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GENERAL PRINCIPLES AND CONCEPTS OF TAXATION .

As to Can be Can be The power to


Four Elements of a State: necessity expressly expressly make tax laws
of delegated to delegated to cannot be
1) People delegation the local the local delegated,
2) Government government government unless there is
3) Territory units by the units by the an express
4) Sovereignty law making law making constitutional
body. body provisions or
NB: Any provision in the Constitution regarding taxation does statute
not create rights for the sovereignty to have the power to tax granting it.
but it merely constitutes limitations upon the supremacy of As to Operates on Operates on Operates on a
tax power. persons a the community or
affected community particular a class of
The Sovereign State is born and will exist continuously with or a class of private individual
ESSENTIAL POWERS. => Inherent Powers of Sovereign individual. property of
State which are necessary for the survival of the an individual
Government. As to Healthy Market value Continuous
benefits economic of the protection and
INHERENT POWERS OF SOVEREIGN STATE standard of property organized
society. expropriated society
Police Power Eminent Domain Taxation Power - to the
Power private
The power to The power to take The power to indvidual
protect citizens private property enforce As to Cost of No Generally no
and provide for for public use contributions to amount of regulation, imposition limit
safety and (but with just support the imposition license and
welfare of compensation) government and other
society. other inherent necessary
The exercised of powers of the State expenses.
The exercised is the Power of As to Protection, Common Inseparable
restricted by Art, Eminent Domain Subject to importance safety and Necessities for the
III, Sec. 1 of the is RESTRICTED INHERENT and welfare of and interest existence of a
Phil. Constitution BY Article III, CONSTITUTIONAL society of the nation- it
“No person shall Section 9 of the LIMITATIONS community supports
be deprived of Philippine transcend police power
life, liberty, or Constitution individual and emeinent
property without “Private Property rights in domain
due process of shall not be taken property.
law.” for public use As to Relatively Superior to Subject to
without just relationshi free from and may Constitutional
compensation.” p to Constitution override and Inherent
constitutio al limitations Constitution limitations
n/ as to Superior to al Inferior to non-
DISTINCTIONS
superiority non- impairment impairment
Police Eminent Taxation of impairment provision clause
power Domain power contracts clause because the
power welfare of
As to Power to Power to The power to the State is
Concept make and take private enforce superior to
any private
implement property for contributions
laws for the public use to raise contract
general with just government As to Limited by Bounded by Constraints by
welfare compensatio funds. limitations the demand public Constitutional
n for public purpose and and Inherent
As to Broader in Merely a Plenary, interest and just limitations
scope application power to comprehensiv due compensatio
process. n
take private e, Unlimited
property for and supreme
public use
NOT ALL the inherent powers od the state are applicable to
As to Property is Private Money is
the community as a whole
purpose taken or property is taken to
destroyed to taken for support the BECAUSE… Eminent Domain is affecting only the particular
promote public use government person whose real property is needed by the government in
general its priority projects.
welfare.
As to Exercised May be Exercised only Taxation is considered as the STRONGEST of all the
Authority only by granted to by inherent powers because much of the needed government
government public government or revenue are raised through taxation.
or its service or its political
political public utility subdivisions.
subdivisions companies

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Taxation is NOT broader than Police Power as to scope of REVENUES and FUNDING
application because taxation is governed by SPECIAL LAW The Philippine government generates revenues
while police power is governed by GENERAL LAW. through personal and INCOME TAX collection.

SIMILARITIES AMONG TAXATION, TAX COLLECTIONS COMPRISE THE BIGGEST


EMINENT DOMAIN AND POLICE POWERS PERCENTAGE OF REVENUE COLLECTED.
 They are inherent powers of the state (they can be
exercised even without being expressly granted in TAX APPROPRIATION: Appropriation is the authority to
the Constitution); spend tax money through legislation.
 They constitute the three ways by which the state
interferes with the private rights and property; 10 Agencies with biggest funds for 2018
 They are all necessary attributes of sovereignty. 1. DEPED
 They are legislative in nature and character; 2. DPWH
 They all underlie and exist independently of the 3. DILG
Constitution; 4. DOH
 The provisions in the Constitution are just limitations 5. Department of National Defense
on the exercise of these powers. 6. DSWD
7. Department of Transportation
NATURE OF TAXATION POWER 8. DAR
1. INHERENT POWER OF SOVEREIGNTY (exist 9. ARMM
inseparably with the state) 10. DENR
2. Essentially a LEGISLATIVE FUNCTION (as to
passage of tax law) Meaning; Nature; Basis; Characteristics
3. For PUBLIC PURPOSES (for the benefits of DEFINITION OF TAXATION
greater majority)
4. TERRITORIAL IN OPERATION (within the physical A power by which an Independent State, through its law-
boundaries of jurisdiction) making body, raises and accumulates revenue from its
5. TAX EXEMPTION OF GOVERNMENT who are inhabitants to pay the necessary expenses of the
exercising governmental functions and not government. (51 Am. Jur. 341; 1 Cooley 72 – 93)
proprietary functions
6. STRONGEST AMONG THE INHERENT POWERS Means Process
OF THE GOVERNMENT (plenary and
comprehensive) As a power, it refers to the inherent power of a state,
7. Subject to CONSTITUTIONAL and INHERENT
LIMITATIONS As a process, it passes a legislative undertaking through
the enactment of tax laws by the Congress which will be
Non-impairment of Contracts: implemented by the Executive Branch of the government
Power of Taxation: Revocation of Exempting Statutes (1997) through its Bureau of Internal Revenue (BIR)
"X" Corporation was the recipient in 1990 of two tax
exemptions both from Congress, one law exempting the As a means, it is a way of collecting and apportioning
company's bond issues from taxes and the other exempting the cost of government among those who are privileged
the company from taxes in the operation of its public utilities. to enjoy its benefits. (Commissioner vs. Algue Inc.
The two laws extending the tax exemptions were revoked by February 17, 1988)
Congress before their expiry dates. Were the revocations
constitutional? Scope/Extent of taxation power
SUGGESTED ANSWER: Yes. The exempting statutes are COMPREHENSIVE as it covers persons, businesses,
both granted unilaterally by Congress in the exercise of activities, professions, rights and privileges.
taxing powers. Since taxation is the rule and tax exemption, UNLIMITED.
the exception, any tax exemption unilaterally granted can be PLENARY as it is complete. Under the NIRC, the BIR may
withdrawn at the pleasure of the taxing authority without avail of certain remedies to ensure the collection of taxes.
violating the Constitution (Mactan Cebu International Airport SUPREME. It is supreme insofar as the selection of the
Authority v, Marcos, G.R No. 120082, September 11, 1996). subject of taxation is concerned
Neither of these were issued by the taxing authority in a Note: It is unlimited in the absence of any Constitutional
contract lawfully entered by it so that their revocation would provision restricting it.
not constitute an impairment of the obligations of contracts.
POWER TO TAX IS THE POWER TO DESTROY
Fiscal system of government Taxation is a DESTRUCTIVE POWER which interferes with
Fiscal Processes the personal and property rights of the people and takes from
-Budget proposal them a portion of their property for the support of the
-Appropriation of expected revenues=80% from government.
taxes
-Allocation of Actual Collections IT MUST BE EXERCISED FAIRLY, EQUALLY and
UNIFORMLY, JUSTLY and NOT TREACHEROUSLY.
Fiscal Policy: these are measures employed by Otherwise, the Tax Collector kills the “hen that lays the
governments to stabilize the economy, specifically by golden egg”
manipulating the levels and allocations of taxes and
government expenditures.

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POWER TO TAX IS NOT THE POWER TO DESTROY civilization. In our jurisdiction, which of the following
WHILE THIS COURT SITS. statements may be erroneous:
1)Taxes are pecuniary in nature.
The Constitution as the fundamental law of overrides any 2)Taxes are enforced charges and contributions.
legislative act that runs counter to it. 3)Taxes are imposed on persons and property within the
territorial jurisdiction of a State.
Any tax law that violates the Constitution must be declared 4)Taxes are levied by the executive branch of the
by the court null and void. government.
5)Taxes are assessed according to a reasonable rule of
Any abusive act in relation to the imposition of tax that leads apportionment. Justify your answer or choice briefly. (5%)
in the destruction of the natural and fundamental rights, SUGGESTED ANSWER: A. 4.Taxes are levied by the
which no free government could consistently violate, it is the executive branch of government. This statement is
duty of the judiciary to hold such act unconstitutional. erroneous because levy refers to the act of imposition by the
legislature which is done through the enactment of a tax law.
Power of Taxation: Limitations; Power to Destroy (2000) Levy is an exercise of the power to tax which is exclusively
Justice Holmes once said: The power to tax is not the power legislative in nature and character. Clearly, taxes are not
to destroy while this Court (the Supreme Court) sits." levied by the executive branch of government. (JVPC v.
Describe the power to tax and its limitations. (5%) Albay, 186 SCRA 198 [1990])
SUGGESTED ANSWER: The power to tax is an inherent
power of the sovereign which is exercised through the TAXES DISTINGUISHED FROM OTHER IMPOSITIONS
legislature, to impose burdens upon subjects and objects FINE TAX
within its Jurisdiction for the purpose of raising revenues to Fine is a tax for doing A tax is a fine for doing right.
carry out the legitimate objects of government. The wrong.
underlying basis for its exercise is governmental necessity
for without it no government can exist nor endure. TAX TARIFF
Accordingly, it has the broadest scope of all the powers of Includes various kinds of A kind of tax imposed on
government because in the absence of limitations, it is enforced contributions articles which are traded
considered as unlimited, plenary, comprehensive and imposed upon persons for internationally
supreme. The two limitations on the power of taxation are the the attainment of public
inherent and constitutional limitations which are intended to purposes.
prevent abuse on the exercise of the otherwise plenary and
unlimited power. It is the Court's role to see to it that the TAX LICENSE
exercise of the power does not transgress these limitations. Levied in the exercise of Emanates from the police
the power of taxation power of the State.
Purpose is to generate Imposed for regulatory
Meaning and Essential Characteristics of Tax/es
revenue purposes
Taxes are: enforced proportional contributions
from persons and property,
TAX SPECIAL ASSESSMENT
levied by the state by virtue of its sovereignty
Levied on land, persons, Levied on land. Collected by
for the support of the government and for all its public property, income, and the government for the
needs. business purpose of reimbursing itself
for certain benefits regarding
ESSENTIAL ELEMENTS/CHARACTERISTICS OF A TAX construction of public works
Enforced contribution= The imposition of tax is not Personal liability of the As a rule, it cannot be made
dependent upon the will or assent of the person being taxed. taxpayer a personal liability of the
persons assessed.
Proportionate in character= The imposition of tax is based on Based on necessity and Based solely on benefits
the ability to pay; higher income – higher tax rates partially on benefits
General application Special application only as
Generally payable in Money= Money is the preferred to a particular time and
payment of taxes. If property is taken to satisfy tax liability, place.
the property is sold through public auction to satisfy the tax
obligation; TAX TOLL
Levied ON persons, property, acts, privileges or transactions Levied for the support Compensation for the use
Levied BY the State which has jurisdiction or control over the of government of another’s property.
subject to be taxed Imposed only by the State Imposed by the government
Levied by the legislature or private individual
Levied FOR public purpose
PAID at regular periods or intervals TAX PENALTY
Civil Liability. Only when a A punishment for the
TRUE or FALSE: person fails to pay his civil commission of the crime
A law that allows taxes to be paid either in cash or in kind is obligation to pay taxes that
valid. ________ he will be criminally liable

Purpose of Taxation; Legislative in Nature (2004) TAX DEBT


Taxes are assessed for the purpose of generating revenue to Based on law Based on contract or
be used for public needs. Taxation itself is the power by judgment
which the State raises revenue to defray the expenses of Failure to pay may result in Failure to pay does not
government. A jurist said that a tax is what we pay for imprisonment result to imprisonment
Generally payable in money Can be payable in money,

