skClar Provect _ Ly bona Tyee [excel aude = rey rie TAXATION | tere ai M — 4, Prof. Othelo C. Carag ae "te $— 1st Semester, AY 2014-2015 tH Casery—FPe U.P. College of Law Part 1: General Principles Reference: De Leon, Hector S. and De Leon, Hector M., Jr., The Fundamentals of Taxation. Manila: Rex Book Store, Inc., 2009. 1 CONCEPT A, Taxation and Tax defined. (de Leon, pp. 1-4) B, Tax as distinguished from other forms of exactions (de Leon, p. 19-25) 1. Tax vs. Tariff 2. Tax vs. license fee Case(s): PAL v. Edu (164 SCRA 320) Progressive Development Corp. v. Q.C. (172 SCRA 629) Osmefia v. Orbos (220 SCRA 703) Compania General de Tabacos v. City of Manila (8 SCRA 367) 3. Tax vs. Toll Sec. 155 of LGC 4, Tax vs. Special Assessment Sec. 240 LGC Case(s): Republic v. Bacolod Murcia (17 SCRA 632) 5. Tax vs. Ordinary debt Case(s): Philex Mining Corporation v. CIR (294 SCRA 687) Caltex v. COA (208 SCRA 755) Il, THEORY AND BASIS OF TAXATION (de Leon, pp. 4-6) A, Lifeblood Theory B, Necessity Theory Case(s): Ferdinand R. Marcos Il v. CA (273 SCRA 47) NPC v. City of Cabanatuan (401 SCRA 259)C. Benefits-Protection Theory (Symbiotic Relationship) Case(s): Commissioner v. Algue (158 SCRA 9) D. Jurisdiction over Subject and Objects PURPOSES/OBJECTIVES OF TAXATION A, Revenue-raising B. Non-revenue/special or regulatory Case(s): Caltex v. Commission on Audit, Ibid. GENERAL PRINCIPLES OF A SOUND TAX SYSTEM (de Leon, pp. 13-14) A, Fiscal adequacy B. Theoretical justice C. Administrative feasibility SCOPE AND LIMITATIONS OF TAXATION (de Leon, pp. 6-11; pp. 30-56) A. Inherent Limitations 1. Public Purpose Case(s): Pascual v. Sec. Public Works (110 Phil. 331) Planters Products, inc.v. Fertiphil Corporation (548 SCRA 485) Tio vs. Videogram Regulatory Board (151 SCRA 208) 2. Inherently Legislative General Rule: Power to tax may not be delegated Case(s): Commissioner vs. Santos and Guild of Phil. Jewelers, Inc. (277 SCRA 617) Kapatiran v. Tan (163 SCRA 372) Exceptions from prohibition against delegation of power to tax: 4a) Delegation to Local Governments Sec. 5, Art. X, Philippine Constitution Local Government Code (RA 7160), Book fi Case(s). LTO v. City of Butuan (322 SCRA 805) Basco v. PAGCOR (197 SCRA 52)B b) Delegation to the President Sec. 28(2) Art. VI, Constitution Sec. 401, Tariff and Customs Code Case(s Garcia v. Executive Secretary (210 SCRA 219) ABAKADA v. Ermita (469 SCRA 1) ¢) Delegation to Administrative Agencies Case(s): Maceda v. Macaraig (197 SCRA 771) Osmefia v. Orbos, Ibid. Commissioner v. CA and Fortune Tobacco Corporation (261 SCRA 236) Territorial Case(s): Iloilo Bottlers v. City of lloilo (164 SCRA 607) Smith vs. CIR (CTA Case No. 6268. Sep. 12, 2002) International Comity Sec. 2, Art. II Philippine Constitution Sec. 32 (B) (7)(a), NIRC Case(s): Tafiada v. Angara (272 SCRA 18) Exemption of Government Entities, Agencies, and Instrumentalities Sec. 32 (B) (7) (b), NIRC Sec. 27(C), NIRC Case(s): Manila International Airport Authority v. CA (495 SCRA 591) Philippine Fisheries Development Authority v. CA (528 SCRA 706) Constitutional Limitations [Note that the Constitution does not grant the power to tax on the State, since the power is inherent, Rather, it regulates and defines, rather than grants, the power.) 1. Provisions directly affecting Taxation a. Prohibition against imprisonment for non-payment of poll tax: No person shall be imprisoned for non-payment of a poll tax. (Sec. 20, Art. lll, Constitution) Community tax v, Poll taxSec. 