Syllabus

TAXATION 1
New Era University, College of Law

Professor Loverhette Jeffrey P. Villordon

I. General Principles of Taxation

A. Definition and concept of taxation
 Paseo Realty & Development Corporation vs. Court of Appeals, G.R. No. 119286, 13 Oct.
2004
B. Nature of taxation
 Mactan Cebu International Airport Authority vs. Marcos, 261 SCRA 667 (1996)
 Pepsi-Cola Bottling Company of the Phil. vs. Mun. of Tanauan, Leyte, 69 SCRA 460 (1976)
 Roxas y Cia vs. CTA, 23 SCRA 276 (1968)
C. Characteristics of taxation
 Sunio vs. National Labor Relations Commission, 127 SCRA 390 (1984)
D. Power of taxation compared with other powers
1. Police power
 Planters Products, Inc. vs. Fertiphil Corporation, G.R. No. 166006 ,14 March 2008
2. Power of eminent domain
 Francia Intermediate Appellate Court, G.R. No. 76749, 28 June 1988
 Domingo vs. Carlitos, G.R. No. L-18994, 29 June 1963
E. Purpose of taxation
1. Revenue-raising
2. Non-revenue/special or regulatory
 Philippine Airlines vs. Edu, G.R. No. L- 41383, 15 August 1988
 National Power Corporation vs. City of Cabanatuan, G.R. No. 149110, 09 April 2003
F. Principles of sound tax system
1. Fiscal adequacy
2. Administrative feasibility
3. Theoretical justice
G. Theory and basis of taxation
1. Lifeblood theory
 CIR vs. Algue, Inc., et al., 158 SCRA 9 (1988)
 Talento vs. Escalda, Jr., G.R. No. 180884, 27 June 2008
2. Necessity theory
 Phil. Guaranty Co., Inc. v. CIR, G.R. No. L-22074, 30 April 1965
3. Benefits-protection theory (Symbiotic relationship)
4. Jurisdiction over subject and objects
H. Doctrines in taxation
1. Prospectivity of tax laws
2. Imprescriptibility
3. Double taxation
a) Strict sense
 Villanueva vs. City of Iloilo, 26 SCRA 578 (1968)
b) Broad sense
 San Miguel Brewery vs. City of Cebu, 43 SCRA 275 (1972)
 CIR vs. Bank of Commerce, GR. No. 149636, 08 June 2005
c) Constitutionality of double taxation
d) Modes of eliminating double taxation
 CIR vs. Procter & Gamble, G.R. No. 66838, 02 Dec. 1991
 CIR vs. SC Johnson and Son, Inc. et al., G.R No. 127105, 25 June 1999
4. Escape from taxation
a) Shifting of tax burden
(i) Ways of shifting the tax burden
 (ii) Taxes that can be shifted
(iii) Meaning of impact and incidence of taxation
b) Tax avoidance
 Delpher Trades Corp. vs. IAC, 157 SCRA 349 (1988)
c) Tax evasion
 CIR vs. Estate of Benigno P. Toda, Jr., G.R. No. 147188, 14 Sept. 2004
5. Exemption from taxation
a) Meaning of exemption from taxation
b) Nature of tax exemption
 Manila Electric Company vs. Vera, 67 SCRA 351 (1975)
 Rodriguez vs. Collector, G.R. No. L-23041, 31 July 1969
c) Kinds of tax exemption
(i) Express
(ii) Implied
 CIR vs. PLDT, G.R. No. 140230, 15 December 2005
(iii) Contractual
 Prov. of Misamis Oriental vs. Cagayan Electric Power and Light
Co. Inc., G.R. No. L-45355, 12 January 1990
d) Rationale/grounds for exemption
e) Revocation of tax exemption
6. Compensation and set-off
7. Compromise
 Valera vs. Office of the Ombudsman, G.R. No. 167278, 27 February 2008
8. Tax amnesty
a) Definition
 Commissioner of Internal Revenue vs. Marubeni Corporation, G.R. No.