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property or service SUGGESTED ANSWER:
Cannot be assigned Can be assigned No. Set-off is available only if both obligations are liquidated
Not subject to compensation May be subject to and demandable. Liquidated debts are those where the
or set-off compensation or set-off exact amounts have already been determined. In the instant
Does not draw interest Draws interest if stipulated case, the claim of the taxpayer for VAT refund is still pending
unless delinquent or delayed and the amount has still to be determined. A fortiori, the
liquidated obligation of the taxpayer to the government can
REQUISITES OF LEGAL COMPENSATION not, therefore, be set-off against the unliquidated claim which
Article 1279, New Civil Code: the taxpayer conceived to exist in his favor. (Philex Mining
Corp. v. CIR, GR No. 125704, August 29, 1998).
In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and
Rule on Set-Off or Compensation of Taxes (2005)
that he be at the same time a principal creditor of the other;
May taxes be the subject of set-off or compensation?
(2) That both debts consist in a sum of money, or if the
Explain. SUGGESTED ANSWER.
things due are consumable, they be of the same kind, and
No, taxes cannot be the subject of set-off or compensation
also of the same quality if the latter has been stated;
for the following reasons:
(3) That the two debts be due;
1) The lifeblood theory requires that there should be no
(4) That they be liquidated and demandable;
unnecessary impediments to the collection of taxes to make
(5) That over neither of them there be any retention or
available to the government the wherewithal to meet its
controversy, commenced by third persons and
legitimate objectives; and
communicated in due time to the debtor. (1196)
2) The payment of taxes is not a contractual obligation but
arises out of a duty to pay, and in respect of the positive acts
**Article 1290, New Civil Code: “When all the requisites
of government, regarding the making and enforcing of taxes,
mentioned in Article 1279 are present, compensation takes
the personal consent of the individual taxpayer is not
effect by operation of law, and extinguishes both debts to
required. (Republic v. Mambulao Lumber Co., G.R. No. L-
the concurrent amount even though the creditors and
17725, February 28, 1962; Caltex v. Commission on Audit,
debtors are not aware of the compensation.
G.R. No. 92585, May 8, 1992; and Philex v. Commissioner of
Internal Revenue, G.R. No. 125704, August 28, 1998)
Doctrines in Taxation
Set-Off Taxes
However, there is a possibility that set-off may arise, if the
Taxes are not subject to set-off or legal compensation=
claims against the government have been recognized and an
government and the taxpayer are NOT mutual creditor and
amount has already been appropriated for that purpose.
debtor of each other.
Where both claims have already become overdue and
Exemptions: Where both the claims of the government and
demandable as well as fully liquidated. Compensation takes
the taxpayer against each other have already become due,
place by operation of law under Art. 1200 in relation to
demandable and fully liquidated.
Articles 1279 and 1290 of the New Civil Code. (Domingo v.
When there is an actual compromise between the
Garlitos, G.R. No. L-18994, June 29, 1963)
taxpayer and the tax officer.
Rule on Set-Off or Compensation on Taxes (2005)
Person cannot refuse to pay tax on the basis that the
Can an assessment for a local tax be the subject of set-off or
government owes him an amount equal to or greater than
compensation against a final judgment for a sum of money
the tax being collected
obtained by the taxpayer against the local government that
made the assessment? Explain.
Collection of tax cannot await the results of a lawsuit against
SUGGESTED ANSWER:
the Government.
No, taxes cannot be the subject of set-off even when there is
a final judgment for a sum of money against the local
Rule on Set-Off or Compensation of Taxes (1996)
government making the assessment. The government and
X is the owner of a residential lot situated at Quirino Avenue,
the taxpayer are not the "mutual creditors and debtors" of
Pasay City. The lot has an area of 300 square meters. On
each other who can avail of the remedy of compensation
June 1, 1994, 100 square meters of said lot owned by X was
which Art. 1278 (Civil Code) is referring to Republic of the
expropriated by the government to be used in the widening
Philippines v. Mambulao Lumber Co., G.R. No. L-17725,
of Quirino Avenue, for P300.000.00 representing the
February 28, 1962; and Francia v. Intermediate Appellate
estimated assessed value of said portion.
Court, G.R. No. L-67649, June 28,1998.
From 1991 to 1995, X, who is a businessman, has not been
paying his income taxes. X is now being assessed for the
There is, however, legal basis to state that an assessment
unpaid income taxes in the total amount of P150,000.00. X
for a local tax may be the subject of set-off or compensation
claims his income tax liability has already been compensated
against a final judgment for a sum of money obtained by the
by the amount of P300.000.00 which the government owes
taxpayer against the local government by operation of law
him for the expropriation of his property. Decide.
where the local government and the taxpayer are in their
SUGGESTED ANSWER: The income tax liability of X can
own right reciprocally debtors and creditors of each other,
not be compensated with the amount owed by the
and that the debts are both due and demandable. This is
Government as compensation for his property expropriated,
consistent with the ruling in Domingo v. Garlitos, G.R. No. L-
taxes are of distinct kind, essence and nature than ordinary
18994, June 29,1963, relying upon Arts. 1278 and 1279 of
obligations. Taxes and debts cannot be the subject of
the Civil Code, where these provisions were applied in
compensation because the Government and X are not
relation to the national tax, and should therefore be
mutually creditors and debtors of each other and a claim for
applicable to a local tax.
taxes is not a debt, demand, contract, or Judgment as is
allowable to be set off. (Francia vs. IAC. G.R 76749, June
28. 1988) Importance of taxation
Taxation power exists inseparably with the State because it
Rule on Set-Off or Compensation of Taxes (2001) is essential for the existence of the government. (Luzon
May a taxpayer who has pending claims for VAT input credit Stevedoring Co. vs. CTA, July 29, 1988).
or refund, set-off said claims against his other tax liabilities?
Explain your answer. (5%) WITHOUT TAXATION, NO REVENUE
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Without revenue, no continuing government (a) its cumulative import volume in a given year exceeds its
Without government, no civilization. trigger volume subject to the conditions state in this Act, in
section 23 below; or but not concurrently; and
BASIS OF TAXATION (b) Its actual c.i.f. import price is less that its trigger price
Principle of Necessity subject to the Conditions State in this Act, in Section 24
government cannot exist without any means to pay its below.
expenses – a necessary burden to preserve the State’s
sovereignty. CLASSIFICATION OF TAXES
BASIS FOR CLASSIFICATION OF TAXES
Taxation is the “lifeblood” or the “bread and butter” of ACCORDING TO:
the government Subject or Object Who bears the burden
1991 Bar Question Purpose Determination of Amount
Discuss the meaning and the implications of the following Rate As to Scope or imposing
statement: “Taxes are the lifeblood of government and their authority
prompt and certain availability is an imperious need”
History of VAT
Reciprocal Duties E.O 279 (Jan. 1, 1988) 10% VAT- Cory Aquino
Government- SILENT PARTNER in PROVIDING E-VAT LAW (Jan. 1, 1996) 10% Expanded VAT- Fidel V.
INCOME/GIVING PROTECTION TO ITS CITIZENRY Ramos
R-VAT LAW (November 2007) 12% Reformed VAT- Gloria
People- pay taxes to support the government Macapagal Arroyo
symbiotic relationship and partnership between the
Objects of Taxation
taxing authority and the subject of taxation
1. Persons
a. Natural- individual taxpayers
PURPOSE/S and OBJECTIVES OF TAXATION
b. Juridical- corporations, partnerships, and
REVENUE PURPOSE: PRIMARY: TO RAISE REVENUE
any association
TO SUPPORT THE GOVERNMENT
2. Properties
REGULATORY PURPOSE or SUMPTUARY PURPOSE a. Real
SECONDARY or NON REVENUE OBJECTIVE b. Personal
 Reduce social inequality c. Tangible
 Encourage growth of local industries d. Intangible
 Implement the police power of the State
 Tool to protect TRADE RELATION 3. Excise Objects
a. Transaction
Special Duties b. Privilege
1. Discriminatory Duty – this special duty is designed c. Right
to offset any foreign discrimination against our local d. Interest
commerce.
2. Countervailing duty- it may be imposed to offset As to the Object or Subject matter of Tax
an foreign subsidy granted to imported goods to the a) Personal, poll/ capitation: fixed in amount and
prejudice of our local industries. imposed on persons residing within a specified
3. Marking duty – it is generally imposed as territory regardless of the amount of their property
additional duty tax on imported articles and/or or their occupation or business. Whether citizen or
containers with improper classifications not Example: Community Tax
4. Dumping duties – it refers to the additional duty b) Property: imposed on personal or real property
taxes imposed on imported goods with lower prices based on its proportionate value or in accordance
compared to their fair market value to protect local with some other reasonable method pf
industries. apportionment. Example: Real Estate Tax
c) Excise: imposed upon the performance of a right or
R.A 8800 (2000) An Act Protecting Local Industry by act, the enjoyment of a privilege or the engagement
providing Safeguard Measures to be undertaken in response in an occupation. Example: Professional tax,
to increased imports and providing penalties for violation Income tax, Estate tax, Donor’s Tax, and R-VAT.
thereof: includes 2 additional special duties d)
General Safeguard Measure: upon a positive final
PERSONS

PROPERTIES

EXCISE OBJECTS

Natural Real Transaction


determination of the Commission that a product is being
imported in to the country in increased quantities, whether Juridical Personal Right
absolute or relative to the domestic production, as to be a Tangible Privelege
substantial cause of serious injury or threat thereof to the Intangible Interest
domestic industry; however in the case of non- agricultural
products; the Secretary shall first establish that the
application of such safeguard measure will be in the public
interest.
Special Safeguard duty: imposed on an agricultural
As to Determination of Amount
product, consistent with Philippine international treaty
a. Ad Valorem: fixed amounts in proportion to the
obligations, if.
value of the property with respect to which the tax is
assessed. Examples: Custom Duties, Real Estate

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Tax, Excise Tax on fermented liquors, cigars. Not over P10,000 5%
Cigarettes, gasoline and automobiles. Over P10,000 but not P500 + 10% of the
b. Specific: fixed amounts imposed and based on over P30,000 excess over P10,000
some standard of weight or measurement, head or Over P30,000 but not P2,500 + 15% of the
number, length or volume. Examples: excise taxes over P70,000 excess over P30,000
on distilled spirits, wines, fireworks, amd Over P70,000 but not P8,500 + 20% of the
cinematographic films over P140,000 excess over P70,000
c. Mixed or compound- imposed both specific and ad Over P140,000 but not P22,500 + 25% of the
valorem over P250,000 excess over P140,000
TITLE VI-NIRC Over P250,000 but not P50,000 + 30% of excess
EXCISE TAXES ON CERTAIN GOODS over P500,000 over P250,000
Chapter I General provisions Over P500,000 P125,000 + 32% of the
Chapter II Exemption or Conditional Tax-Free Removal of excess over P500,000
Certain Articles
Chapter III Excise tax on Alcohol Products
Chapter IV Excise tax on tobacco products
Chapter V Excise tax on petroleum products
Chapter VI Excise tax on miscellaneous articles Rates of Donor’s Tax- GIFT TO RELATIVES
Chapter VII Excise tax on mineral products Tax Table
Chapter VIII Administrative provisions regulating business of If Net gift is: Donor’s Tax is :
persons dealing in articles subject to excise tax Not over ₱100,000.00 Exempt
Over ₱ 100,000.00 but not ₱ 0+ 2% of the excess over
over ₱ 200,000.00 ₱ 100,000
As to purpose
Over ₱ 200,000.00 but not ₱ 2,000 + 4% of the excess
1. Revenue or Fiscal: imposed for the purpose of over ₱ 500,000.00 over ₱ 200,000
raising public funds for the service of the Over ₱ 500,000.00 but not ₱ 14,000 + 6% of the excess
government. Income tax, VAT and transfer taxes over ₱ 1,000,000.00 over ₱ 500,000
2. Regulatory, Compensatory, Sumptuary: imposed Over ₱ 1,000,000.00 but not ₱ 44,000 +8% of the excess
primarily for the regulation of useful or non-useful over ₱ 3,000,000.00 over ₱ 1,000,000
occupation or enterprises and secondarily only for Over ₱ 3,000,000.00 but not ₱ 204,000 + 10% of the
the raising of revenue. Customs duties, protective over ₱ 5,000,000.00 excess over ₱ 3,000,000
tariff on imports to control foreign trade and excise Over ₱ 5,000,000.00 but not ₱ 404,000 + 12% of the
tax. over ₱ 10,000,000.00 excess over ₱ 5,000,000
Over ₱ 10,000,000.00 and ₱ 1,004,000 + 15% of the
As to who bears the burden above excess over ₱ 10,000,000
a. Direct ex. Community tax, income tax, transfer tax,
When the done or beneficiary is a STRANGER the tax
traveler’s tax and corporate income tax
payable by the donor shall be 30% of the NET gifts.
b. Indirect ex, VAT, custom duties, amusement tax,
excise tax on specified goods, and percentage
Stranger (sec. 99(B) NIRC)
taxes
As to scope or Authority Collecting the Tax
a. National: collected by National Government PROGRESSIVE RATES IN COMPUTING ESTATE TAX
TAX TABLE
Estate and Donor’s taxes, Income tax, R-VAT,
If Net Taxable Estate is: Estate Tax is:
Excise Tax, Custom Duties, Documentary Stamp
Not over ₱ 200,000.00 0%
Tax Over ₱ 200,000.00 but not ₱0 + 5% of the excess over
b. Local or Municipal: collected by the Municipal over ₱ 500,000 ₱ 200,000
Governments Over ₱ 500,000 but not over ₱ 15,000 + 8% of the excess
Community Tax, Municipal license taxes, ₱ 2,000,000 over ₱ 500,000
Professional Tax, Real Estate Tax Over ₱ 2,000,000 but not ₱135,000+ 10% of the
As to Rate or Graduation over ₱5,000,000 excess over ₱2,000,000
1. Proportional or flat rate: based on a fixed Over ₱ 5,000,000 but not ₱ 465,000 + 15% of the
percentage of the amount of the property, receipt or over ₱ 10,000,000 excess over ₱5,000,000
other basis to be taxed. Example: Real Estate tax Over ₱ 10,000,000 ₱ 1,215,000 + 20% of the
and R-VAT excess over ₱ 10,000,000
2. Progressive or Graduated rate: tax rate increase as
the tax base or bracket increases. Example: Income SURVEY OF PHILIPPINE TAXES
Tax, estate tax, and donor’s tax
Custom Duties= National tax but not BIR tax.
3. Regressive Rate: rate of tax decreases as the tax
base or bracket increases. Sec. 21 of NIRC
Income Tax
PROGRESSIVE RATES IN COMPUTING INCOME TAX Transfer Tax- Donor’s Tax; Estate Tax
Rates of Tax on Taxable Income of Individuals Business Tax- R-VAT; Percentage Tax, Excise Tax
Documentary Stamp Tax
Such other taxes as may be imposed and collected by BIR

Direct TAXES
Are those taxes paid by the persons who are bound by law to
pay the tax. These taxes are non-transferrable.
Examples: Donor’s Tax, Estate Tax, Income Tax

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personal delivering mail, physically handicapped, and
Indirect TAXES disabled citizens who are sixty-five (65) years or older.
Are those demanded in the first instance from one person
(statutory taxpayer) but the burden thereof can be shifted or When public safety and welfare so requires, the sanggunian
passed to another. These taxes are transferrable. concerned may discontinue the collection of the tolls, and
Example: Percentage Tax; Documentary Stamp Tax, R-VAT, thereafter the said facility shall be free and open for public
Excise Tax use.

The Local Taxes REAL PROPERTY TAXES


TAXING POWER OF THE PROVINCES Fundamental Principle-Real Property Taxation
 Tax on Transfer of Rea Property Ownership 1) Real property shall be appraised at its current fair
 Tax on Business of printing and publication market value
 Franchise tax 2) Real property shall be classified for assessment
 Tax on sand, gravel and other quarry resources purposes on the basis of its actual use
 Professional tax 3) Real property shall be assessed on the basis of a
 Amusement tax uniform classification within each local government
 Annual Fixed Tax for Every Delivery Truck or Van of unit
Manufacturers or Producers, wholesale pf, dealers, 4) The appraisal, assessment, levy and collection of
or retailers in certain products real property tax shall not be let to any private
o In an amount not exceeding Five hundred person; and
pesos (₱500.00) 5) The appraisal and assessment of real property shall
be equitable
TAXING POWER OF THE MUNICIPALITIES LGU’S EMPOWERED BY PROVINCES
 Tax on Business LGC to IMPOSE REAL CITIES
 Fees and Charges on Business and Occupation PROPERTY TAX MUNICIPALITIES within
 Fees for sealing and licensing of weights and the Metropolitan Manila
measures Area
 Fishery rentals, fees and charges
Municipalities outside the Metropolitan Manila Area and
TAXING POWER OF THE CITIES BARANGAYS do not enjoy the power of real property
The city, may levy the taxes, fees and charges which the taxation.
province or municipality may impose. COMPONENTS OF THE REAL PROPERTY TAX
The rates of taxes that the city may levy may exceed the Annual ad Valorem Tax Special Levies
maximum rates allowed for the province or municipality 1. Special education
by not more than 50% except by the rates of fund- 1%
2. Tax on idle land-
professional and amusement taxes.
5%
3. Special
TAXING POWER OF THE BARANGAYS Assessment
On stores or retailers with fixed business
establishments with gross sales or receipts of the *City can imposed what province and municipality can
preceding calendar year of Fifty thousand pesos imposed
(₱50,000.00) or less, in the case of cities and Thirty
thousand pesos (₱30,000.00) or less, in the case of Local Taxation: Coverage (2002)
municipalities, at a rate not exceeding one percent (1%) Aside from the basic real estate tax, give three (3) other
on such gross sales or receipts. taxes which may be imposed by provincial and city
governments as well as by municipalities in the Metro Manila
Other fees and charges in the barangay- The barangay area. (3%) SUGGESTED ANSWER: The following real
may levy reasonable fees and charges: property taxes aside from the basic real property tax may be
1) On community breeding of fighting cocks, cockfights imposed by provincial and city governments as well as by
and cockpits; municipalities in the Metro Manila area:
2) On places of recreation which charge admission 1.Additional levy on real property for the Special Education
fees; and Fund (Sec. 235, LGC);
3) On billboards, signboards, neon signs, and outdoor 2.Additional Ad-valorem tax on Idle lands (Sec. 23§, LGC);
advertisements and 3.Special levy (Sec. 240).
[Note: The question is susceptible to dual interpretation
Common revenue-raising powers because it is asking for three other taxes and not three other
Service Fees and Charges real property taxes. Accordingly, an alternative answer
Public Utility Charges- public utilities owned, operated and should be considered and given full credit]
maintained by them within their jurisdiction. A. The following taxes, aside from basic real estate tax,
may be imposed by:
Toll fees and charges- toll fees or charges for the use of any 1.Provincial Government
public road, pier or wharf, waterway, bridge, ferry or a. Printer's or publisher's tax
telecommunication system funded and constructed by the b. Franchise Tax
local government unit concerned. Provided, that no such toll c. Professional tax
fees or charges shall be collected from officers and enlisted 2.City Government - may levy taxes which the province or
men of the Armed Forces of the Philippines and members of municipality are authorized to levy (Sec. 151, LGC)
the Philippine National Police on mission., post office a. Printer's or publisher's tax
b. Franchise tax
7|Page
c. Professional tax agreed upon. The period so agreed upon may be extended
3.Municipalities in the Metro Manila Area - may levy taxes at by subsequent written agreement made before the expiration
rates which shall not exceed by 50% the maximum rates of the period previously agreed upon.
prescribed in the Local Government Code. (c) Any internal revenue tax which has been assessed within
a.Annual fixed tax on manufacturers, assemblers, the period of limitation as prescribed in paragraph (a) hereof
repackers, processors, brewers, distillers, rectifiers and may be collected by distraint or levy or by a proceeding in
compounders of liquors, distilled spirits, and wines or court within five (5) years following the assessment of the
manufacture of any article of commerce of whatever kind or tax.
nature; (d) Any internal revenue tax, which has been assessed
b.Annual fixed tax on wholesalers, distributors, or within the period agreed upon as provided in paragraph (b)
dealers in any article of commerce of whatever kind or hereinabove, may be collected by distraint or levy or by a
nature; c.Percentage tax on retailers proceeding in court within the period agreed upon in writing
[Note: Other taxes may comprise the enumeration because before the expiration of the five (5) -year period. The period
many other taxes are authorized to be imposed by LGUs.] so agreed upon may be extended by subsequent written
agreements made before the expiration of the period
Purposes of Tariff previously agreed upon.
1. For revenues (e) Provided, however, That nothing in the immediately
2. Retaliation against the tariffs levied by a foreign preceding and paragraph (a) hereof shall be construed to
country authorize the examination and investigation or inquiry into
3. For protection of domestic products any tax return filed in accordance with the provisions of any
tax amnesty law or decree.
Flexible Tariff Clause: refers to the authority given to the
President to adjust tariff rates under Section 401 of the Tariff RULES in Sec. 203 and 222 of the NIRC
and Customs Code, which is the enabling law that made
effective the delegation of the taxing power to the President LIMITATIONS for ASSESSMENT OF TAX
under the Constitution.