156 - 164, Local Government Code (LGC) (RA 7160) b. Uniformity and Equity in Taxation: The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. (Sec. 28(1), Art. VI, Constitution) Case(s): Uniformity in Taxation City of Baguio v. de Leon (25 SCRA 938) Commissioner v. Lingayen Gulf Electric (164 SCRA 27) Valid Classification of taxpayers/subject matter to be taxed Pepsi Cola v. City of Butuan (24 SCRA 787) c. Grant By Congress Of Authority To President To Impose Tariff Rates: The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions and as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues and other duties or imposts within the framework of the national development program of the Government. (Sec. 28) (2), Art. VI, Constitution d. Prohibition Against Taxation Of Religious, Charitable Entities And Educational Entities: Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and non-profit cemeteries, and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes shall be exempt from taxation. (Sec. 28(3), Art. VI, Constitution) Case(s): Abra Valley College v. Aquino (162 SCRA 106) Lung Center of the Philippines v. Quezon City (433 SCRA 119) e. Prohibition Against Taxation Of Non-Stock, Non-Profit Institutions: All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. (Sec. 4(3) and (4), Art. XIV, Constitution; Sec. 26(3), Art. VI, Constitution) Secs. 27(B) and 30(H) of NIRC Revenue Memorandum Circular (RMC) No. 76-2003 Revenue Regs. No. 13-98 (Deductibility of Contributions or Gifts Actually Paid or Made to Accredited Donee Institutions in Computing Taxable Income) f. Majority Vote Of Congress For Grant Of Tax Exemption: No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of the Congress. (Sec. 28(4), Art. VI, Constitution)g. Prohibition On Use Of Tax Levied For Special Purpose: All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government. (Sec. 29, Art, VI, Constitution) Case(s) Osmefia v. Orbos, Ibid. Gaston v. Republic Planters Bank (158 SCRA 626) h. President's Veto Power On Appropriation, Revenue And Tariff Bills: The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object. (Sec. 25(2) and Sec. 27(2), Art. Vi, Constitution) Case(s): Gonzales v. Macaraig (191 SCRA 452) i. Non-impairment of Jurisdiction of the Supreme Court: The Supreme Court shall have the power to review and revise, reverse, modify or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final judgment or decrees of lower courts in all cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto. (Sec. 2 and 5(b), Art. Vill, Constitution) j. Grant Of Power To LGUs To Create Its Own Sources Of Revenue: Each local government unit shall have the power to create its own sources of revenue and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments. Local government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them. (Sec. 5, Art. X, Constitution) 2. Provisions indirectly affecting Taxation a, Due Process. Sec. 1, Art, Ill, Constitution Case(s): Tan v. Del Rosario (237 SCRA 324) Sison v. Ancheta (130 SCRA 654) b. Religious Freedom. Sec. 5, Art. Ill, Constitutionvi. vu. Sec. 29(2), Art. VI, Constitution Case(s): American Bible Society v. City of Manila (101 Phil 386) Tolentino vs. Sec. of Finance, 235 SCRA 630 c. Non-impairment of Obligations of Contracts. Sec. 10, Art. Ill, Constitution Sec. 11, Art. XIl, Constitution Case(s): Tolentino v. Sec. of Finance, Ibid. STAGES OF TAXATION (de Leon, p. 8) A. Levy B, Assessment and Collection c. Payment D. Refund KINDS OF TAXES (de Leon, pp. 14-18) A. As to Object Personal, capitation or poll tax (e.g. basic community tax) 2. Property tax (e.g. realty