137377, 18 December 2001
b) Distinguished from tax exemption
9. Construction and interpretation of:
a) Tax laws
(i) General rule
(ii) Exception
b) Tax exemption and exclusion
(i) General rule
(ii) Exception
c) Tax rules and regulations
 Philippine Bank of Communications vs. CIR, G.R. No. 112024, 28 January
1999
 CIR vs. Petron Corporation, G. R. No. 185568, 21 March 2012
d) Penal provisions of tax laws
e) Non-retroactive application to taxpayers
I. Scope and limitation of taxation
1. Inherent limitations
a) Public purpose
 Bagatsing vs. Ramirez, G.R. No. L-41631, 17 December 1976
 Gaston vs. Republic Planters Bank, G.R. No. L-77194, 15 March 1988
b) Inherently legislative
(i) General rule
(ii) Exceptions
(a) Delegation to local governments
(b) Delegation to the President
 Southern Cross Cement Corporation vs. Philippine Cement
Manufacturers Corporation, G.R. No. 158540, 08 July 2004
(c) Delegation to administrative agencies
 CIR vs. Fortune Tobacco Corporation, G.R. Nos. 167274-75,
21 July 2008
c) Territorial (Situs of taxation)
(i) Meaning
  Manila Electric Company vs. Yatco, G.R. No. 45697, 01 November
1939
 Philippine Guaranty Company vs. CIR, G.R. No. L-22074, 30 April
1965
(ii) Situs of income tax
(a) From sources within the Philippines
(b) From sources without the Philippines
(c) Income partly within and partly without the Philippines
(iii) Situs of property taxes
(a) Taxes on real property
(b) Taxes on personal property
(iv) Situs of excise tax
(a) Estate tax
(b) Donor’s tax
(v) Situs of business tax
(a) Sale of real property
(b) Sale of personal property
(c) Value-Added Tax (VAT)
d) International comity
e) Exemption of government entities, agencies, and instrumentalities
2. Constitutional limitations
a) Provisions directly affecting taxation
(i) Prohibition against imprisonment for non-payment of poll tax
(ii) Uniformity and equality of taxation
 Pepsi-Cola Bottling Co. of the Philippines, Inc. vs. City of Butuan,
24 SCRA 789 (1968)
 Reyes vs. Almanzor, G.R. Nos. L-49839-46,26 April 1991
(iii) Grant by Congress of authority to the president to impose tariff rates
(iv) Prohibition against taxation of religious, charitable entities, and
educational entities
 Commissioner of Internal Revenue vs. Court of Appeals, G.R. No.
L-124043, 14 Oct. 1998
 Lung Center of the Philippines vs. Quezon City, 433 SCRA 119
(2004)
(v) Prohibition against taxation of non-stock, non-profit institutions
 CIR vs. St. Luke's Medical Center, G.R. No. 195909, 26 September
2012
(vi) Majority vote of Congress for grant of tax exemption
 John Hay Peoples Alternative Coalition et al. vs. Lim, G.R. No.
119775, 24 October 2003
(vii) Prohibition on use of tax levied for special purpose
(viii) President’s veto power on appropriation, revenue, tariff bills
(ix) Non-impairment of jurisdiction of the Supreme Court
(x) Grant of power to the local government units to create its own sources of
revenue
(xi) Flexible tariff clause
(xii) Exemption from real property taxes
(xiii) No appropriation or use of public money for religious purposes
b) Provisions indirectly affecting taxation
(i) Due process
 Sison, Jr. vs. Ancheta, 130 SCRA 654 (1984)
(ii) Equal protection
 Tiu vs. Court of Appeals, 301 SCRA 278 (1999)
(iii) Religious freedom
(iv) Non-impairment of obligations of contracts
 Cagayan Electric Power and Light Co. Inc. vs. Commissioner, G.R.
No. L-60126, 25 Sept. 1985
J. Stages of taxation
 1. Levy
2. Assessment and collection
3. Payment
4. Refund
 Philex Mining Corporation vs. CIR, G.R. No. 125704, 28 August 1998
 State Land Investment Corporation vs. Commissioner of Internal Revenue, G.R.
