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COR JESU COLLEGE OF LAW

TAXATION LAW I
Course Outline Part 3
Income Taxation Fundamental Matters

General References:

Republic Act No. 8424


Revenue Regulations No. 2-40

Revenue Regulations No. 2-98


Jurisprudence

I. INCOME TAXATION

A. Definition
B. Basis
1. Lifeblood Doctrine (Necessity Theory)

2. Symbiotic Relationship (Benefits-Protection Theory)

a. Partnership Theory

CIR vs. Lednicky; G.R. Nos. L-18169, L-18262, L-21434, 31 July 1964

b. Protection Theory

CIR vs. BOAC; G.R. Nos. L-65773-74, 30 April 1987

c. Theory of Favorable Business Climate

CREBA vs. Romulo; G.R. No. 160756, 09 March 2010

C. Systems
1. Global

2. Schedular

3. Mixed (Semi-Global or Semi-Schedular)


II. INCOME TAX

A. Definition
B. Nature
C. Functions (Purposes)
Case: Madrigal vs. Rafferty; G.R. No. L-12287, 07 August 1918

D. Features (Characteristics) of Philippine Income Tax Law


1. Global or Schedular (Mixed)

2. Progressive (Proportionate)

3. Direct Tax

4. Comprehensive

5. Gross Income and Net Income Taxation

6. Self-assessing

7. Pay-As-You-File

8. American Origin

9. Moral Neutrality of Taxing Authority

Case: James vs. United Sates; 366 U.S. 213 (1961)

E. Criteria in Imposing Philippine Income Tax


1. Citizenship Principle

2. Residence Principle

3. Source Principle

III. DEFINITION OF TERMS


Sec. 22, NIRC

IV. TYPES OF INCOME TAX


A. Normal (Regular) Personal Income Tax
B. Normal (Regular) Corporate Income Tax
C. Optional Gross Income Tax
D. Minimum Corporate Income Tax
E. Improperly Accumulated Earnings Tax
F. Final (Withholding)
G. Capital Gains Tax
H. Branch Profits Remittance Tax
I. Fringe Benefits Tax
J. Special (Preferential) Income Tax

V. INCOME

A. Concept
Revenue Regulations No. 2, Sec. 36
Sec. 32(A), NIRC
a. Income vs. Capital

b. Return on Capital vs. Return of Capital

Cases:
1. Fisher vs. Trinidad; G.R. No. L-17518, 30 October 1922

2. Conwi vs. CTA; G.R. No. 48532, 31 August 1992

3. Eisner vs. Macomber; 252 U.S. 189 (1920)

4. CREBA vs. Romulo; supra.

c. Income vs. Revenue

d. Income vs. Receipts

B. Net Worth Method


1. Perez vs. CTA; G.R. No. L-10507, 30 May 1958
2. Castro vs. Collector; G.R. No. L-12174, 26 April 1962

3. Fernandez Hermanos vs. CIR; G.R. No. L-21551, 30 September 1969

C. Flow of Wealth Test


CIR vs. Tours Specialist; G.R. No. L-66416, 21 March 1990

D. Invisible Income (Indirect Receipts)


Cancellation of Debt

E. Claim of Right Doctrine


F. Doctrine of Proprietary Interest (Economic Benefit Principle)
G. Substantial Alteration of Interest
H. Control Test
1. Assignment of Income Doctrine

2. Power to Dispose

Helvering vs. Horst; 311 U.S. 112 (1960)

I. Severance Test/Theory (Macomber Test)


Eisner vs. Macomber; supra.

J. All-Events Test
CIR vs. Isabela Cultural Corp.; G.R. No. 172231, 12 February 2007

K. Taxable vs. Non-Taxable Income


Secs. 31 & 36, NIRC

a. Characteristics of Taxable Income


1. There must be gain or profit

2. The gain must be realized or received

3. The gain must not be excluded by law or treaty


CREBA vs. Secretary Romulo; supra.