tax) 3. Privilege tax (e.g. internal revenue taxes, customs duties) Case(s): Association of Customs Brokers v. Municipal Board (93 Phil 106) B. As to Burden or Incidence 1, Direct (e.g. income, estate and donor's tax) 2. Indirect (e.g. excise, VAT) Case(s): Philippine Acetylene v. Commissioner (20 SCRA 1056) Maceda v. Macaraig (197 SCRA 771) Comm. v. John Gotamco (148 SCRA 36) CIR v. PLOT (478 SCRA 61) C. As to Determination of Amount 1. Specific taxvil, 2. Ad valorem 3. Mixed D. As to Purposes 1. General or Fiscal (e.g. income taxes) 2. Special, Regulatory or Sumptuary (e.g SEF under the LGC) E. As to Scope or Authority to Impose National - internal revenue taxes 2. Local - real property tax, municipal tax F. As to Graduation 1. Progressive (e.g. income tax) 2, Regressive 3. Proportionate (e.g. real estate tax (Sec. 233 Local Government Code)) DOCTRINES IN TAXATION (de Leon, pp. 56-81) A. Prospectivity of Tax Laws B. Imprescriptibility Secs. 203, 222, NIRC Sec. 1603, TCC Secs. 222, 225, LGC Situs of Taxation Sec. 28 (a) (3), NIRC Case(s): Wells Fargo v. Collector (70 Phil 325) Commissioner v. BOAC (149 SCRA 395) D. Double Taxation 1. Strict Sense Case(s): Alcan Packaging Starpack Corporation v. The Treasurer Of The City Of Manila (C.T.A. AC NO. 17. September 11, 2006) 2. Broad Sense Case(s): Villanueva v. City of lloilo (26 SCRA 578)Commissioner Of Internal Revenue vs. Solidbank Corporation (416 SCRA 436) 3. Constitutionality of Double Taxation Case(s): China Banking Corporation v. Court Of Appeals, Court Of Tax Appeals, and CIR (403 SCRA 634) 4, Tax Treaties (as Relief from Double Taxation) Commissioner Of Internal Revenue v. S.C. Johnson And Son, Inc. (309 SCRA 87) E. Escape from Taxation 1. Shifting of tax burden a, Ways of Shifting the tax burden b. Taxes that can be shifted c. Meaning of impact and incidence of taxation 2. Tax avoidance Case(s): Delpher Trades Corp. v. IAC (157 SCRA 349) Yutivo v. CTA (1 SCRA 160) 3. Tax evasion Case(s): Republic v. Gonzales (13 SCRA 633) CIR y. Estate of Benigno Toda (438 SCRA 290) 4. Exemption from Taxation a, Meaning of Exemption from Taxation b. Nature of Tax Exemption Case(s): Tolentino v. Sec. of Finance, Ibid. CIR v. PLDT, Ibid. CIR vs. John Gotamco and Sons, Inc., Ibid. . Kinds of tax exemptioni. Express ji, Implied ‘fi, Contractual d. Nature of the power to grant tax exemption e. Rationale/grounds for tax exemption f. Revocation of tax exemption F. Compensation and Set-Off Case(s): Philex Mining Corp. vs. CIR, Ibid. G. Taxpayer’s Suit Case(s): Pascual v. Sec. of Public Works, Ibid. Lozada and Igot v. Comelec (120 SCRA 337) Gonzales v. Marcos (65 SCRA 624) H. Compromises Sec. 204, NIRC Sec. 709, Sec. 2316, TCC 1. Tax Amnesty 1. Definition 2. Distinguished from tax exemption CONSTRUCTION AND INTERPRETATION OF TAX LAWS (de Leon, pp. 81-99) AL Tax Laws 1, General Rule 2, Exception B. Tax Exemption and Exclusion 1. General Rule Case(s): CIR v. YMCA (298 SCRA 83) 2. Exceptions Case(s): Manila International Airport Authority v.CA, Ibid.C. BIR Rules and Regulations (Secs. 4 and 244 of the NIRC) 1 ‘Administrative rules and regulations are intended to carry out not to modify the law. Case(s): CIR v. C.A., R.O.H Auto Prodcuts Phil., Inc., et.al. (240 SCRA 368) Interpretative regulations need not be published and neither is hearing required if intended only to clarify statutory provisions for proper observance. Case(s): IR vs. CA and Fortune Tobacco, Ibid. There is requirement of notice and hearing when promulgated rules substantially add to or increase the burden of