No. 171956, 18 January 2008
K. Definition, nature, and characteristics of taxes
L. Requisites of a valid tax
M. Tax as distinguished from other forms of exactions
1. Tariff
2. Toll
3. License fee
4. Special assessment
5. Debt
N. Kinds of taxes
1. As to object
a) Personal, capitation, or poll tax
b) Property tax
c) Privilege tax
2. As to burden or incidence
a) Direct
b) Indirect
3. As to tax rates
a) Specific
b) Ad valorem
c) Mixed
4. As to purposes
a) General or fiscal
b) Special, regulatory, or sumptuary
5. As to scope or authority to impose
a) National – internal revenue taxes
b) Local – real property tax, municipal tax
6. As to graduation
a) Progressive
b) Regressive
c) Proportionate
II. Income taxation
A. Income tax systems
1. Global tax system
 Mercury Drug Corporation vs. CIR, G.R. No. 164050, 20 July 2011
2. Schedular tax system
3. Semi-schedular or semi-global tax system
B. Features of the Philippine income tax law
1. Direct tax
2. Progressive
3. Comprehensive
4. Semi-schedular or semi-global tax system
C. Criteria in imposing Philippine income tax
1. Citizenship principle
2. Residence principle
 Garrison vs. CA and Republic, G.R. Nos. L-44501-05, 19 July 1990
3. Source principle
D. Taxable period
1. Calendar period
2. Fiscal period
3. Short period
E. Kinds of taxpayers
 1. Individual taxpayers
a. Citizens
i. Resident citizens
ii. Non-resident citizens
b. Aliens
i. Resident aliens
ii. Non-resident aliens
a) Engaged in trade or business
b) Not engaged in trade or business
c. Special class of individual employees (i.e. Minimum wage earner)
2. Corporations
a. Domestic corporations
b. Foreign corporations
i. Resident foreign corporations
 Marubeni vs. Commissioner, G.R. No. 76573, 14 September 1989
ii. Non-resident foreign corporations
 Commissioner vs. British Overseas Airways Corporation, G.R. No.
L-65773-74, 30 April 1987
(cf. South African Airways v. Commissioner of Internal Revenue, 626 Phil. 566,
574–575 (2010), and Air Canada v. CIR, G.R. no. 169507, 11 January 2016)
c. Joint venture and consortium
3. Partnerships
 Pascual vs. Commissioner, G.R. No. 78133, 18 October 1988
4. General professional partnerships
 Tan vs. Del Rosario, G.R. No. 109289, 03 October 1994
5. Estates and trusts
6. Co-ownerships
 Oña vs. Commissioner, G.R. No. L-19342, 25 May 1972
F. Income taxation
1. Definition
2. Nature
3. General principles
G. Income
1. Definition (cf. Capital)
 Madrigal vs. Rafferty, G.R. No. L-12287, 07 August 1918
2. Nature
3. When income is taxable
a. Existence of income
b. Realization of income
i. Tests of realization
ii. Actual vis-à-vis constructive receipt
c. Recognition of income
4. Tests in determining whether income is earned for tax purposes
a. Realization test
 Fisher vs. Trinidad, G.R. No. L-17518, 30 October 1922
b. Claim of right doctrine or doctrine of ownership, command, or control
 Commissioner vs. Javier, G.R. No. 78953, 31 July 1991
c. Economic benefit test, doctrine of proprietary interest
d. Severance test
e. All events test
 CIR v. Isabel Cultural Corporation, G.R. No. 172231, 12 February 2007
H. Gross income
1. Definition
2. Concept of income from whatever source derived
3. Gross income vis-à-vis net income vis-à-vis taxable income
4. Classification of income as to source
a. Gross income and taxable income from sources within the Philippines
b. Gross income and taxable income from sources without the Philippines
 c. Income partly within or partly without the Philippines
5. Sources of income subject to tax
a. Compensation income
 First Lepanto Taisho Insurance Corporation vs. CIR, G.R. No. 197117, 10
April 2013
 Baier-Nickel vs. Commissioner, G.R. No. 153793, 29 August 2006
 Nitafan vs. Commissioner, G.R. No. 78780, 23 July 1987