These are customs of duties imposed on those who bring


merchandise into a country from abroad. Within 3
years
A schedule of list of rates, duties or taxes imposed on
imported good.

From the date prescribed If filed after the date


IMPRESCRIPTIBILITY OF TAXES prescribed by law, from the
G.R: Taxes in general are not cancellable by law to file a return date of ACTUAL FILING
Exemptions: unless otherwise the limitation are provided by
the tax laws or the tax code itself. A reminder but, If no return is filed; If the return filed is
fraudulent= Period to assess is within TEN (10) years FROM
LIMITATIONS in the ASSESSMENT and COLLECTION OF Discovery of the OMISSION, FRAUD or FALSITY.
TAXES as provided for by the TAX CODE
LIMITATIONS in the ASSESSMENT and COLLECTION OF
Sec. 203 Period of Limitation Upon Assessment and TAXES as provided for by other TAX LAWS
Collection. - Except as provided in Section 222, internal Section 4, R.A. 9135
revenue taxes shall be assessed within three (3) years after TARIFF and CUSTOMS CODE
the last day prescribed by law for the filing of the return, and “When articles have been entered and passed free of duty of
no proceeding in court without assessment for the collection final adjustment duties made, with subsequent delivery, such
of such taxes shall be begun after the expiration of such entry and passage free from duty or settlements of duties
period: Provided, That in a case where a return is filed will, after the expiration of three (3) years, from the date of
beyond the period prescribed by law, the three (3)-year the final payment of duties and in the absence of fraud or
period shall be counted from the day the return was filed. For protest or compliance audit pursuant to the provisions of this
purposes of this Section, a return filed before the last day Code, BE FINAL AND CONCLUSIVE UPON ALL THE
prescribed by law for the filing thereof shall be considered as PARTIES, unless the liquidation of the import entry was
filed on such last day. merely tentative.”
SEC. 222. Exceptions as to Period of Limitation of
Assessment and Collection of Taxes. - Liquidation of import entry becomes final and conclusive
(a) In the case of a false or fraudulent return with intent to upon all parties after the expiration of one (1) year from the
evade tax or of failure to file a return, the tax may be final settlement of duties and delivery of the imported articles
assessed, or a proceeding in court for the collection of such in the absence of fraud or protest.
tax may be filed without assessment, at any time within ten
(10) years after the discovery of the falsity, fraud or omission: Liquidations that are tentative in character are not covered
Provided, That in a fraud assessment which has become by the limitations.
final and executory, the fact of fraud shall be judicially taken
cognizance of in the civil or criminal action for the collection Section 194 R.A. 7160
thereof. LOCAL GOVERNMENT CODE
(b) If before the expiration of the time prescribed in Section G.R.: Local Taxes, fees or charges= ASSESSED within FIVE
203 for the assessment of the tax, both the Commissioner (5) years from the date they became due.
and the taxpayer have agreed in writing to its assessment
after such time, the tax may be assessed within the period

8|Page
If the return filed is fraudulent= Period to assess is within
TEN (10) years FROM Discovery of the OMISSION, FRAUD REGRESSIVE SYSTEM OF TAXATION
or FALSITY. The tax rate DECREASES as the amount of taxable income
INCREASES
Example: VAT
Tax Pyramiding
Tax pyramiding is the imposition of a tax upon another tax. It BASIC PRINCIPLES OF A SOUND TAX SYSTEM
has no basis in fact or in law. (People v. Sandiganbayan, Gr. Fiscal Adequacy: the sources of revenue should be
No. 152532, August 16, 2005) sufficient to meet the demands of public expenditures.

There is tax pyramiding when sales taxes are incorrectly Equality or Theoretical Justice: the tax imposed should be
applied to goods several times from production to final sale, proportionate to the taxpayer’s ability to pay.
thus, shifting the tax burden to the ultimate consumer.
Administrative Feasibility: the tax laws should be capable
ASPECTS OF TAXATION of convenient, just, and effective administration.
First Aspect
LEVY- involves the passage of tax laws or ordinances “A good tax system is one which is designed on the basis of
through the legislature. > TAX POLICY an appropriate set of principles/ rules.”

PROSPECTIVITY OF TAX LAWS: the effectivity of the tax Canons of Taxation


law commences upon its approval and its scope would only Main Canons of Taxation
cover the present and future transactions. Convenience: The mode and timing of payment should be as
far as possible, convenient to the taxpayers.
retroactive application of tax laws shall not be applied unless Equity: Aims at providing economic and social justice to the
there is a clear intent of the legislature that such law shall people. That every person should pay tax to the government
also be imposed on past transactions. depending upon his ability to pay.
Certainty: The tax which an individual has to pay should be
Ex Post FACTO LAW: Not applicable for TAX PURPOSES certain, not arbitrary. Taxpayer should know in advance how
a law is said to be ex post facto if it provides for the infliction much tax he has to pay, what time he has to pay, what form
of punishment upon a person for an act done which, when the tax is to be paid to the government.
such act was committed, is not subject to any punishment. Economy: There should be economy in the tax
administration. The cost of tax collection should be lower
Second Aspect than the amount of tax collected.
- If cost is higher than tax collected What to do? Cancel the
tax
Productivity: The tax when levied should produce sufficient
involves the act of revenue to the government.
administration and Elasticity: The tax system should be fairl elastic so that if at
implementation of anytime the government is in need of more funds, it should
Assessment
the tax laws by the
executive branch of increase its financial resources without incurring any
the government additional cost of collection.
Simplicity: The tax system must not be complicated and
Tax Administration
difficult to understand as it would not lead to oppression and
corruption. It should be fairly simple, plain and intelligible to
involves the act the taxpayer.
Tax of collecting the
Payment/ Diversity: The system of taxation should include a large
Collection tax. "tax
number of taxes which are economical, like the collection of
collections"
direct and indirect taxes. There should be variety in taxation
to achieve equity, yield and stability.

NATURE OF TAXATION
2 Kinds of Assessment: What is the nature of the power of taxation? (1996 Bar
1. Taxpayer’s Question)
2. Government SUGGESTED ANSWER: The POWER TO TAX is an
attribute of sovereignty and is inherent in the State. It is a
TAX PAYMENT / COLLECTION OF METHODS power emanating from necessity because it imposes a
Pay As you Earn necessary burden to preserve the State's sovereignty (Phil
Pay as you Transact Guarantee Co. vs. Commissioner, L-22074, April 30, 1965).
Pay as you are Assessed It is inherently legislative in nature and character in that the
Pay as you file power of taxation can only be exercised through the
enactment of law.
TAX SYSTEMS
PROGRESSIVE SYSTEM OF TAXATION Inherent Power of Sovereignty
tax laws shall give emphasis on direct rather than indirect From the moment a state is born, it automatically possesses
taxes or on the ability-to-pay principle of taxation. the power to collect taxes from its inhabitants.
The tax rate INCREASES as the amount of taxable income
INCREASES. The government having sovereignty can enforce
Example: Individual Tax System contributions upon its citizens even without a specific

9|Page
provision in the Constitution authorizing it. It is so because Do LOCAL GOVERNMENT UNITS possess the inherent
the State has the supreme power to command and enforce power of taxation of the state?
obedience to its will from the people within its jurisdiction. NO. In order for these local government units to have the
power to tax, there must be an expressed constitutional
It is a necessary attribute of sovereignty, belonging as a provision granting them the power to tax or at least a
matter of RIGHT to every independent State or government. valid delegation of tax power, through a statute,

Without the power of taxation, no sovereign State can FOR PUBLIC PURPOSE
continue to exist without means to pay its expenses;
and for those means, it has the right to compel all its It has been held that tax has been utilized for public purpose
citizens and properties within its jurisdiction to pay if the welfare of the nation or the greater portion of its
taxes. population has benefited with its use. (Gomez vs. Palomar,
25 SCRA 827)
Can the government having sovereignty enforce
SETTLED CASES OF “PUBLIC PURPOSE”
contributions through taxation even without a specific
provision in the Constitution authorizing it? 1. Public Improvement
YES. Any provision in the Constitution regarding 2. Unemployment relief
taxation does not create rights for the sovereignty to 3. Buildings and roads/ infrastructure
have the power to tax but it merely constitutes 4. Local police forces (subsidies) under R.A 6141
limitations upon the supremacy of tax power. An Act to Create a Peace and Order Special Account in the
General Fund to Finance the Activities and Functions of the
Power of Taxation: Inherent in a Sovereign State (2003) Police Commission and Certain Police Activities of the
Why is the power to tax considered inherent in a sovereign National Bureau of Investigation and for Other Purposes
State? (4%) 5. Industries classified as indispensable under P.D.
SUGGESTED ANSWER: It is considered inherent in a 1987
sovereign State because it is a necessary attribute of AN ACT CREATING THE VIDEOGRAM REGULATORY
BOARD
sovereignty. Without this power no sovereign State can exist
6. Construction of home sites
or endure. The power to tax proceeds upon the theory that
7. Promotion of science and invention
the existence of a government is a necessity and this power
8. Educational subsidy
is an essential and inherent attribute of sovereignty,
9. Pensions to deserving retirees
belonging as a matter of right to every independent state or
10. Rehabilitation of the sugar industry
government. No sovereign state can continue to exist without
11. Oil industry’s protection
the means to pay its expenses; and that for those means, it
12. Socialized Housing
has the right to compel all citizens and property within its
13. Upliftment of the underprivileged
limits to contribute, hence, the emergence of the power to
tax. (51 Am. Jur.,Taxation 40). TAX EXEMPTION OF THE GOVERNMENT

Power of taxation  The state cannot be taxed without its consent;


otherwise, such is derogation to its sovereignty.
Subject to Inherent and Constitutional Limitations  The State immunity from taxation is inherent in its
power to impose tax.
 violation of these inherent limitations is
tantamount to taking a property without due process G.R: TAX EXEMPTION applies only to government entities
of law through which the government immediately and directly
 a tax law that violates the Constitution, shall be exercises GOVERNMENTAL FUNCTIONS.
declared null and void.
 Any tax law that contradicts the limitation of EXCEPTION: Government Entities performing
taxation is also unconstitutional PROPRIETARY FUNCTIONS are generally subject to tax.

Inherent Limitations: NATURAL RESTRICTIONS to EXCEPTION TO THE EXCEPTION: When the


safeguard and ensure that the power of taxation shall be provisions in their charters or the law creating them provides
exercised by the government only for the betterment of for a tax exemption.
the people whose interest should be served, enhanced
SUMMARY:
and protected
Agencies performing governmental functions are exempt
INHERENT LIMITATIONS:
from tax unless expressly taxed.
1. Taxes may be levied only for public purposes;
WHILE, agencies performing proprietary functions are
2. Government entities are generally tax-exempt.
subject to tax unless expressly exempted.
3. Taxation is subject to international comity
4. Tax power is limited to territorial jurisdiction of the Does the activity is one that IF YES THEN IT IS
State; government is not statutorily PERFORMING
5. Being inherently legislative, taxation may not be required to perform? PROPRIETARY
delegated; FUNCTIONS
Is the activity carried by
NATIONAL GOVERNMENT EXERCISES THE INHERENT private enterprise?
POWER OF TAXATION OF THE STATE.
Is the activity
conducted/used as a means
of raising revenue?
10 | P a g e
enact laws and ordinances, and to impose and collect taxes
are given to the Congress.
Does the activity conducted/ IF YES THEN IT IS Power of Taxation: Legislative in Nature (1994)
used benefits the general PERFORMING The Secretary of Finance, upon recommendation of the
public? GOVERNMENTAL
Commissioner of Internal Revenue, issued a Revenue
FUNCTIONS
Regulation using gross income as the tax base for
Examples: Operations of
police department corporations doing business in the Philippines. Is the
Conducting safety Revenue Regulation valid?
inspections SUGGESTED ANSWER: The regulation establishing gross
Suing to enforce public income as the tax base for corporations doing business in
policy the Philippines (domestic as well as resident foreign) is not
valid. This is no longer implementation of the law but actually
it constitutes legislation because among the powers that are
exclusively within the legislative authority to tax is the power
to determine -the amount of the tax. (See 1 Cooley 176-184).
Certainly, if the tax is limited to gross income without
Gov.'t of the National deductions of these corporations, this is changing the
Philippines/RP government amount of the tax as said amount ultimately depends on the
taxable base.

G.R: The power to make tax laws CANNOT be


NOT
INTERCHANGEABLE DELEGATED
Exemptions: (CAN BE DELEGATED)
1. The power to tax can be delegated to the LOCAL
Republic of the Philippines GOVERNMENT UNITS (LGU)
Basis: “Each local government unit shall have the power to
It is synonymous with “Government of the Republic of the create its own sources of revenue, fees, charges, subject to
Philippines”. It is the corporate governmental authority guidelines and limitations as the Congress may provide
through which the functions of the government are exercised consistent with the basic policy of local autonomy. Such
through the Philippines . taxes, fees, and charges shall accrue exclusively to the local
governments.” Article X, Section 5 of the Constitution;
National Government Section 133 of R.A. 7160
It refers to the entire machinery of the central government as What branch of LGU? Legislative branch
distinguished from the different forms of local governments. It City: Councilors-VM Prov.: Board members-VG
is composed of the three (30 great departments: the What can be delegated to LGU? Assessment, collection
executive, legislative and the judicial.
2. Delegation to Administrative Bodies.
GOV.T OF THE PHILIPPINES ≠ NATIONAL
GOVERNMENT Only if the power delegated is ministerial and advisory
since said powers are not legislative but only administrative
Does not include Includes all the bureaus and
in nature. (power to value property, assess and collect taxes)
Government Owned and instrumentalities including
Controlled Corporations Government Owned and
(GOCCs) Controlled Corporations SUMMARY:
(GOCCs) If what is delegated to a non-legislative body is TAX
LEGISLATION, the delegation is INVALID.