those governed. Case(s): CIR vs. CA and Fortune Tobacco, Ibid. Tax regulations differentiated: Interpretative v. Legislative Case(s): BPI Leasing Corporation v. CA, CTA and CIR (416 SCRA 4) BIR Rulings and circulars, rules and regulations promulgated by the Commissioner of Internal Revenue would have no retroactive application if to so apply them would be prejudicial to the taxpayers. Sec. 246, NIRC Case(s): CIR v. Mega General Merchandising Corp. (166 SCRA 166) CIR v. Burroughs (142 SCRA 324) CIR v. Benguet Corporation (463 SCRA 28) Any revocation, modification, reversal of such rules/regulations including rulings of the CIR shall not be given retroactive effect except in case of rulings (a) where taxpayer deliberately misstates or omits material facts; (b) where facts subsequently gathered materially differ from the facts on which rulings are based; and (c) where taxpayer acted in bad faith. D. Penal Provisions of Tax LawsPart 2: Income Taxation References: 1, Mamalateo, Victorino C., Philippine Income Tax, Manila: Rex Bookstore, Inc. 2010 Edition. 2. National Internal Revenue Code of 1997. Mandaluyong City: National Book Store, July 2009 Edition. INTRODUCTION (Mamalateo, pp. 1-10) ‘A. Income Tax Systems 1. Global Tax System 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 tax Comprehensive 4, Semi-schedular or semi-global tax system C. Criteria in Imposing Philippine Income tax 1, Citizenship principle 2. Residence principle 3. Source principle D. Types of Philippine Income tax E, Taxable Period (Mamalateo, pp. 345-350) 1. Calendar Year Sec. 22 (P), NIRC 2. Fiscal Year Sec. 22 (Q), NIRC ulSecs. 43, 44, 46 NIRC 3. Short Period Sec. 47, NIRC ll, CONCEPT OF INCOME A. Income Tax Defined Madrigal v. Rafferty (38 Phil 414) Fisher v. Trinidad (43 Phil 973) B. When is income taxable? (Mamalateo, pp. 11-12) 1. Existence of income 2. Realization of income a. Tests of Realization Fisher v. Trinidad, Ibid. b. Actual v. constructive receipt Limpan v. CIR (17 SCRA 703) Republic v. dela Rama (18 SCRA 861) 3. Recognition of Income 4, Methods of accounting for taxable income and deductible expenses (Mamalateo, pp. 335-345; pp. 350-354) . Cash v. accrual method of accounting Secs. 43 - 45, NIRC Sec. 51- 53 Rev. Regs. No. 2 b. Installment v. deferred payment v. percentage of completion (in long term contracts) Sec. 49, NIRC Sec. 48, NIRC Sec. 44, RR2 c. Distinction between tax accounting and financial accounting C. Tests in determining income (Mamalateo, pp. 79-81) 4, Realization TestEisner v. Macomber (252 US 189) Fisher v. Trinidad, Ibid. 2. Claim of Right doctrine or Doctrine of ownership, command, or control 3. Economic benefit test / Doctrine of proprietary interest 4, Severance Test Ill, KINDS OF TAXPAYERS A, Individual Taxpayers (Mamalateo, pp. 21-37) 4. Citizens a. Resident citizens (RC) Sec. 23 (A), NIRC Sec. 22 (A) (1) (a) b, Non-resident citizens (NRC) Sec. 22 (E), NIRC Sec. 23 (C), NIRC Sec. 24 (A) (1) (b), NIRC 2. Aliens a. Resident aliens (RA) Sec. 22 (F), NIRC b. Non-resident aliens (NRA) i, NRA engaged in trade or business in the Philippines (NRA-ETB) 180- day test Sec. 25 (A) (1), NIRC ii. NRA not engaged in trade or business in the Philippines (NRA-NETB) Sec. 25 (B), NIRC ¢. Special Class of Individual Employees i. Aliens employed by RHQs, AHQs, ROHQs of MNC’s Sec. 22 (DD); (EE), NIRC Sec. 25 (C), NIRC fi, Aliens employed by OBUsSec. 