b. Fringe benefits
i. Special treatment of fringe benefits
ii. Definition
iii. Taxable and non-taxable fringe benefits
 Henderson vs. Collector, G.R. No. G.R. No. L-12954, 28 February
1961
c. Professional income
d. Income from business
e. Income from dealings in property
i. Types of properties
a) Ordinary assets
b) Capital assets
ii. Types of gains from dealings in property
a) Ordinary income vis-à-vis capital gain
b) Actual gain vis-à-vis presumed gain
c) Long term capital gain vis-à-vis short-term capital gain
d) Net capital gain, net capital loss
 Compagnie Financiere Sucres et Denrees vs. Commissioner,
G.R. No. 133834, 28 August 2006
e) Income tax treatment of capital loss
i) Capital loss limitation rule (applicable to both corporations
and individuals)
ii) Net loss carry-over rule (applicable only to individuals)
f) Dealings in real property situated in the Philippines
g) Dealings in shares of stock of Philippine corporations
i) Shares listed and traded in the stock exchange
ii) Shares not listed and traded in the stock exchange
h) Sale of principal residence
f. Passive investment income
i. Interest income
 Commissioner vs. GCL Retirement Plan, G.R. No. 95022, 23 March
1992
ii. Dividend income
 Commissioner vs. Wander Philippines Inc., G.R. No. L-68375, 15 April
1988
a) Cash dividend
b) Stock dividend
 Commissioner vs. A. Soriano Corporation, G.R. No. 108576, 20
January 1999
c) Property dividend
d) Liquidating dividend
iii. Royalty income
iv. Rental income
a) Lease of personal property
b) Lease of real property
v. Unreported Increase in Net Worth
 Commissioner vs. Fernandez Hermanos, Inc., G.R. Nos. L-21551
and L-21557, 30 September 1969
g. Annuities, proceeds from life insurance or other types of insurance
 El Oriente Fabrica De Tabacos, Inc. vs. Posadas, G.R. No. 34774, 21
September 1931
 h. Prizes and awards
i. Pensions, retirement benefit, terminal leave pay or separation pay
 Commissioner vs. Castaneda, G.R. No. 96016, 17 October 1991
j. Income from any source whatever
i. Forgiveness of indebtedness
ii. Recovery of accounts previously written-off – when taxable/when not taxable
iii. Receipt of tax refunds or credit
iv. Source rules in determining income from within and without
a) Interests
 NDC vs. CIR, G.R. No. L-53961, 30 June 1987
b) Dividends
c) Services
d) Rentals
e) Royalties
f) Sale of real property
g) Sale of personal property
h) Shares of stock of domestic corporation
6. Situs of income taxation
7. Exclusions from gross income
a. Rationale for the exclusions
 Commissioner vs. Mitsubishi Metal Corporation, G.R. No. L-54908, 22 January
1990
b. Taxpayers who may avail of the exclusions
c. Exclusions distinguished from deductions and tax credit
d. Under the Constitution, i.e. Income derived by the government or its political
subdivisions from the exercise of any essential governmental function
e. Under the Tax Code
i. Proceeds of life insurance policies
ii. Return of premium paid
iii. Amounts received under life insurance, endowment or annuity contracts
iv. Value of property acquired by gift, bequest, devise or descent
 Pirovano vs. Commissioner, G.R. No. L-19865, 31 July 1965
v. Amount received through accident or health insurance
vi. Income exempt under tax treaty
vii. Retirement benefits, pensions, gratuities, etc.
viii. Winnings, prizes, and awards, including those in sports competition
f. Under special laws (i.e. Personal Equity and Retirement Account)
 Dumaguete Cathedral Credit Cooperative vs. CIR, G.R. No. 182722, 22 January
2010
8. Deductions from gross income
a. General rules
i. Deductions must be paid or incurred in connection with the taxpayer’s trade,
business or profession.