G.R.: Income received by GOCCs is SUBJECT TO TAX. BUT, if what is involved is only TAX ADMINISTRATION, the
Sec. 27 C NIRC delegation is allowed and valid and the non-delegability rule
is not violated.
EXEMPTION: 4 tax exempts GOCCs under Section 27(C),
NIRC 3. The Congress may, by law, authorize the President to
1. GSIS Government Service Insurance System impose tariff rates, import and export quotas, etc, subject
2. SSS Social Security System to the limitations and guidelines as the Congress may
3. PHIC Philippine Health Insurance Corporation impose, consistent with the national development
4. PCSO Philippine Charity Sweepstakes. program of the government. Article VI, Section28 (2) of
Note: PAGCOR was deleted from list of exempt GOCCs per the Constitution
R.A. No. 9337
Power of Taxation: Limitations of the Congress (2001)
1 tax exempt GOCC under R.A. 9679 otherwise known as Congress, after much public hearing and consultations with
New PagIBIG Fund Law of 2009 various sectors of society, came to the conclusion that it will
be good for the country to have only one system of taxation
Pag IBIG = Pagtutulungan sa Kinabukasan: Ikaw, Bangko,
by centralizing the imposition and collection of all taxes in the
Industriya at Gobyerno
national government. Accordingly, it is thinking of passing a
Essentially a legislative Function law that would abolish the taxing power of all local
The law-making body of the government and its political government units. In your opinion, would such a law be valid
subdivisions exercise the power of taxation. The power to under the present Constitution? Explain your answer. (5%)

11 | P a g e
SUGGESTED ANSWER: No. The law centralizing the withholding tax due on the cash dividends given to its non-
imposition and collection of all taxes in the national resident stockholders in the U.S. The Commissioner denied
government would contravene the Constitution which the claim. On January17, 1985, ABCD filed a petition with
mandates that: . . . "Each local government unit shall have the Court of Tax Appeals (CTA) reiterating its demand for
the power to create their own sources of revenue and to levy refund.Is the contention of ABCD Corporation correct? Why
taxes, fees, and charges subject to such guidelines and or why not? (3%)
limitations as Congress may provide consistent with the
basic policy of local autonomy." It is clear that Congress can SUGGESTED ANSWER: Yes. The provision of a treaty must
only give the guidelines and limitations on the exercise by take precedence over and above the provisions of the local
the local governments of the power to tax but what was taxing statute consonant with the principle of international
granted by the fundamental law cannot be withdrawn by comity. Tax treaties are accepted limitations to the power of
Congress. taxation. Thus, the CTA should apply the treaty provision so
that the claim for refund representing thedifference between
Power of Taxation: Legality; Local Gov’t Taxation (2003) the amount actually withheld and paid to the BIR and the
May Congress, under the 1987 Constitution, abolish the amount due and payable under the treaty, should be granted
power to tax of local governments? (4%)
WHO MAY QUESTION THE VALIDITY OF A TAX
SUGGESTED ANSWER: No. Congress cannot abolish what
MEASURE/ EXPENDITURE OF TAXES? TAXPAYERS
is expressly granted by the fundamental law. The only
authority conferred to Congress is to provide the guidelines TAXPAYER SUIT= effected through court proceedings and
and limitations on the local government's exercise of the could only be allowed if the act involves a direct and illegal
power to tax (Sec. 5, Art. X, 1987 Constitution). disbursement of public funds derived from taxation.

TERRITORIALITY Taxpayer Suit; When Allowed (1996)


G.R.: The power to tax can only be exercised WITHIN the
When may a taxpayer's suit be allowed? SUGGESTED
territorial jurisdiction of a taxing authority.
ANSWER:A taxpayer's suit may only be allowed when an act
Tax laws are not applicable to the property of foreign complained of, which may include a legislative enactment,
government. directly involves the illegal disbursement of public funds
derived from taxation (Pascual vs. Secretary of Public
Taxation is bound to observe Works, 110 Phil. 331)
INTERNATIONAL COMITY Rules observed in fixing tax situs
BASIS: Section 2, Article II of the Constitution “ The 1. Poll/Capitation/Community Tax
Philippines renounces war as an instrument of national -based upon the residence of the taxpayer,
policy, adopts the generally accepted principles of regardless of the source of income or location of the
international law as part of the law of the land and adheres to property of the taxpayer.
the policy of peace, equality, justice, freedom, cooperation, 2. Real Property
and amity with all nations.” -subject to taxation in the state or country where it is
located, regardless of whether the owner is a
Principle of International Law: resident or a non-resident.
“Sovereign Equality Among States” 3. Personal Property
“ states are juridically equal, enjoy the same rights, and -wherever it was actually kept or located
have equal capacity in their exercise.” MOBILIA SEQUUNTUR PERSONAM
-movable follows the person
EXCEPTION: when there exists a “privity of relationship” EXCEPTION: Share of stocks- state in which they
between the taxing State and the object of tax. are permanently kept regardless of the domicile of
the owner or the state in which corporation was
Where privity of relationship exists, the state can still organized.
exercise its taxing powers over its citizen outside its
territory. Basic: Principle of Mobilia Sequuntur Personam (1994)
What is the principle of mobilia sequuntur personam in
BASIS: “the right to tax is the capacity of the government to income taxation?
provide benefits and protection to the object of the tax. SUGGESTED ANSWER: Principle of Mobilia Sequuntur
Personam in income taxation refers to the principle that
Power of Taxation: Limitations: Tax Treaties (2009) taxation follows the property or person who shall be subject
to the tax.
X(B) ABCD Corporation (ABCD) is a domestic corporation
with individual and corporate shareholders who are residents CONSTITUTIONAL LIMITATIONS
of the United States. For the 2ndquarter of 1983, these U.S.- PROVISIONS OF THE FUNDAMENTAL LAW OF THE
based individual and corporate stockholders received cash LAND that restrict the comprehensive, unlimited, plenary and
dividends from the corporation. The corresponding supreme exercise by the State of its inherent power to tax.
withholding tax on dividend income ---30% for individual and
35% for corporate non-resident stockholders ---was 1. DUE PROCESS OF LAW
deducted at source and remitted to the BIR. “No person shall be deprived of life, liberty, or property
without due process of law, nor shall any person be
On May 15, 1984, ABCD filed with the Commissioner of denied the equal protection of the laws.” Article III, Sec. 1
Internal Revenue a formal claim for refund, alleging that of the 1987 Constitution
under the RP-US Tax Treaty, the deduction withheld at
source as tax on dividends earned was fixed at 25% of said
income. Thus, ABCD asserted that it overpaid the

12 | P a g e
property of the same class shall be taxed at the same rate.
Give taxpayer fair The requirement of uniformity is complied with when the tax
opportunity to operates with the same force and effect in every place where
assert his substantial the subject of it is found (Churchill & Tail v. Conception, 34
rights before
competent court
Phil. 969). It does not mean that lands, chattels, securities,
income, occupations, franchises, privileges, necessities and
luxuries shall be assessed at the same rate. Different articles
Give NOTICE to the Provide HEARING to maybe taxed at different amounts provided that the rate is
taxpayer the taxpayer
uniform on the same class everywhere with all people at all
times. Accordingly, singling out one particular class for
taxation purposes does not infringe the requirement of
Before he shall uniformity.
be denied or
deprived of his PROGRESSIVE SYSTEM OF TAXATION
property for
non-payment
of tax. tax laws shall give emphasis on direct rather than indirect
taxes or on the ability-to-pay principle of taxation

The tax rate INCREASES as the amount of taxable income


INCREASES
2. EQUAL PROTECTION OF LAW
“No person shall be deprived of life, liberty, or property Is a tax law adopting a regressive system of taxation VALID?
without due process of law, nor shall any person be
denied the equal protection of the laws.” Article III, Sec. 1 YES. “Congress shall evolve a progressive system of
of the 1987 Constitution taxation.”-this is only a mere directive upon Congress, not
legally enforceable. The Congress is not mandated to
 that all persons subject to legislation shall be prescribe, but to evolve progressive system of taxation.
treated alike under similar circumstances and
REGRESSIVE SYSTEM OF TAXATION
conditions both in the privileges conferred and
liabilities imposed The tax rate DECREASES as the amount of taxable income
 There is denial of equal protection of laws if there is INCREASES
discrimination in the implementation of tax laws
EQUALITY: The burden of tax falls equally and
SUBJECT TO: Reasonable Classification impartially upon all the persons and property subject to
Requisites: it.
1. Must not be limited to existing conditions only Equality in taxation is similar to PROGRESSIVE SYSTEM
2. Must apply equally to all members of the same
OF TAXATION
class
3. Must rest on SUBSTANTIAL DISTINCTION Primary requisite of equity principle
4. Must be germane to the purpose of the law
a progressive tax rate shall be applied equally to all persons,
Power of Taxation: Equal Protection of the Law (2000) firms and corporations, and transactions placed in similar
An Executive Order was issued pursuant to law, granting tax classification and situation. Sison, Jr. vs. Ancheta, (130
and duty incentives only to businesses and residents within SCRA 654, July 25, 1984
the "secured area" of the Subic Economic Special Zone, and
denying said incentives to those who live within the Zone but a progressive tax rate shall be applied equally to all persons,
outside such "secured area". Is the constitutional right to firms and corporations, and transactions placed in similar
equal protection of the law violated by the Executive Order? classification and situation. > CLASSIFICATION OF
Explain. (3%) TAXPAYERS
SUGGESTED ANSWER:No. Equal protection of the law
clause is subject to reasonable classification. Classification, CLASSIFICATION OF TAXPAYERS
to be valid, must (1) rest on substantial distinctions, (2) be
germane to the purpose of the law, (3) not be limited to INDIVIDUAL TAXPAYERS CORPORATE TAXPAYERS
existing conditions only, (4) apply equally to all members of CITIZEN- Resident Citizen DOMESTIC- Resident
the same class -Non-Resident Domestic Corporation
Citizen -Special
3. RULE OF UNIFORMITY AND EQUITY Domestic Corporation
“The rule of taxation shall be uniform and equitable. ALIEN- Resident Alien FOREIGN- Resident
Congress shall evolve a progressive system of -Non-Resident Alien Foreign Corporation
engaged in trade/business [Special Resident Foreign
taxation.” Article VI, Section 28 of the 1987 Constitution
-Non-Resident Alien Corporation]
UNIFORMITY: All taxable property situated alike shall be not engaged in -Resident Non-
subjected to the tax trade/business Foreign Corporation
[Special Non-Resident
operates with the same force and effect in every place where Foreign Cotporation]
the subject may be found.

Uniformity in the Collection of Taxes (1998) INDIVIDUAL TAXPAYERS


Explain the requirement of uniformity as a limitation in the CITIZEN: Sec. 1, Art. IV of the 1987 Constitution, a
imposition and/or collection of taxes. (5%| Filipino Citizen is he who is/has:
SUGGESTED ANSWER: Uniformity in the imposition and/or
collection of taxes means that all taxable articles, or kinds of

13 | P a g e
 Born (by birth) with father and/or mother as a non-resident alien individual who shall come to the
Filipino citizen Philippines and stay therein for an aggregate period of only
 Born before January 17, 1973 of Filipino mother 180 days or less during any calendar year shall be deemed
who elects Philippine Citizenship upon reaching a non-resident alien not doing business in the Philippines.
the age of majority; or Must not have business income within the Philippines
 Acquired Philippine citizenship after birth
(naturalized) in accordance with the Philippine Special Taxpayers- Alien individuals or Filipino citizens
laws. taxed with 15% tax rate based on gross compensation or
income. Provided, however, That the same tax treatment
ALIEN: a foreign-born person who is not qualified to shall apply to Filipinos employed and occupying the same
acquire Philippine citizenship by birth or after birth. position as those of aliens employed by these multinational
companies. For purposes of this Chapter, the term
Resident Citizen (GLOBAL TAX PAYER) 'multinational company' means a foreign firm or entity
A citizen of the Philippines residing therein is taxable on all engaged in international trade with affiliates or subsidiaries
income derived from sources within and without the or branch offices in the Asia-Pacific Region and other foreign
Philippines. markets.
Filipino citizen who stayed permanently in the Philippines or
stayed outside the Philippines for less than 183 days during If alien (not engaged in trade/ business) with special
the taxable year. employment contracts: all of his gross compensation income
is subject to 15% final tax
Non-Resident Citizen
If Filipino citizen:First option, taxed 15% at his gross
A Filipino citizen who stayed outside the Philippines for 183
compensation income
days or more during the taxable year and has established
Second option, taxed at a regular
proof to the BIR Commissioner of his definite intention
income tax ranging from 5-32%
to reside outside the Philippines on a permanent basis
as an immigrant or employee.
SUMMARY FOR INDIVIDUAL TAXPAYERS
Citizen of the Philippines who works and derives income Situs of Income
from abroad and whose employment requires him to be
physically present abroad most of the time (at least 183 Taxpayers Within Outside
days) during the taxable year. Citizens:
Resident citizen Taxable Taxable
Taxable only on income derived from sources within the Nonresident citizen Taxable Nontaxable
Philippines. Aliens:
Resident alien, NRAETB and Taxable Nontaxable
*Note: A Filipino citizen previously a non-resident citizen NRANETB
and arrives and resides permanently in the Philippines
Special Taxpayers:
at any time during the taxable year shall be treated a
Citizen Taxable Taxable
nonresident citizen for the same taxable year with
respect to his income derived from sources abroad until Aliens Taxable Nontaxable
the date of his arrival in the Philippines

