE LGU FOR COLLECTION OF REVENUES 259
Local governments lien for delinquent taxes, fees, charges.259
Civil remedies, in general. 260
Procedure for administrative action 260
Distraint of personal property.. 260
Levy of real property, procedure..261
Further distraint or levy. 262
Exemption of personal property from distraint or levy.262
Penalty on local treasurer for failure to issue and execute
warrant of distraint or levy.. 262
Procedure for judicial action.. 262

REAL PROPERTY TAXATION.. 265

FUNDAMENTAL PRINCIPLES.. 266
NATURE OF REAL PROPERTY TAX 267
IMPOSITION OF REAL PROPERTY TAX. 267
Power to levy real property tax.. 267
 TABLE OF CONTENTS

Exemption from real property tax 269

APPRAISAL AND ASSESSMENT OF REAL PROPERTY TAX. 271
Rule on appraisal of real property at fair market value. 272
Declaration of real property. 273
Listing of real property in assessment rolls 274
Preparation of schedules of fair market value 274
Authority of assessor to take evidence 275
Amendment of schedule of fair market value. 275
Classes of real property 275
Actual use of property as basis of assessment 275
Assessment of real property... 276
Assessment levels.. 276
General revisions of assessments and property classification .. 276
Date of effectivity of assessment or reassessment 276
Assessment of property subject to back taxes. 276
Notification of new or revised assessment 277
Appraisal and assessment of machinery. 277
COLLECTION OF REAL PROPERTY TAX. 277
Date of accrual of real property tax 277
Collection of tax. 277
Collecting authority 277
Duty of assessor to furnish local treasurer with assessment rolls. 277
Notice if time for collection of tax.. 278
PERIODS WITHIN WHICH TO COLLECT REAL PROPERTY TAX 278
SPECIAL RULES ON PAYMENT.. 278
Payment of real property tax in installments. 278
Interests on unpaid real property tax. 278
Condonation of real property 278
REMEDIES OF LGUS FOR COLLECTION OF REAL PROPERTY TAX.. 280
Issuance of notice of delinquency for real property tax payment.. 280
Local governments lien 280
Remedies in general 280
Resale of real estate taken for taxes, fees or charges. 281
Further levy until full payment of amount due 281
REFUND OR CREDIT OF REAL PROPERTY TAX 282
Payment under protest. 282
Repayment of excessive collections. 283
TAXPAYERS REMEDIES 283
Contesting an assessment of value of real property.. 283
Appeal to the Local Board of Assessment Appeals.. 283
Appeal to the Central Board of Assessment Appeals. 284
Effect of payment of tax. 284
Payment of real property under protest.. 284

TARIFF AND CUSTOMS CODE OF 1978, AS AMENDED......................................................................................... 289

TARIFF AND DUTIES, DEFINED. 289

FLEXIBLE TARIFF CLAUSE.. 297
REQUIREMENTS OF IMPORTATION. 305
Import entry 305
Declaration of correct weight or value. 303
Liability for payment of duties 306
Liquidation of duties.. 308
IMPORTATION IN VIOLATION OF TCC 310
Smuggling. 310
Other fraudulent practices... 316
CLASSIFICATION OF GOODS 293
Taxable importation.. 293
 TABLE OF CONTENTS

Prohibited importation293
Conditionally-free importation..294
CLASSIFICATION OF DUTIES298
Ordinary/Regular Duties 299
Ad valorem; Methods of valuation299
Specific 299
Specific duties.. 299
Dumping duties..300
Countervailing duties.300
Marking duties.300
Retaliatory/Discriminatory duties..300
Safeguard.301
REMEDIES. 3 17
Government 317
Administrative/Extrajudicial. 317
Judicial 317
Taxpayer 318
Protest 318
Drawback, Abatement and refund..319
Abadonment ..320

JUDICIAL REMEDIES; COURT OF TAX APPEALS 324

JURISDICTION OF THE COURT OF TAX APPEALS.. 325

JUDICIAL PROCEDURES 328
Judicial action for collection of taxes.. 328
Local taxes.. 328
Civil cases. 328
Who may appeal, mode of appeal, effect of appeal.. 328
Suspension of collection of tax.. 330
Taking of evidence.. 330
Motion for reconsideration or new trial 330
Appeal to the CTA, en banc.. 331
Petition for review on certiorari to the Supreme Court.. 331
Criminal cases 334
Institution and prosecution of criminal actions. 334
Institution on civil action in criminal action. 334
Appeal and period to appeal.. 335
Petition for review on certiorari to the Supreme Court.. 335
TAXPAYERS SUIT IMPUGNING THE VALIDITY OF TAX MEASURES
OR ACT OF TAXING AUTHORITY. 336
Taxpayers suit, defined.. 336
Distinguished from citizens suit 336
Requisites for challenging the constitutionality of a tax . 336
Concept of Locus Standi as applied in taxation.. 337
Doctrine of transcendental importance.. 337
Ripeness for judicial determination.337

INDEX 340

BIBLIOGRAPHY.. 342