ii. Deductions must be supported by adequate receipts or invoices (except
standard deduction)
 Consolidated Mines, Inc. vs. Court of Tax Appeals, G.R. No. L-
18843 and L-18844, 29 August 1974
iii. Additional requirement relating to withholding. Reasonableness of deductions
 Commissioner vs. Arnoldus Carpentry Shop, Inc., G.R. No. 71122, 25
March 1988
 C. M. Hoskins & Co., Inc. vs. Commissioner, G.R. No. L-24059, 28
November 1969
b. Return of capital (cost of sales or services)
i. Sale of inventory of goods by manufacturers and dealers of properties
ii. Sale of stock in trade by a real estate dealer and dealer in securities
iii. Sale of services
c. Itemized deductions
i. Expenses
 a) Requisites for deductibility
i) Nature: ordinary and necessary
 Commissioner vs. General Foods Phils. Inc., G.R.
No. 143672, 24 April 2003
ii) Paid and incurred during taxable year
b) Salaries, wages and other forms of compensation for personal
services actually rendered, including the grossed-up monetary value of
the fringe benefit subjected to fringe benefit tax which tax should have
been paid
c) Travelling/transportation expenses
d) Cost of materials
e) Rentals and/or other payments for use or possession of property
f) Repairs and maintenance
g) Expenses under lease agreements
h) Expenses for professionals
i) Entertainment/Representation expenses
j) Political campaign expenses
k) Training expenses
ii. Interest
a) Requisites for deductibility
b) Non-deductible interest expense
c) Interest subject to special rules
i) Interest paid in advance
ii) Interest periodically amortized
iii) Interest expense incurred to acquire property for use in
trade/business/profession
iv) Reduction of interest expense/interest arbitrage
iii. Taxes
a) Requisites for deductibility
 Commissioner vs. Palanca, G.R. No. L-16626, 29 October
1966
b) Non-deductible taxes
c) Treatments of surcharges/interests/fines for delinquency
d) Treatment of special assessment
e) Tax credit vis-à-vis deduction
iv. Losses
a) Requisites for deductibility
 Plaridel Surety And Insurance Company vs. Commissioner,
G.R. No. L-21520, 11 December 1967
b) Other types of losses
i) Capital losses
ii) Securities becoming worthless
iii) Losses on wash sales of stocks or securities
iv) Wagering losses
v) Net Operating Loss Carry-Over (NOLCO)
v. Bad debts
a) Requisites for deductibility
 Collector vs. Good Rich International Rubber Co., G.R. No.
L-22265, 22 December 1967
b) Effect of recovery of bad debts
vi. Depreciation
a) Requisites for deductibility
 Basilan Estates Inc. vs. Collector, G.R. No. L-22492, 05
September 1967
b) Methods of computing depreciation allowance
i) Straight-line method
ii) Declining-balance method
iii) Sum-of-the-years-digit method
 vii. Charitable and other contributions
a) Requisites for deductibility
b) Amount that may be deducted
viii. Contributions to pension trusts
 Roxas vs. CTA and Commissioner, G.R. No. L-25043,26 April 1968
d. Optional standard deduction
i. Individuals, except non-resident aliens
ii. Corporations, except non-resident foreign corporations
iii. Partnerships
e. Personal and additional exemption (R.A. No. 9504, Minimum Wage Earner Law)
i. Basic personal exemptions
ii. Additional exemptions for taxpayer with dependents
iii. Status-at-the-end-of-the-year rule
iv. Exemptions claimed by non-resident aliens
f. Items not deductible
i. General rules
ii. Personal, living or family expenses
iii. Amount paid for new buildings or for permanent improvements (capital
expenditures)
iv. Amount expended in restoring property (major repairs)
v. Premiums paid on life insurance policy covering life or any other officer or
employee financially interested
vi. Interest expense, bad debts, and losses from sales of property between
related parties
vii. Losses from sales or exchange or property
viii. Non-deductible interest
ix. Non–deductible taxes
x. Non-deductible losses
xi. Losses from wash sales of stock or securities
g. Exempt corporations
i. Propriety educational institutions and hospitals
ii. Government-owned or controlled corporations
iii. Others
I. Taxation of resident citizens, non-resident citizens, and resident aliens
1. General rule that resident citizens are taxable on income from all sources within and without
the Philippines vs. Treatment of Non-resident citizens