OVERSEAS CONTRACT WORKER CORPORATE TAXPAYERS


An individual citizen of the Philippines who is working and CORPORATION: Include partnerships, no matter how
deriving income from abroad as an overseas contract worker created or organized, joint-stock companies, joint accounts
is taxable only on income derived from sources within (cuentas en participacion), association, or insurance
the Philippines: Provided, That a seaman who is a citizen of companies, but does not include general professional
the Philippines and who receives compensation for services partnerships and a joint venture or consortium formed
rendered abroad as a member of the complement of a vessel for the purpose of undertaking construction projects or
engaged exclusively in international trade shall be treated engaging in petroleum, coal, geothermal and other
as an overseas contract worker. energy operations pursuant to an operating consortium
agreement under a service contract with the
SEAMAN: same as Overseas Contract Worker
Government.
Resident Alien
'General professional partnerships' are partnerships formed
Persons who are not citizens of the Philippnes but are
by persons for the sole purpose of exercising their common
residing within the Philippines including foreign individuals
profession, no part of the income of which is derived from
who have stayed in the Philippines for more than one year
engaging in any trade or business. (Not a corporation in
from date of arrival.
taxation)
Non-Resident Alien engaged in trade/business RDC= 30% TR x TI= TD
Foreign individuals whose residences are not within the
Philippines but earning business income in the Philippines. Domestic Corporation (DC) – a corporation created or
shall be subject to an income tax in the same manner as an organized in the Philippines or under its laws and liable for
individual citizen and a resident alien individual, on taxable income from sources within and without the Philippines.
income received from all sources within the Philippines.
Special Domestic Corporation
NOTE: a non-resident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more Proprietary educational institutions and hospitals which
than 180 days during any calendar year shall be deemed a are nonprofit shall pay a tax of ten percent (10%) on their
non-resident alien doing business in the Philippines. (need taxable income. Provided, that if the gross income from
not be continuous) 'unrelated trade, business or other activity' exceeds fifty
percent (50%) of the total gross income derived by such
Non-Resident Alien not engaged in trade/business
14 | P a g e
educational institutions or hospitals from all sources, 30% CLASSIFICA DOMESTIC RESIDENT NON-
shall be imposed on the entire taxable income. TIONS CORPORAT FOREIGN RESIDENT
IONS CORPORAT FOREIGN
'unrelated trade, business or other activity' means any IONS CORPORAT
trade, business or other activity, the conduct of which is not IONS
substantially related to the exercise or performance by
such educational institution or hospital of its primary purpose SOURCES Within and Within Within
or function OF TAXABLE without
INCOME the the
What are trade related activities? Include income derived the Philippines Philippines
from auxiliary activities- school owned canteen, cafeteria, Philippines
dormitory and bookstore within the school premises.
INCOME IN TAXABLE TAXABLE GROSS
Foreign corporation- corporation organized and existing GENERAL INCOME INCOME INCOME
under the laws of foreign country irrespective of the
nationality of its stockholders. (R.A. 9337) Normal Tax Normal Tax Final Tax
whether engaged or not in trade or business in the Rate Rate Rate
Philippines, is taxable only on income derived from sources
within the Philippines. (Sec. 22 (D), NIRC) 35% from 35% from 35% from
July 1, 2005 July 1, 2005 July 1, 2005
Resident Foreign Corporation (RFC) – applies to a foreign to to to
corporation engaged in trade or business within the December December December
Philippines. 31, 2008 31, 2008 31, 2008
Establishes a branch or an office for the purpose of doing
30% 30% 30%
business or trade. (Sec. 22 (H), NIRC)
effective effective effective
RFC= 30% TR x TB (TI)=TD
January 1, January 1, January 1,
2009 2009 2009
Special Resident Foreign Corporation- TR x GI-TD

Non-Resident Foreign Corporation (NRFC) [Sec. 221,


NIRC]– a corporation which is not domestic and not engaged 4. NO IMPRISONMENT FOR NON-PAYMENT OF POLL
in trade or business in the Philippines is liable for income TAX
from sources within.
“no person shall be imprisoned for debt or non-payment of a
30% x GI=TD poll tax.” Article III, Section 20 of the 1987 Constitution
Special RFC= TR x GI=TD
POLL TAX COMMUNITY TAX
1. International carriers [Sec. 28 (28) (3)] or International
a tax imposed on a person as a resident within a territory
Shipping [Sec. 28 (28) (3) (b)] = 2 ½ % Based on Income
derived from within based on gross Philippine billings. of the taxing authority without regard to his property,
[Sec. 28 (A) (3) (a)] business or occupation.

2. Offshore banking unit [Sec. 28(A)(4)]= 10% final tax rate; the prohibition of imprisonment applies only to the
based on income derived from WITHIN Gross Onshore nonpayment of poll tax.
Income
Exception: Any income of nonresidents, whether imprisonment for nonpayment of other taxes or imposition
individuals or corporations, from transactions with said of fine would not be contrary to the Constitution.
offshore banking units shall be exempt from income tax.
5. NON-IMPAIRMENT OF OBLIGATIONS AND
3. Foreign currency deposit unit [Sec. 28 (A) (7) (b)]= 10% CONTRACTS
final tax rate; based on income derived from WITHIN
gross onshore income. Exception: Any income of “no law impairing the obligation of contracts shall be passed”
nonresidents, whether individuals or corporations, from Section 10 Article III, 1987 Constitution
transactions with said offshore banking units shall be exempt
If the State will enter into a contract, it does so upon the
from income tax.
same terms and conditions as entered into by a private
4. Regional or area headquarters of multinational individual or corporation and may not assert its
corporations= 15% sovereignty as justification in impairing a contractual
5. Regional operating headquarters of multinational obligation which it has assumed.
corporations
6. PROHIBITION AGAINST INFRINGEMENT OF
Special NRFC= TR x GI=TD RELIGIOUS FREEDOM

1. NR owner, lessor, distributor of cinematographic film= “No law shall be made respecting an establishment of
25% based on gross income derived from within the religion, or prohibiting the free exercise thereof. The free
Philippines exercise and enjoyment of religious profession and worship,
2. NR owner or lessor of vessels chartered by Philippines without discrimination or preference, shall forever be
nationals= 4 ½ % of gross rentals, lease or charter fees from allowed. No religious test shall be required for the exercise of
leases or charters to Filipino citizens or corporations, derived civil or political rights.” Section 5 Article III, 1987
from within the Philippines Constitution
3. NR owner or lessor of aircraft, machinery and equipment=
7 ½ % of gross rentals or fees, derived from within the 7. PROHIBITION: re: APPROPRIATION OF PROCEEDS
Philippines OF TAXATION

15 | P a g e
“No public money or property shall ever be appropriated, 10. CONGRESS GRANTING TAX EXEMPTION
applied, paid or used directly or indirectly for the use,
benefit, or support of any sect, church, denomination, “No law granting any tax exemption shall be passed without
sectarian , institution, or system of religion, or for the use, the concurrence of a majority of all the members of the
benefit or support of any priest, preacher, minister, or other Congress.” Art. VI, Sec. 28(4) of the 1987 Constitution
religious teacher or dignitary as such, except when such
GRANT OF TAX EXEMPTIONS= Absolute Majority Vote
priest, preacher, minister, or dignitary is assigned to the of the
armed forces, or to any penal institution, or government MEMBERS of Congress
orphanage or leprosarium.”
WITHDRAWAL OF TAX EXEMPTIONS= Relative majority
Basis:
vote is sufficient/ majority of the attendees constituting
Tax principle that taxes can only be levied for public quorum
purposes.
11. PRESIDENT’S VETO POWER
Principle of the separation of the church and the State.
“Every bill passed by the Congress shall, before it becomes
8. PROHIBITION AGAINST TAXATION OF RELIGIOUS, a law be presented to the President. If he approves the
CHARITABLE AND EDUCATIONAL ENTITIES same, he shall sign it; otherwise, he shall veto it and return
EXEMPTION FROM REAL PROPERTY TAXES the same with his objections at large in its journal and
“Charitable institutions, churches, parsonages or convents proceed to reconsider it….” Art. VI, Sec. 27(2) of the 1987
appurtenant thereto, mosques and non-profit cemeteries and Constitution
all lands, buildings and improvements actually, directly and
VETO POWER = The power of the President to refuse to
exclusively used for religious, charitable or educational
sign into law (can be tax laws) a bill that has been passed
purposes shall be exempt from taxation.” Art. VI, Sec. 28(3)
by a legislature.
of the 1987 Constitution
ITEM VETO= the power to veto items in appropriation bills
The Supreme Court, however, held that such tax exemption without affecting any other provisions of such bills.
for the above provision should be applicable only to REAL
PROPERTY TAXES and not to transfer taxes. POWER VETO=the power to disapprove legislative act with
the result that bills shall fail to become laws.
To be exempted from taxation, the real property must be
actually, directly and exclusively used for religious, If the President vetoed the bill, two-thirds (2/3) of the
educational and charitable purposes. members of the House are required to make such bill to
The issue of ownership is not relevant, as long as the real become a law.
property is used actually, directly and exclusively for The power of the President to “remit fines and
religious, educational and charitable purposes, THEN IT forfeitures” does not include civil penalties regarding
SHALL BE EXEMPTED FROM REAL ESTATE TAX. nonpayment of tax and other violation of tax laws.
“idle lands or property” used by others for other purposes 12. SUPREME COURT’S JURISDICTION OVER TAX
although owned by religious, educational and charitable CASES
institutions could be subjected to real estate tax
“The Supreme Court shall have the power to review,
income derived from these “idle lands or property” not revise, reverse, modify or affirm on appeal or certiorari, as
related to the exercise or performance of religious, the laws or the Rules of Court may provide, final judgments
educational and charitable purposes or functions shall be and orders of lower courts in all cases involving the legality
subject to internal revenue taxes---INCOME TAX. of any tax, impost, assessment, or toll or any penalty
9. PROHIBITION AGAINST TAXATION OF NON-STOCK, imposed in relation thereto.” Art. VIII, Sec. 5(2)(b) of the
NON PROFIT EDUCATIONAL INSTITUTIONS 1987 Constitution

“All revenues and assets of non-stock, non-profit educational “no law shall be passed increasing the appellate jurisdiction
institutions used actually, directly, and exclusively for of the Supreme Court as provided in this Constitution without
educational purposes shall be exempt from taxes and its advice and concurrence.” Article VI, Section 30 of the
duties. Upon the dissolution or cessation of the corporate 1987 Constitution
existence of such institutions, their assets shall be disposed The Power of Judicial Review in taxation is limited only to the
of in the manner provided by law.” Article XIV, Section 4 (3) interpretation and application of tax laws.
1ST PAR. of the 1987 Constitution
Congress cannot deprive the Supreme Court of its
Proprietary educational institutions, including those power to review, revise, modify or affirm the decisions of
cooperatively owned, may likewise be entitled to such lower courts.
exemptions, subject to the limitations provided by law,
including restrictions on dividends and provisions for 13. REVENUE BILLS SHALL ORIGINATE FROM THE
reinvestment. Article XIV, Section 4 (3) 2ND PAR. of the HOUSE OF REPRESENTATIVES
1987 Constitution
“All appropriation, revenue or tariff bills, bills authorizing
Subject to conditions prescribed by law, all grants, increase of the public debt, bills of local application, and
endowments, donations, or contributions used actually, private bills, shall originate exclusively in the House of
directly, and exclusively for educational purposes shall be Representatives, but the Senate may propose or concur with
exempt from tax. Article XIV, Section 4 (4) of the 1987 amendments.” Art. VI, Sec. 24 of the 1987 Constitution
Constitution
16 | P a g e
ART-iDLAP 1. Residence of the taxpayers
2. Subject matter of the tax (person, property, rights or
Power of Taxation: Limitations: Passing of Revenue Bills activity)
(1997) The House of Representatives introduced HB 7000 3. Citizenship of the taxpayer
which envisioned to levy a tax on various transactions. After 4. Source of the income being taxed
the bill was approved by the House, the bill was sent to the 5. Nature, kind or classification of the tax being
Senate as so required by the Constitution. In the upper imposed
house, instead of a deliberation on the House Bill, the 6. Place of the activity, privilege, business or
Senate introduced SB 8000 which was its own version of the occupation being taxed.
same tax. The Senate deliberated on this Senate Bill and
approved the same. The House Bill and the Senate Bill were GENERAL RULE OF TAX SITUS
then consolidated in the Bicameral Committee. Eventually,
the consolidated bill was approved and sent to the President Source or Location
who signed the same. The private sectors affected by the of Object
(Taxable?)
new law questioned the validity of the enactment on the
Nature Citizens Residenc Within Outside
ground that the constitutional provision requiring that all
of Tax hip y the the
revenue bills should originate from the House of
Philippi Philippi
Representatives had been violated. Resolve the issue. nes nes
SUGGESTED ANSWER: There is no violation of the I. Incom Filipino Resident Yes Yes
constitutional requirement that all revenue bills should e Tax
originate from the House of Representatives. What is
prohibited is for the Senate to enact revenue measures on its Filipino Nonresid Yes No
own without a bill originating from the House. But once the ent
revenue bill was passed by the House and sent to the
Senate, the latter can pass its own version on the same Aliens Resident Yes No
subject matter consonant with the latter's power to propose
Aliens Nonresid Yes No
or concur with amendments. This follows from the co-
ent
equality of the two chambers of Congress (Tolentino v.
Secretary of Finance, GR No. 115455, Oct. 30, 1995). II. Transf Filipino Resident Yes Yes
14. INFRINGEMENT OF PRESS FREEDOM er Tax

“No law shall be passed abridging the freedom of speech, of Filipino Nonresid Yes Yes
expression, or of the press, or the right of the people ent
peaceably to assemble and petition the government for
Aliens Resident Yes Yes
redress of grievances.” Article III, Section 4 of the 1987
Constitution Aliens Nonresid Yes No
ent
15. GRANT OF FRANCHISE
III Busine Yes No
“No franchise, certificate, or any other form of authorization
. ss Tax
for the operation of a public utility shall be granted except to
citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines, at least sixty per
centum of whose capital is owned by such citizens; x x x The DOUBLE TAXATION
participation of foreign investors in the governing body of any
public utility enterprise shall be limited to their proportionate act of the sovereign by TAXING TWICE for the same
share in its capital, and all the executive and managing purpose in the same year upon the same property or activity
officers of such corporation or association must be citizens of of the same person when it should be TAXED ONCE for the
the Philippines. “ Art. XII, Sec. 11 of the 1987 Constitution same purpose and with the same kind of character of tax.
(PAPAY)
16. TAXES AS GENERAL FUNDS OF THE GOVERNMENT
KINDS OF DOUBLE TAXATION
“All money collected on any tax levied for a special purpose
shall be treated as a special fund and paid out for such INTERNATIONAL DOUBLE TAXATION: Imposition of
purpose only. If the purpose for which a special fund was comparable taxes in two or more states on the same
created has been fulfilled or abandoned, the balance, if taxpayer in respect of the same subject matter and for
any, shall be transferred to the general funds of the identical periods
Government.” Article VI, Section 29 (3) of the 1987
DOMESTIC DOUBLE TAXATION: It arises when the taxes
Constitution
are imposed by the local or national government within the
SITUS OF TAXATION same state.

Defines BOUNDARIES of the taxing power over the objects INDIRECT DOUBLE TAXATION: It is a PERMISSIBLE
of taxation IN TERMS OF LOCATION whether or not they DOUBLE TAXATION. It is ALLOWED if the taxes are of
shall be subject to tax. different nature or character, imposed by different taxing
authority.
BASIC CONSIDERATION THAT JUSTIFIES TAX SITUS =
GOVERNMENT PROTECTION Examples: From the same corporation: Tax on the corporate
income and tax on the stockholders dividends;
DETERMINING FACTORS TO THE SITUS OF TAXATION

17 | P a g e
Upon same occupation/activity: tax imposed by the state and What are the usual methods of avoiding the occurrence of
tax imposed by the local government; double taxation?
SUGGESTED ANSWER: The usual methods of avoiding the
Upon same real property leased for earning purposes: occurrence of double taxation are: 1.Allowing reciprocal
subject to real estate tax and income tax. exemption either by law or by treaty; 2.Allowance of tax
credit for foreign taxes paid; 3.Allowance of deduction for
DIRECT DOUBLE TAXATION: PROHIBITED foreign taxes paid; and 4.Reduction of the Philippine tax rate.
Note: Any three of the methods shall be given full credit
How to Counteract Double Taxation:
Double Taxation (1997)
Through Tax Exemptions: the income or capital which is Is double taxation a valid defense against the legality of a tax
taxable in the State of source/situs is EXEMPTED in the measure?
State of residence. SUGGESTED ANSWER: No, double taxation standing alone
and not being forbidden by our fundamental law is not a valid
Through Tax Credit: the tax paid in the state of source/situs defense against the legality of a tax measure (Pepsi Cola v.
is CREDITED against the tax levied in the state of residence. Tanawan, 69 SCRA 460). However, if double taxation
amounts to a direct duplicate taxation,
Through Tax Treaty
1.in that the same subject is taxed twice when it should be
Through Allowance for deductions such as Vanishing taxed but once,
deduction 2.in a fashion that both taxes are imposed for the same
purpose
VANISHING DEDUCTIONS- PROPERTY PREVIOUSLY 3.by the same taxing authority, within the same jurisdiction or
TAXED taxing district,
4.for the same taxable period and
Purpose – to minimize the effects of a double taxation on 5.for the same kind or character of a tax then it becomes
the same property within a short period of time. legally objectionable for being oppressive and inequitable.