Fernandez Hermanos vs. CIR; supra.

b. Revaluation Increment (Value Appreciation)


o Fisher vs. Trinidad, supra.

o CIR vs. Filinvest Development Corp.; G.R. Nos. 163653 & 167689

c. Realization Principle
Realization vs. Recognition

Sec. 38, Revenue Regulations No. 2-40

d. Doctrine of Constructive Receipt


o CIR vs. Bank of Commerce; G.R. No. 149636, 08 June 2005

o Limpan Investment vs. CIR; G.R. No. L-21570, 26 July 1966

VI. TYPES OF INCOME

A. Compensation
B. Business Income (Exercise of Profession)
C. Passive Income
D. Capital l

VII. GENERAL PRINCIPLES

1. Classification of Taxpayers

A. INDIVIDUAL
1. Citizen

a. Resident Citizen

b. Nonresident Citizen

2. Alien
a. Resident Alien

b. Nonresident Alien Engaged in Trade or Business within the Philippines

c. Nonresident Alien Not Engaged in Trade or Business within the Philippines

Overseas Contract Worker

Seaman

Dual Citizenship (RA 9225)

B. CORPORATION
1. Domestic Corporation

2. Foreign Corporation

a. Resident Foreign Corporation

b. Nonresident Foreign Corporation

C. PARTNERSHIP
Ordinary Partnership

General Professional Partnership

Joint Venture and Consortium

Case:

Madrigal vs. Rafferty; supra.

D. ESTATE
E. TRUST
F. CO-OWNERSHIP

VII. SOURCES OF INCOME AND SITUS OF TAXATION


A. Situs
B. Sources
C. Income from Sourceswithin the Philippines
D. Income from Sources without the Philippines
E. Income from Sources Partly within and Partly without the Philippines
F. CASES:
1. CIR vs. BOAC; supra.

2. CIT vs. Japan Air Lines; G.R. No. 60714, 04 October 1991

3. Howden vs. Collector; G.R. No. L-19392, 14 April 1965

4. Philippine Guaranty vs. CIR; G.R. L-22074; 30 April 1965

5. NDC vs. CIR; G.R. No. L-53961, 30 June 1987

6. CIR vs. JulianeBaier-Nickel; G.R. No. 153793, 29 August 2006

Sec. 42, NIRC

VIII. ACCOUNTING PERIODS AND ACCOUNTING METHODS

A. ACCOUNTING (TAXABLE) PERIODS


1. Regular Accounting Period

a. CalendarYear

b. Fiscal Year

2. Short Accounting Period

a. Commencement of Business

b. Dissolution of Business

c. Change of Accounting Period

d. Death of Taxpayer

e. Termination of Accounting Period by CIR

B. ACCOUNTING METHODS
1. General Methods

a. Accrual Basis

b. Cash Basis
2. Installment Method

3. Deferred Payment Method

4. Percentage of Completion Method

5. Outright and Spread-Out Methods

6. Crop Year Basis

7. Hybrid Method

Consolidated Mines vs. CTA; G.R. Nos. L-18843 & L-18844

Filipinas Synthetic Fiber vs. CA; G.R. Nos. 118498 & 124377, 12 October
1999

C. TRANSFER PRICING
D. ARMS LENGTH PRINCIPLE

IX. WITHHOLDING TAX SYSTEM

A. WITHHOLDING TAX AT SOURCE


SECS. 57-59, NIRC

SECS. 78-83, NIRC

SEC. 257 (A), RR 2-98

CONCEPT

THREE-FOLD PURPOSE

KINDS

1. Final Withholding Tax


2. Creditable Withholding Tax
Withholding on Compensation

Expanded Withholding Tax

B. WITHHOLDING OF VAT

C. WITHHOLDING AGENT
D. CASES

o CREBA vs. Secretary, supra.


o RCBC vs. CIR; G.R. No. 170257, 07 September 2011

o CIR vs. Wander Philippines; G.R. No. L-68375, 15 April 1988


o CIR vs. Procter & Gamble; G.R. No. L-66838, 15 April 1988

o Filipinas Synthetic vs. CA; G.R. Nos. 118498 & 124377, 12 October 1999

D. TIMIE OF WITHHOLDING
E. RETURN AND PAYMENT