2. Taxation on compensation income
a. Inclusions
i. Monetary compensation
a) Regular salary/wage
b) Separation pay/retirement benefit not otherwise exempt
c) Bonuses, 13th month pay, and other benefits not exempt
d) Director’s fees
ii. Non-monetary compensation (Fringe benefit not subject to tax)
b. Exclusions
i. Fringe benefit subject to tax
ii. De minimis benefits
iii. 13th month pay and other benefits, and payments specifically excluded from
taxable compensation income
c. Deductions
i. Personal exemptions and additional exemptions
ii. Health and hospitalization insurance
iii. Taxation of compensation income of a minimum wage earner
a) Definition of statutory minimum wage
b) Definition of minimum wage earner
c) Income also subject to tax exemption: holiday pay, overtime pay,
night-shift differential, and hazard pay
3. Taxation of business income/income from practice of profession
 4. Taxation of passive income
a. Passive income subject to final tax
i. Interest income
ii. Royalties
iii. Dividends from domestic corporations
iv. Prizes and other winnings
b. Passive income not subject to final tax
5. Taxation of capital gains
a. Income from sale of shares of stock of a Philippine corporation
i. Shares traded and listed in the stock exchange
ii. Shares not listed and traded in the stock exchange
b. Income from the sale of real property situated in the Philippines
c. Income from the sale, exchange, or other disposition of other capital assets
J. Taxation of non-resident aliens engaged in trade or business
1. General rules
2. Cash and/or property dividends
3. Capital gains
K. Individual taxpayers exempt from income tax
1. Senior citizens
2. Minimum wage earners
3. Exemptions granted under international agreements
L. Taxation of domestic corporations
1. Tax payable
a. Regular tax
b. Minimum Corporate Income Tax (MCIT)
i. Imposition of MCIT
ii. Carry forward of excess minimum tax
iii. Relief from the MCIT under certain conditions
iv. Corporations exempt from the MCIT
v. Applicability of the MCIT where a corporation is governed both under the
regular tax system and a special income tax system
 CIR vs. Philippine Airlines, G.R. No. 179259, 25 September 2013
2. Allowable deductions
a. Itemized deductions
b. Optional standard deduction
3. Taxation of passive income
a. Passive income subject to tax
i. Interest from deposits and yield, or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements and royalties
ii. Capital gains from the sale of shares of stock not traded in the stock
exchange
iii. Income derived under the expanded foreign currency deposit system
iv. Inter-corporate dividends
v. Capital gains realized from the sale, exchange, or disposition of lands and/or
buildings
b. Passive income not subject to tax
4. Taxation of capital gains
a. Income from sale of shares of stock
b. Income from the sale of real property situated in the Philippines
c. Income from the sale, exchange, or other disposition of other capital assets
5. Tax on proprietary educational institutions and hospitals
6. Tax on government-owned or controlled corporations, agencies or instrumentalities
M. Taxation of resident foreign corporations
1. General rule
2. With respect to their income from sources within the Philippines
3. Minimum Corporate Income Tax
4. Tax on certain income
a. Interest from deposits and yield, or any other monetary benefit from deposit
 substitutes, trust funds and similar arrangements and royalties
b. Income derived under the expanded foreign currency deposit system
c. Capital gains from sale of shares of stock not traded in the stock exchange
d. Inter-corporate dividends
N. Taxation of non-resident foreign corporations
1. General rule
2. Tax on certain income
a. Interest on foreign loans
b. Inter-corporate dividends
c. Capital gains from sale of shares of stock not traded in the stock exchange
O. Improperly accumulated earnings of corporations
 Cyanamid Philippines, Inc. vs. Commissioner, G.R. No. 108067, 20 January 2000
P. Exemption from tax on corporations
Q. Taxation of partnerships
R. Taxation of general professional partnerships
S. Withholding tax
 CIR vs. Asian Transmission Corporation, G.R. No. 179617, 19 January 2011
1. Concept
2. Kinds
a. Withholding of final tax on certain incomes
b. Withholding of creditable tax at source