This deduction is a privileged allowed to the estate of the Double Taxation:


decedent to provide some relief from the burden of taxation What Constitutes DT? (1996)
as a result of the successive transfers by inheritance or X, a lessor of a property, pays real estate tax on the
donation of the same property within a relatively short period premises, a real estate dealer's tax based on rental receipts
and income tax on the rentals. X claims that this is double
of time. (not exceeding five (5) years)
taxation? Decide.
WHEN CAN A VANISHING DEDUCTION BE CLAIMED? SUGGESTED ANSWER: There is no double taxation.
DOUBLE TAXATION means taxing for the same tax period
1. The present decedent died within 5 years from the the same thing or activity twice, when it should be taxed but
receipt of the inheritance or donation; once, by the same taxing authority for the same purpose and
2. The property on which to claim a vanishing with the same kind or character of tax. The REAL ESTATE
deduction must be located in the Philippines; TAX is a tax on property; the REAL ESTATE DEALER'S TAX
is a tax on the privilege to engage in business; while the
3. The property must have formed part of the taxable
INCOME TAX is a tax on the privilege to earn an income.
estate of the prior decedent, or of the taxable gift of These taxes are imposed by different taxing authorities and
the donor; are essentially of different kind and character (Villanueva vs.
4. The property for which vanishing deduction is City of Iloilo, 26 SCRA 578).
claimed can be identified as having been received
by the decedent from donor as gift or from such Double Taxation; Indirect Duplicate Taxation (1997)
prior decedent by gift, bequest, devise, or When an item of income is taxed in the Philippines and the
inheritance, or a property acquired in exchange same income is taxed in another country, is there a case of
thereto; double taxation?
5. The donor’s tax or estate tax has been finally SUGGESTED ANSWER: Yes, but it is only a case of indirect
determined and paid by or in behalf of such donor duplicate taxation which is not legally prohibited because the
or the estate of such prior decedent; taxes are imposed by different taxing authorities.
6. No vanishing deduction on the property was
allowed to the estate of the prior decedent Double Taxation; License Fee vs. Local Tax (2004)
A municipality, BB, has an ordinance which requires that all
Percentage of Vanishing Deduction:
stores, restaurants, and other establishments selling liquor
More Than Not More than should pay a fixed annual fee of P20.000. Subsequently, the
Percentage municipal board proposed an ordinance imposing a sales tax
xx 1 yr equivalent to 5% of the amount paid for the purchase or
100% consumption of liquor in stores, restaurants and other
1 of 2 yrs 80% establishments. The municipal mayor, CC, refused to sign
2 yrs 3 yrs the ordinance on the ground that it would constitute double
60% taxation. Is the refusal of the mayor justified? Reason briefly.
3 yrs 4 yrs (5%)
40% SUGGESTED ANSWER: No. The refusal of the mayor is not
4 yrs 5 yrs justified. The impositions are of different nature and
20% character. The fixed annual fee is in the nature of a license
5 yrs xx fee imposed through the exercise of police power while the
xxx 5% tax on purchase or consumption is a local tax imposed
through the exercise of taxing powers. Both a license fee and
Double Taxation; Methods of Avoiding DT (1997) a tax may be imposed on the same business or occupation,
or for selling the same article and this is not in violation of the

18 | P a g e
rule against double taxation {Campania General de Tabacos Tax exemption: A grant of immunity, expressed or
de Filipinos v. City of Manila, 8 SCRA 367 [1963 implied, to a persons or corporations of a particular class,
from a tax upon property or an excise which persons and
MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF corporation generally within the same taxing district are
TAXATION obliged to pay
TAX EVASION: A scheme wherein taxpayer uses Tax Exemptions: Nature & Coverage; Proper Party (2004)As
UNLAWFUL means to defeat or lessen the payment of tax an incentive for investors, a law was passed giving newly
established companies in certain economic zone exemption
Taxpayer is subject to civil and/or criminal liabilities from all taxes, duties, fees, imposts and other charges for a
period of three years. ABC Corp. was organized and was
TAX AVOIDANCE: Also called “TAX MINIMIZATION” and
granted such incentive. In the course of business, ABC Corp.
valid if used by the taxpayer in GOOD FAITH purchased mechanical equipment from XYZ Inc. Normally,
the sale is subject to a sales tax. XYZ Inc. claims, however,
A scheme wherein taxpayer uses LEGALLY PERMISSIBLE
that since it sold the equipment to ABC Corp. which is tax
means to reduce or totally escape payment of taxes.
exempt, XYZs hould not be liable to pay the sales tax. Is this
Tax Avoidance vs. Tax Evasion (1996) claim tenable? (5%)
Distinguish tax evasion from tax avoidance. SUGGESTED ANSWER: A. No. Exemption from taxes is
SUGGESTED ANSWER: Tax evasion is a scheme used personal in nature and covers only taxes for which the
outside of those lawful means to escape tax liability and, taxpayer-grantee is directly liable. The sales tax is a tax on
when availed of, it usually subjects the taxpayer to further or the seller who is not exempt from taxes. Since XYZ Inc. is
additional civil or criminal liabilities. Tax avoidance, on the directly liable for the sales tax and no tax exemption privilege
other hand, is a tax saving device within the means is ever given to him, therefore, its claim that the sale is tax
sanctioned by law, hence legal. exempt is not tenable. A tax exemption is construed in
strictissimi jurisand it can not be permitted to exist upon
Tax Avoidance vs. Tax Evasion (2000) vague implications (Asiatic Petroleum Co., Ltd. V. Llanes, 49
Mr. Pascual's income from leasing his property reaches the Phil 466 [1926]).
maximum rate of tax under the law. He donated one-half of Assume arguendo that XYZ had to and did pay the sales tax.
his said property to a non-stock, non-profit educational ABC Corp. later found out, however, that XYZ merely shifted
institution whose income and assets are actually, directly and or passed on to ABC the amount of the sales tax by
exclusively used for educational purposes, and therefore increasing the purchase price. ABC Corp. now claims for a
qualified for tax exemption under Article XIV, Section 4 (3) of refund from the Bureau of Internal Revenue in an amount
the Constitution and Section 30 (h) of the Tax Code. Having corresponding to the tax passed on to it since it is tax
thus transferred a portion of his said asset, Mr. Pascual exempt. Is the claim of ABC Corp. meritorious? (5%)
succeeded in paying a lesser tax on the rental income SUGGESTED ANSWER; B. No. The claim of ABC Corp. is
derived from his property. Is there tax avoidance or tax not meritorious. Although the tax was shifted to ABC Corp.
evasion? Explain. (2%) by the seller, what is paid by it is not a tax but part of the cost
SUGGESTED ANSWER: There is tax avoidance. Mr. it has assumed. Hence, since ABC Corp. is not a taxpayer, it
Pascual has exploited a fully permissive alternative method has no capacity to file a claim for refund. The taxpayer who
to reduce his income tax by transferring part of his rental can file a claim for refund is the person statutorily liable for
income to a tax exempt entity through a donation of one-half the payment of the tax.
Principles
of the income producing property. The donation is likewise
exempt from the donor's tax. The donation is the legal means
TAX EXEMPTIONS Not presumed
employed to transfer the incidence of income tax on the
TAX DEDUCTIONS Strictly construed against
rental income
TAX AMNESTY the taxpayer
TAX CONDONATIONS Personal in nature and
SEVERAL FORMS OF TAX AVOIDANCE TO MINIMIZE
cannot be
TAX LIABILITY
transferred/assigned by the
 SHIFTING person to whom it is given
without the consent of the
 TAX OPTION
State.
 TRANSFORMATION
 EXEMPTION Tax Amnesty vs. Tax Exemption (2001)
Distinguish a tax amnesty from a tax exemption. (3%)
Tax option: Taxpayers may choose to pay lower tax rate in
SUGGESTED ANSWER: Tax amnesty is an immunity from
some transactions as permitted by Tax Laws i.e Selling
all criminal, civil and administrative liabilities arising from
shares of stock.
nonpayment of taxes. It is a general pardon given to all
Selling directly to the buyer: 5 % to 10% tax based on
taxpayers. It applies only to past tax periods, hence of
capital gains
retroactive application. (People v. Costonedo, G.R. No. L-
Selling through stock market- ½ of 1% based on the selling
46881, 1988).
price
Tax exemption is an immunity from the civil liability only. It is
an immunity or privilege, a freedom from a charge or burden
Shifting: Transfer of tax burden to another.
to which others are subjected. (Florer v. Sheridan, 137 Ind.
Exemplified by INDIRECT TAXES i.e.R-VAT, Percentage
28, 36 ME 365). It is generally prospective in application
Tax and Excise Tax

Transformation: The producer absorbs the payment of tax TAX EXEMPTION: Prospective in application, immunity from
to reduce prices to maintain market share. Additional tax civil liability.
expense can be recovered by the producer by improving the
process of production. The tax is transformed into a gain It is an immunity or privilege, a freedom from a charge or
through the medium of production burden to which others are subjected.

19 | P a g e
TAX AMNESTY: General pardon given to all taxpayers. 4. Payment of usurious interest
5. Illegal gains-gambling, theft, embezzlement (income
Applies only to past tax periods. Retroactive in application. to embezzler if forgiven by the owner), extortion,
fraud
Immunity from all criminal, civil and administrative liabilities 6. Tax refund
arising from non-payment of taxes. 7. Bad debts recovery
Earnings, lawfully or unlawfully, acquired without the
TAX EXEMPTION v. TAX CONDONATIONS consensual recognition, express or implied, of an obligation
The condonation of a tax liability is equivalent and is in the to repay AND without restriction as to their disposition are
nature of a tax exemption TAXABLE, even though it may still be claimed that he is not
it should be sustained only when expressed in explicit terms, entitled to retain the money or even though he may still be
and it cannot be extended beyond the plain meaning of those adjudged to restore its equivalent.
terms.
Taxable Income: Illegal Income (1995 Bar)
TAX EXEMPTION v. TAX ECLUSIONS (SEE Sec. 32 NIRC) Mr. Lajojo is a big-time swindler. In one year he was able to
earn P1 Million from his swindling activities. When the
Tax Exclusions are items/receipts NOT INCLUDED in the
Commissioner of Internal Revenue discovered his income
determination of the Taxable Income. Exempt from Income from swindling, the Commissioner assessed him a deficiency
tax. Not included in the Income Tax Return. Not taxable. income tax for such income. The lawyer of Mr. Lajojo
protested the assessment on the following grounds:
TAX EXEMPTION v. TAX DEDUCTIONS (SEE Sec. 34 of
1)The income tax applies only to legal income, not to illegal
NIRC) income;
Exclusion vs. Deduction from Gross Income (2001) 2)Mr. Lajojo's receipts from his swindling did not constitute
Distinguish "Exclusion from Gross Income" from "Deductions income because he was under obligation to return the
From Gross Income". Give an example of each. (2%) amount he had swindled, hence, his receipt from swindling
SUGGESTED ANSWER: EXCLUSIONS from gross income was similar to a loan, which is not income, because for every
refer to a flow of wealth to the taxpayer which are not treated peso borrowed he has a corresponding liability to pay one
as part of gross income, for purposes of computing the peso; and
taxpayer’s taxable income, due to the following reasons: (1) 3)If he has to pay the deficiency income tax assessment,
It is exempted by the fundamental law; (2) It is exempted by there will be hardly anything left to return to the victims of the
statute; and (3) It does not come within the definition of swindling. How will you rule on each of the three grounds for
income. (Section 61, RR No. 2). DEDUCTIONS from gross the protest? Explain.
income, on the other hand, are the amounts, which the law SUGGESTED ANSWERS:
allows to be deducted from gross income in order to arrive at 1) The contention that the income tax applies to legal
net income. income and not to illegal income is not correct. Section 28(a)
of the Tax Code includes within the purview of gross income
Exclusions pertain to the computation of gross income, while
all Income from whatever source derived. Hence, the
deductions pertain to the computation of net income.
illegality of the income will not preclude the imposition of the
Exclusions are something received or earned by the income tax thereon.
taxpayer which do not form part of gross income while 2) The contention that the receipts from his swindling did
deductions are something spent or paid in earning gross not constitute income because of his obligation to return the
income. amount swindled is likewise not correct. When a taxpayer
acquires earnings, lawfully or unlawfully, without the
Example of an exclusion from gross income is proceeds of consensual recognition, express or implied, of an obligation
life insurance received by the beneficiary upon the death of to repay and without restriction as to their disposition, he has
the insured which is not an income or 13th month pay of an received taxable income, even though it may still be claimed
employee not exceeding P30.000 which is an income not that he is not entitled to retain the money, and even though
recognized for tax purposes. Example of a deduction is he may still be adjudged to restore its equivalent (James vs.
business rental. U.S.,366 U.S. 213, 1961).To treat the embezzled funds not
as taxable income would perpetuate injustice by relieving
Reasons for Exclusion embezzlers of the duty of paying income taxes on the money
they enrich themselves with through embezzlement, while
A. The item of receipt does not fall within the definition honest people pay their taxes on every conceivable type of
of income for income tax purposes. income. (James vs. U.S.)
3) The deficiency income tax assessment is a direct tax
Income =means ALL WEALTH that flows into the hands of imposed on the owner which is an excise on the privilege to
the taxpayer other than as a mere return of capital. earn an income. It will not necessarily be paid out of the
same income that were subjected to the tax. Mr. Lajojo's
It includes the forms of income specifically described as liability to pay the tax is based on his having realized a
gains derived from the sale or other disposition of capital. taxable income from his swindling activities and will not affect
his obligation to make restitution. Payment of the tax is a civil
Sources of Income: is any property, activity, or service that
obligation imposed by law while restitution is a civil liability
produced the income. arising from a crime.
PROPERTY (Capital)
LABOR (Service)
SALE (Exchange of capital asset and activity) Requisites for income to be taxable

INCOME DERIVED FROM WHATEVER SOURCE FORMS 1. There must be GAIN or PROFIT, whether in cash or
PART OF THE TAXPAYER’S INCOME its equivalent: There should be an earnings in
This includes the following: EXCESS of the capital, invested or in EXCESS of
1. Treasure found or punitive damages representing the amount invested A RECOVERY OF AMOUNT
profits lost
INVESTED IS NOT AN INCOME
2. Amount received by mistake
2. The gain must be REALIZED or RECEIVED:
3. Cancellation of the taxpayer’s indebtedness
20 | P a g e
RECEIPT includes constructive receipt: that income State with reasons the tax treatment of the following in the
must be credited yo the taxpayer without any preparation of annual income tax returns: a) Proceeds of life
substantial limitation or condition upon which insurance received by a child as irrevocable beneficiary
payment is to be made.
Examples of INCOME CONSTRUCTIVELY SUGGESTED ANSWER: Not to be reported in the annual
RECEIVED: income tax returns because the proceeds of the life
insurance are excluded from gross income. Proceeds of life
a. Interest credited on savings bank deposit
insurance policies paid to the heirs of the beneficiaries upon
b. Matured interest coupons not yet collected
the death of the insured is an exclusion from gross income.
by the taxpayer (Sec. 32(B) NIRC)
c. Dividends applied by the corporation
against the indebtedness of a stockholder
d. Share in the profit of a partner in a general -ALWAYS EXCLUDED irrespective of the beneficiary
professional partnership, although not yet designated in the policy.
distributed, is regarded as constructively
received; This applies to GROUP INSURANCE, DEATH BENEFITS,
e. Intended payment deposited in court WORKMEN’S COMPENSATION INSURANCE, HEALTH or
ACCIDENT INSURANCE.
(CONSIGNATION)
Reason: It is an indemnity rather than gain or profit, because
3. The gain must not be excluded by law or treaty from
insurance is a CONTRACT OF INDEMNITY
taxation: There are some Exclusions from gross
income (as provided for by the NIRC, other tax laws Sec. 32(B)(2) AMOUNT RECEIVED AS A RETURN OF
and treaty so, not all income is required to be PREMIUM
included in computing the taxable income. Reason: It is JUST A MERE RETURN OF CAPITAL
NON TAXABLE DAMAGES: Sec. 32(B)(3) GIFTS, BEQUESTS AND DEVISES
Reason: It is NOT a product of capital or industry.
1. Damages recovered in libel and slander suits BUT the INCOME from such property shall be INCLUDED in
2. Damages recovered for alienation of affection the GROSS INCOME
3. Damages recovered for breach of promise to marry
4. Damages recovered for loss of life of spouse Sec. 32(B)(4) COMPENSATION FOR INJURIES OR
5. Damages recovered in annulment of marriage SICKNESS
Reason: It is COMPENSATORY, NOT GAIN/PROFIT. It
Reason why not taxable damages: recovery in such adds nothing to the individual.
action is not derived from CAPITAL, LABOR, or from Moral Damages = NOT TAXABLE/EXEMPT
BOTH COMBINED but merely COMPENSATORY. Exemplary Damages = NOT TAXABLE/EXEMPT
Damages for loss earnings/income = TAXABLE
EXEMPTIONS: TAXABLE DAMAGES
Sec. 32(B)(5) INCOME EXEMPT UNDER TREATY
1. Compensation for unrealized earnings Reason: Adherence to the generally accepted principles of
2. Interest for those non taxable damages international law.
3. Damages for unrealized profits Example: Income derived by the US Consular officials in the
4. Compensatory liquidated damages Philippines in connection with such consular service.
5. Damages recovered in intangible assets
infringement suits Sec. 32(B)(6) RETIREMENT BENEFITS, PENSIONS,
GRATUITIES, ETC.
Reason why taxable damages: represent recovery of Retirement Benefits received by officials and employees of
loss of profit. private firms, individuals or corporations.
Private plan maintained by their employer approved by the
B. A SPECIAL LAW exempts it from tax. BIR for the exclusive benefit of the employee.
Retiring official or employee who has rendered at least 10
1. PRICES RECEIVED IN CHARITY, HORSE years of service.
RACING, SWEEPSTAKES FROM PCSO; At least 50 years of age at the time of retirement.
2. INCOME FROM BOND and SECURITIES
-for sale in the international market P.D. 81 Separation benefits due to death, sickness or other physical
-Issued by EPZA P.D. 66 disability or any causes beyond the control of the said
3. SALARIES AND STIPEND IN DOLLARS RECEIVED official or employee.
BY NON-FILIPINO CITIZENS SERVING AS STAFF
OF: Social security benefits, retirement gratuities received by
-International Rice Research Institute resident or non-resident citizens or resident aliens from
-Ford Foundation Grants foreign government agencies and other private or public
- Agricultural Department of the Southeast Asian institutions.
Fisheries Development Center
-Population Council of New York Benefits received from GSIS including retirement gratuity
received by government officials and employees.
C. A provision of the TAX CODE exempts it from
tax (Sec. 32 (B) Sec. 32(B)(7) MISCELLANEOUS ITEMS
Sec. 32(B)(7)(a) INCOME DERIVED BY FOREIGN
PROCEEDS FROM LIFE INSURANCE ( Sec. 32(b)(1)]
GOVERNMENT
Whether such is received in an INSTALLMENT or LUMP Income received from the investment in the Philippines BY:
SUM Foreign Government
Financing Institutions controlled and owned by Foreign
2005 BAR examination
government

21 | P a g e
Regional or International Financing Institutions established MWE Minimum Wage Earner (Sec. 22 (HH))
by Foreign Government
Reason: to lessen the burden of foreign loans or lessen the MWE’s are PRIVATE SECTOR and PUBLIC SECTOR >
interest of the foreign loans. EXEMPT from TAX and NOT subject to Withholding tax.

Sec. 32(B)(7)(b) INCOME DERIVED BY THE Holiday pay, overtime pay, night shift differential pay and
GOVERNMENT or ITS POLITICAL SUBDIVISION hazard pay and hazard pay earned by the MWE shall be
From any PUBLIC UTILITY covered by the INCOME TAX EXEMPTION
From the EXERCISE OF ESSENTIAL GOVERNMENTAL
FUNCTIONS An employee who receives additional compensation such as
commissions , honoraria, fringe benefits, benefits in excess
RECIPIENTS OF THE INCOME MUST BE: of allowable statutory amoun of P82,000.00, taxable
Local Government Units (LGU) allowances and othe taxable income other than SMW,
Example: Income derived by the municipality from the Holiday pay, overtime pay, night shift differential pay and
operation of power plant. hazard pay SHALL NOT ENJOY THE PRIVELEGE OF
Government of the Philippines/Republic of the BEING A MWE, therefore, his ENTIRE EARNINGS ARE NO
Philippines LONGER EXEMPT FROM INCOME TAX.

Sec. 32(B)(7)(c) PRIZES AND AWARDS ALLOWABLE TAX DEDUCTIONS


Prizes and award under the following conditions: Sec. 34 of the NIRC
Received in recognition of religious, charitable, scientific, These are amount allowed by law to reduce gross income
educational, artistic, literary or civic achievement; to taxable income.
Recipient was selected without any action on his part to
enter the contract; BASIC PRINCIPLES
Recipient is not required to render substantial future services Non resident alien not engaged in trade or business and non
as a condition to receiving the prize or rewards. resident foreign corporation are not allowed to claim
deductions. Reason: tax base is Gross income
Sec. 32(B)(7)(d) PRIZES and AWARDS in SPORTS
COMPETITION The taxpayer must point to some specific provisions of the
Exempted by: R.A. 7549 otherwise known as an Act statute/law authorizing the deduction.
Exempting all Prizes and Awards gained from Local and
International Sports Tournament and competitions for the The taxpayer must prove that he is entitled to the deduction
payment of income and other forms of taxes and for other authorized by law.
purposes.
If the taxpayer fails to deduct certain expenses for the
R.A. 7549 taxable year, he cannot deduct them from the income of the
Recipient is EXEMPT from INCOME TAX next or succeeding year.
Contributor of the Award/Donor is EXEMPT from DONOR’S
TAX Cohan Rule= If expenses were incurred and there are no
Contributor of the Award/Donor can claim it as DEDUCTION documentary evidence to support such, BIR must make an
from Gross Income. estimate of deduction that may be allowed in computing the
taxpayer’s taxable income.
CONDITIONS FOR EXEMPTIONS: Disallowance of 50% of the taxpayer’s claimed deduction is
Received in Recognition of local and international Sports VALID.
competition held in Philippines and abroad sanctioned by
National Sports Association (accredited by the Philippine KINDS OF ALLOWABLE DEDUCTIONS
Olympic Committee) I. PREMIUM PAYMENTS ON HEALTH and/or
It must be an unconditional receipt; recipient is not required HOSPITALIZATION INSURANCE(PHHI) Sec. 34(M)
to render substantial future services. Premiums paid during the taxable year for health and/or
hospitalization insurance taken by him on himself, including
Sec. 32(B)(7)(e) 13th MONTH PAY and OTHER BENEFITS his family.
Other Benefits: It will INCLUDE CHRISTMAS BONUS, *PHHI applicable only to individual
PRODUCTIVITY INCENTIVES
TOTAL EXCLUSION shall NOT EXCEED P82,000.00 CONDITIONS BEFORE PHHI SHALL BE ALLOWED AS
DEDUCTION FROM GROSS INCOME:
Sec. 32(B)(7)(f) GSIS, SSS, Medicare and Other That the family had a gross income of not more than two
Contributions hundred fifty thousand pesos (P250,000.00) for the taxable
EXEMPTION: GSIS Educational Plan Premium year.
GSIS Memorial Plan Premium Family = NUCLEAR FAMILY- parents and the children who
are not yet taxpayers their income notwithstanding.
Sec. 32(B)(7)(g) Gains from the Sale of Bonds, In case of married persons, only the spouse claiming the
Debentures or other Certificate of Indebtedness additional exemptions for dependents shall be entitled to the
WITH MATURITY of MORE THAN FIVE(5) YEARS deduction;
The deduction shall not exceed P2,400.00 for the family, or
Sec. 32(B)(7)(h) Gains from Redemption of Shares in P200 a month.
Mutual Fund
Sec. 22 (BB) of the NIRC II. OPTIONAL STANDARD DEDUCTION (OSD) Sec. 34 (L)
OSD is a deduction from gross income allowed to be taken in
R.A. 9504 TAX EXEMPTION of STATUTORY MINIMUM lieu of the itemized deductions.
WAGE EARNER
Statutory Minimum Wage (Sec. 22 (GG)) Applicable to INDIVIDUAL (but not to non-resident alien)
Fixed by RTWPB of the DOLE Applicable also to CORPORATION as allowed by Sec. 3 of
R.A. 9504

22 | P a g e
₱50,000.00 ₱25,000.00
OSD RATE Whether taxpayer is IN ADDITION to the basic
40% 40% married, head of the family personal exemption for each
of Gross sales/ Gross of Gross Income or single. (R.A. 9504) qualified dependent children
Receipts INDIVIDUAL CORPORATE TAXPAYERS not exceeding four (4) (R.A.
TAXPAYERS, other than (Sec. 27(A)) 9504)
NRA
TAXPAYERS ALLOWED for TAXPAYERS NOT
The taxpayer must signifies in his return his intention to elect PERSONAL EXEMPTION ALLOWED FOR
Optional Standard Deduction PERSONAL EXEMPTION
1. RC 1. NRA-ETB not
OTHERWISE, he shall be considered as having availed of 2. NRC enjoying reciprocity
the Itemized deductions. 3. RA clause
4. Estates and Trusts 2. NRA-NETB
The election of OSD is irrevocable for the taxable year for 5. NRA-ETB enjoying 3. Corporations
which the choice is made. reciprocity clause 4. Partnerships

SHALL NOT APPLY TO GROSS COMPENSATION PRINCIPLE OF RECIPROCITY (Sec. 35 (D))


INCOME ARISING OUT OF EMPLOYER-EMPLOYEE Means that NRAETB shall be allowed a personal exemption,
RELATIONSHIP. only if the income tax law in his country grants personal
exemption to the citizens and residents of the
III. ITEMIZED DEDUCTIONS Sec. 34 (A to J) Philippines, subject to the following limitations:
These are expenses related to trade or business or to the  The amount of exemption shall in no case exceed
practice of profession. the personal exemption granted by our law to
citizens or residents of the Philippines;
Applicable to both individual and corporate taxpayers. Personal exemptions are available only to citizens and
residents, including estate and trust.
KINDS OF ITEMIZED DEDUCTION (by statutory
classification) ++ non-resident alien engaged in business in the Philippines
is allowed with personal exemption based on reciprocity.
A. BUSINESS EXPENSES
(Sec. 35D of the NIRC states “personal exemption” – some
B. INTEREST authors said that reciprocity extends only to basic personal
C. TAXES exemption.
D. LOSSESS
E. BAD DEBTS NRA-ETB= those who have stayed within the Philippines
F. DEPRECIATION for more than 180 days during the taxable year shall be
G. DEPLETION deemed nonresident aliens doing business in the Philippines.
H. CHARITABLE AND OTHER CONTRIBUTIONS
I. RESEARCH AND DEVELOPMENT TAXPAYERS ENTITLED TO ADDITIONAL EXEMPTIONS
EXPENDITURE 1. RC
J. PENSION TRUST CONTRIBUTION 2. NRC
3. RA if qualified children are LIVING WITH HIM IN THE
DEDUCTIONS ≠ EXCLUSIONS PHILIPPINES
FROM GROSS FROM GROSS If Children are living abroad, RA is not entitled to
INCOME Sec. 34 INCOME Sec. 32 additional exemptions.
Something paid or Should not form
incurred in doing part of gross REQUISITES for ADDITIONAL EXEMPTIONS
business or trade income because DEPENDENT MUST BE:
excluded by law, 1. A taxpayer’s child, whether legitimate, illegitimate or
by the constitution legally married;
or does not fall 2. Chiefly depending for support on the taxpayer;
within the 3. Living with the taxpayer;
definition of 4. Not married; not gainfully employed, not more than
income. 21 years old. (Sec. 32(B), NIRC)
Pertains to the Pertains to the
computation of determination of The law allows the continuous exemption even if the
ordinary taxable Gross Income. dependent child is more than 21 years old, with the provision
income. stating “or if such dependent, regardless of age, is
incapable of self-support because of mental or physical
defect.” (Sec. 35B, par.4,NIRC)
ALLOWANCE OF PERSONAL EXEMPTION for
INDIVIDUAL TAXPAYER RULES IN CLAIMING ADDITIONAL EXEMPTIONS:
IF BOTH SPOUSES ARE WORKING: only one can claim
Section 35 of the NIRC SUBSTITUTES FOR THE the additional exemption.
DISALLOWANCE OF FAMILY, LIVING AND PERSONAL G.R. Husband is the proper claimant.
EXPENSES Exemption: Wife can claim if:
-husband explicitly waives his right
KINDS: BASIC PERSONAL EXEMPTION -husband has no income
ADDITIONAL PERSONAL EXEMPTION -husband works abroad
IF ONLY ONE SPOUSE IS WORKING said spouse may
PERSONAL EXEMPTON (PE) claim Additional exemption.
A. BASIC II. ADDITIONAL
PERSONAL EXEMPTION PERSONAL EXEMPTION
23 | P a g e
Form needed: Sworn Declaration and Waiver of Right to DEPENDENT CHILDREN (Maximum of Four)
Claim Exemption of Qualified Dependent Children Additional Exemption
Change of Status This Year Next Year
Exemptions; Personal & Additional Exemption (2006) 1. Born ₱25,000.00 ₱25,000.00
Charlie, a widower, has two sons by his previous marriage. 2. Reaches 21 years old- ₱25,000.00
Charlie lives with Jane who is legally married to Mario. They normal child
have a child named Jill. The children are all minors and not 3. Reaches 21 years old- ₱25,000.00 ₱25,000.00
gainfully employed. abnormal child and
1. How much personal exemption can Charlie claim? incapable to support
Explain. (2.5%) himself
SUGGESTED ANSWER: Charlie can claim the personal 4. Marries ₱25,000.00
exemption of a Head of a Family or P50,000.00 provided 5. Gainfully employed ₱25,000.00
that, at least one of his minor and not gainfully employed 6. Dies ₱25,000.00
children is unmarried and living with and dependent upon
him for chief support (Tax Reform Act, RA 8424, Chapter VII,
ITR; Personal Income; Married Individual (2004)
Section 35[A]; BIR Revenue Regulation 02-98).
RAM got married to LISA last January 2003. On November
2. How much additional exemption can Charlie claim?
30, 2003, LISA gave birth to twins. Unfortunately, however,
Explain. (2.5%)
LISA died in the course of her delivery. Due to complications,
SUGGESTED ANSWER: His children from his previous
one of the twins also died on December 15, 2003. In
marriage who are legitimate children and his illegitimate child
preparing his Income Tax Return (ITR) for the year 2003,
with Jane will all entitle him to additional personal exemption
what should RAM indicate in the ITR as his civil status: (a)
of P75,000.00 for each dependent, if apart from being minor
single; (b) married; (c) Head of the family; (d) widower; (e)
and not gainfully employed, they are unmarried, living with
none of the above? Why? Reason. (5%)
and dependent upon Charlie for their chief support (Tax
SUGGESTED ANSWER: RAM should indicate "(b) married"
Reform Act, RA8424, Chapter VH, Section 35(A); BIR
as his civil status in preparing his Income Tax Return for the
Revenue Regulation 02-98).
year 2003. The death of his wife during the year will not
QUALIFIED DEPENDENT OTHER THAN CHILDREN:
change his status because should the spouse die during the
A. Parents
taxable year, the taxpayer may still claim the same
1. Incapable of self-support
exemptions (that of being married) as if the spouse died at
2. Taxpayer should provide the chief support
the close of such year (Section 35/Cj, NIRC).
B. BROTHERS/SISTERS
1. Should not be more than 21 years old
2. Should not be gainfully employed Dependent means a legitimate, illegitimate or legally
3. Regardless of age, if brother/sister is adopted child chiefly dependent upon and living with the
incapable of self-support due to mental or
taxpayer if such dependent met the criteria provided under
physical defect
Sec. 35(b) of NIRC
4. Taxpayer provided for the chief support
C. Senior citizen Head of Family means an unmarried or legally separated
1. Resident of the Philippines
man or woman with one or both parents, or with one or more
2. At least 60 years old
3. Retired from either government or private brothers or sisters, or with one or more legitimate,
service recognized, natural, or legally adopted children, living with
4. Has income of NOT MORE THAN and dependent upon him or her for their chief support; where
₱60,000.00 per year which will be such brothers, sisters or children are not more than twenty-
reviewed by NEDA every 3 years. one years of age, unmarried, and not gainfully employed; or
Taxpayer or benefactor of senior citizen shall be entitled only where such brothers or sisters or children, regardless of age,
to the BASIC PERSONAL EXEMPTION of ₱50,000.00. He are incapable of self-support because of mental or physical
shall not be entitled to claim the ADDITIONAL EXEMPTION defect. (Sec. 35A par. 3, NIRC)
OF ₱25,000.00 for supporting his/ her parents,
brothers/sister or senior citizen. Living with may be construed that the taxpayer and his
dependents reside under one roof, or do not necessarily
CHANGE OF STATUS SUMMARY reside under one roof with consideration on the character of
Individual Taxpayer Exemption the separation.
Change of Status This year Next year
1. Married ₱50,000.00 ₱50,000.00 Gainfully employed means that the dependent is engaged
2. Died ₱ 50,000.00 in an employment, work or trade that will remove him from
3. Widowed with 1 qualified ₱75,000.00 ₱75,000.00 the status of chief support from the taxpayer.
dependent child
4. Widowed with qualified ₱50,000.00 ₱50,000.00 Chief support refers to the principal or main support
dependent not his child whether money or in kind extended continuously to the
5. Widowed without ₱50,000.00 ₱50,000.00 dependent, such that if withdrawn, the dependent will have a
dependents destitute life.
6. Legally separated with 1 ₱75,000.00 ₱75,000.00
qualified dependent child DEDUCTIONS ≠ ALLOWANCE
7. Legally separated with ₱50,000.00 ₱50,000.00 FROM GROSS FOR PERSONAL
qualified dependent not his INCOME Sec. 34 EXEMPTIONS
child Sec. 35
8. Legally separated without ₱50,000.00 ₱50,000.00 Actual business As to Arbitrary amounts
dependents expenses or Amount because it may not
9. Not legally separated ₱50,000.00 ₱50,000.00 expenses incurred be enough to cover
in the exercise of personal living
CHANGE OF STATUS SUMMARY profession expenses.
To recover the cost As to To cover the family,

24 | P a g e
of doing business Purpose living and personal 6. Division Chiefs of the BIR
expenses 7. BIR Collecting Agents
Business Expenses As to Nature Family, living and
personal expenses Other government agencies under the
Corporate As to Individual supervision and control of DFA, principally
taxpayers except Claimant Taxpayers only tasked in enforcing other tax laws.
NRFC, it can also except NRA-NETB
be claimed by  Bureau of Customs and Tariff Commission
individual taxpayers tasked to enforce the Tariff and Customs Code
except NRA-NETB. and tasked to collect taxes on imports embodied
1. Itemized As to Kind 1. Basic Personal in the NIRC.
Deductions Exemption  LTO- responsible to collect registration fees and
2. Optional 2. Additional motor vehicle tax
Deductions Personal  Local Officers in Charge to enforce local taxation
(OSD) of 40% of Exemption 1. Provincial, City, Municipal and Barangay
Gross Income of
Treasurers;
Receipt. OSD is
2. Provincial and City Assessors;
applicable to
individual and 3. Provincial and City Board Assessment
corporate Appeals
taxpayers (sec. 3 4. Central Board of Assessment Appeals.
R.A 9504)  Duly and lawfully authorized collectors: These
are persons, agencies or duly accredited banks
authorized by the BIR, BC, TC and LTO to
Brief History of the NIRC: collect taxes.
June 3, 1977 President Marcos promulgated the National Other Governmental Offices that may have
Internal Revenue Code of 1977, which updated the 1934 Tax incidental functions regarding TAX
Code. P.D 1158 A DECREE TO CONSOLIDATE AND ENFORCEMENT INTERPRETATION OF TAX
CODIFY ALL THE INTERNAL REVENUE LAWS OF THE LAWS
PHILIPPINES (NIRC of 1977 -Secretary of Justice: Vitaliano Aguirre
As the Chief Legal Officer of the Government.
Oct. 1985 P.D. 1994 FURTHER AMENDING CERTAIN Has authority to render administrative interpretation
PROVISIONS OF THE NATIONAL INTERNAL REVENUE and ascertain the validity of tax laws.
CODE = NIRC of 1986
Is the interpretation of the Secretary of Justice
1986 Revolutionary Government – Executive Orders subject to review? It is subject to review by the
amended the provisions of the NIRC. Courts of Justice.

NIRC of 1986 was amended by various PDs, EOs and laws Various Offices that indirectly provide
enacted by different legislative bodies of the Philippines, the assistance in the COLLECTION OF TAXES
latest being the TAX REFORM ACT of 1997 (R.A. No. 8424) 1. The Courts
2. Register of Deeds;
R.A. 9504= NIRC of 1997 AN ACT AMENDING SECTION 3. Secretary of Public Works and Highways Office
22, 24, 34, 35, 51, AND 79 OF REPUBLIC ACT NO. 8424, 4. City Prosecutors Office or City Fiscals
AS AMENDED OTHERWISE KNOWN AS THE NATIONAL 5. Notaries Public
INTERNAL REVENUE OF 1997 relative to the Withholding
of Income Tax on Compensation and other concerns. Powers of the Internal Revenue Commissioner:

Recent NIRC: Sec. 1 This Code shall be known as the 1) Has the exclusive and original power to interpret tax
National Internal Revenue Code of 1997. laws (Sec. 4)
-Subject to review by the Secretary of Finance
BIR, under the SUPERVISION and CONTROL of 2) Power to decide tax cases (Sec. 4)
Department of Finance (DOF), is principally tasked with the - disputed assessments,
enforcement of the NIRC. -refunds of internal revenue taxes, fees or other
charges,
Powers and Duties of BIR (Sec. 2) -penalties imposed in relation thereto, or
1. Assessment and Collection of all national internal -other matters arising under this Code or other laws
revenue taxes, fees, and charges or portions thereof.
2. Enforcement of all forfeitures, penalties, and fines ** Subject to appeal to the exclusive appellate
connected therewith
jurisdiction of the Court of Tax Appeals
3. Execution of Judgments in all cases decided in its
3) Power to summon (Sec. 5)
favor by the Court of Tax Appeals and the ordinary
courts The intention is to ascertain the correctness of
4. Administration of the supervisory police power tax return and to determine the taxpayer’s
liability and compliance.
Chief Officials of BIR (Sec. 3) -Examine taxpayer’s records;
1. Chief =Commissioner of Internal Revenue -Obtain taxpayer’s financial information’
2. 4 assistant chiefs = Deputy Commissioners -Summon the person liable for tax;
3. Revenue Regional Directors (17) -Take testimony of the person concerned under
4. Regional District Officers oath;
5. Revenue Examiners and Officers

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-Conduct regular canvass concerning all The Commissioner can demand for immediate payment
persons liable to pay any internal revenue tax. of tax when it is discovered that:
4) Power to make assessment  The taxpayer retires from business
I. Examination of the ff:  The taxpayer intends to leave the country
a. Returns and determination of tax due, and  The taxpayer removes his property from the
b. Statements, reports and other documents not Philippines
 The taxpayer hides/conceal his property
submitted (Sec. 6)
II.Authority on the ff: Distinguish government assessment from assessment
a. Conduct inventory and surveillance, and notice
prescribe presumptive Gross sales and Assessment is the official action of ascertaining the amount
receipts; of tax due from a taxpayer, done under the existing law;
b. Terminate Taxable period
If it shall come to the knowledge of the Assessment notice is a formal demand sent to the taxpayer
Commissioner that taxpayer: requiring payment within a specified time, the tax due =,
 Retiring from business subject to tax including interest and civil penalties.
 Intends to leave the Philippines
 Removes, hide or conceals his 5) Power of delegation
properties in the Philippines BIR Commissioner can delegate powers vested in
 Performs any act tending to obstruct him under the pertinent provisions of the NIRC to
the proceedings of the collection of tax ANY or such subordinate officials with the rank
for the past or current quarter or equivalent to a Division Chief or higher.
renders the same totally or partially BUT, the following powers of the BIR Commissioner
inefficient. SHALL NOT be delegated:
c. To prescribe real property values 1. The power to recommend the promulgation of
For purposes of computing internal rules and regulations by the Secretary of
revenue tax the value of the property shall Finance;
be: Whichever is higher of: the FAIR 2. The power to issue rulings of first impression or
MARKET VALUE as determined by the to reverse, revoke or modify any existing ruling
Commissioner; OR the FAIR MARKET of the Bureau;
VALUE as shown schedule of values of the 3. The power to compromise or abate under Sec.
Provincial and Assessors. 204 (A) and (B) of the NIRC, ANY tax liability;
d. To inquire into Bank Deposits Accounts G.R.: No. 3
Inquiry is limited only to the bank deposits Exemption: Assessments issued by the regional
of offices involving basic deficiency taxes of ₱
1. A decedent to determine his gross 500,000 or less AND minor criminal violations,
estate; may be compromised by the regional evaluation
2. Any taxpayer who has filed an board.
application for compromise of his tax COMPOSITION OF THE REGIONAL EVALUATION
liability under Sec. 204 (A) (2) of the BOARD
NIRC by reason of financial incapacity. Chairman: Regional Director
e. To accredit and register Tax Agents Members: Heads of the Legal, Assessment and
These are individual and general Collections Divisions
professional partnership accredited based on Revenue District Officer having jurisdiction over the
the ff: Professional Competence, Integrity, taxpayers.
Moral Fitness 6) Power to ensure the provision and distribution of
IF DENIED ACCREDITATION: An appeal forms, receipts, certificates, and appliances, and the
can be made to the Secretary of Finance acknowledgement of payment of taxes
who shall rule within 60 days.
REGISTRATION REQUIREMENTS WITH THE BIR
Failure to rule within the prescribed period
shall be deemed as APPROVAL of the  Registration (Sec. 236)
application for accreditation of the appellant  Within 10 days from date of first
individual or general professional employment (Form 1902)
partnership.  On or before the start of the business
f. To prescribe additional procedural or (Form 1901,1903)
documentary requirements  Renewal, on or before end of January
This is in connection with the submission or  ₱ 500 per business establishment (Form
preparation of financial statements 605}
accompanying the tax returns.  Registration Update (Form 1905), no charge:
 Transfer of place of business
Tax Assessment: the determination of tax liability.
 Closing of business
Types of Tax Assessments
1. Taxpayer’s Assessment (Tax Return) BUT, NOT ALL taxpayers are required to pay an
2. Government Assessment annual registration fee of ₱500.
 Within 3 years from date of actual filing or
TAXPATERS EXEMPT FROM PAYMET OF ₱500
from prescribed date of filing whichever is
REGISTRATION FEE:
longer
 Cooperatives
 Within 10 years from date of tax violation  Individuals earning purely compensation
Termination of Tax period income
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 Overseas workers (Sec. 236B)
 Business with ₱100,000 and below
earning per year

There should only be one (1) Taxpayers


Identification Number to be issued to each taxpayer.

BIR administrative requirements for doing business:

 Printing of Sales invoice/receipts: Secure an


authority to print (Form 1906)
 Invoice for sale of goods/ official receipts for
services and rent: to be issued in duplicate,
duplicate copy to be preserved for at least 3
years.
 Keeping of books of accounts(journal/ledger):
recorded in native language, English or
Spanish
: Preserve for at least 3 years
: Need to be audited by a CPA if quarterly
gross receipts/earnings is more than
₱150,000.00

Is the Customs Commissioner under the supervision of the


BIR Commissioner? The Customs Commissioner and his
subordinates are agents of the BIR Commissioner with
respect to the collection of national internal revenue
taxes on imported goods. (Sec. 12)

Commissioner’s Annual report (Sec. 19)


Contents: Detailed statements of the collection specifying the
ff: sources of revenue by type of tax, by manner of payment,
by revenue region, by industry group. Disbursements by
classes of expenditures.

If the actual collection falls short by 15% OR exceeds by


15% = ANNUAL NATIONAL BUDGET

If actual collection exceeds or falls short of target as set in


the annual national budget by 15% or more, the
Commissioner shall explain the reason for such excess or
shortfall.

Submission of report and pertinent information (Sec. 20


A)
UPON REQUEST OF CONGRESS & IN AID OF
LEGISLATION
The Commissioner shall furnish the appropriate Committee
pertinent information including but not limited to the following:
1. Industry Audit
2. Collection performance data
3. Status reports in criminal actions against persons
and taxpayer’s returns.
SEC. 204 of the NIRC Authority of the Commissioner to
Compromise, Abate & Refund or Credit Taxes In the
exercise of his power pursuant to Sec. 204, the
Commissioner SHALL: SUB,IT TO THE OVERSIGHT
COMMITTEE (SEC, 290) through its Chairmen of the
Committee on Ways and Means of the SENATE and
HOUSE OF REPRESENTATIVES every SIX (6) months of
each calendar year.

THE NATIONAL INTERNAL REVENUE TAXES


(a) Income tax;
(b) Estate and donor's taxes;
(c) Value-added tax;
(d) Other percentage taxes;
(e) Excise taxes;
(f) Documentary stamp taxes; and
(g) Such other taxes as are or hereafter may be imposed and
collected by the Bureau of Internal Revenue.

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