25 (D), NIRC ili, Aliens employed by petroleum service contractors, subcontractors Sec. 25, NIRC 3, Estates and Trusts 4. Co-ownerships 5, General Professional Partnerships Sec. 26, NIRC B. Corporations (Mamalateo, pp. 37-59) 1. Domestic corporation, defined Sec. 22 (B); (C), NIRC 2. Taxable Partnership or Business Partnership 3. Joint Venture (JV) a. Exempt JV b. Taxable JV 4, Foreign Corporations a. Resident foreign corporation (RFC) Sec.22 (H), NIRC b. Non-resident foreign corporation Sec. 22 (I), NIRC c. Subsidiary v. branch of a foreign corporation IV. GROSS INCOME (Mamalateo, pp. 60-148) A Gross Income Defined Sec. 32 (A), NIRC Gross Income v. Net Income v. Taxable Income Sec. 31, NIRC Sources of Income Subject to Taxiii, 3. Compensation income Sec. 32(A) (1), NIRC Sec. 2.78 RR 2-98 Convenience of the Employer Rule Collector v. Henderson (1 SCRA 649) Fringe Benefits Sec. 33, NIRC Revenue Regs. 3-98 Bonuses, 13" month pay and other benefits unless exempt under Sec. 32 (B), NIRC Excluded: De Minimis Benefits Revenue Regs. 3-98 Revenue Regs. 10-00 Revenue Regs. 5-08 Revenue Regs. 10-08 Income from Business Sec. 32 (A), NIRC Professional Income Income from dealings in property (Mamalateo, pp. 302 - 333) Sec. 32 (A, 3) NIRC Rodriguez v. Collector (28 SCRA 1119) Gonzales v. CTA (14 SCRA 71) Gutierrez v. CTA (101 Phil 173) §. Type of properties aa. ordinary assets bb. capital assets © What is capital asset Sec. 39 (A) (1), NIRC Rev. Regs. 07-03 * Distinction between ordinary asset and capital asset = Long term capital gain v. short term capital gain Sec. 39 (B), NIRC 15‘Types of gains from dealings in property aa. bb. cc. Ordinary income v. capital gain Sec. 39, NIRC and Sec. 22 (Z), NIRC ‘Actual v. presumed gain Sec. 6 (E), NIRC Sec. 24(D), NIRC Sec. 27(D)(5), NIRC Sec. 100, NIRC Net capital gain (loss) Sec. 39 (A), NIRC Tuason v. Lingad (58 SCRA 170) Ferrer v. Collector (5 SCRA 1022) Calasanz v. Commissioner (144 SCRA 664) Gonzales v. CTA, Ibid. Special rules pertaining to incame/toss from dealings in property aa. Computation of the amount of the gain (loss) Sec. 40 (A), NIRC * Basis of the property sold Sec. 40 (B), NIRC * Basis of property exchanged in corporate readjustment Sec. 40 (C) (5), NIRC + Recognition of gain/loss in exchange of property General rule Sec. 40 (C, 1), NIRC Exceptions: * Where no gain/loss shall be recognized Sec. 40 (C)(2), NIRC Meaning of tax-free exchange! merger/consolidation/ de facto merger Sec. 40 (C) (6), NIRC Com. v. Rufino (148 SCRA 42) Revenue Memo Order 26-92 16Rev. Regs, 18-2001 Rev. Memorandum Ruling No. 01-01 Rev. Memorandum Ruling No, 01-02 Rev. Memorandum Order No. 32-2001 Rev. Memorandum Order No. 17-2002 Rev. Memorandum Ruling No. 2-2002 * Transaction where gain is recognized but not the loss Exchange not solely in kind Sec. 40 (C)(3), NIRC Sec. 40 (C)(4), NIRC Wash sales/compared with short selling Sec. 38, NIRC Sec. 39°(F) (1), NIRC Transactions between related taxpayers Sec. 36 (8) legal transactions Sec. 96, RR2 * Gains and losses attributable to the failure to exercise privileges or options to buy/sell property Sec. 39 (F) (2), NIRC * Percentage of gain or loss taken into account (note: for individuals only); holding period rule Sec. 39 (B), NIRC bb. Income tax treatment of capital loss © Capital loss limitation rule (applicable to both corporations and individuals) Sec. 39 (C), NIRC '* Net loss Carry-Over Rule (applicable only to individuals) Sec. 39 (D), NIRC iv. Income from dealings in capital asset subject to special rules aa. Dealings in real property situated in the Philippines 7Rey. Regs. 07-03 Rev. Regs. 13-99 Rev. Regs. 8-98 RMC 45-02 bb. Dealings in shares of stock of Philippine corporations Definition of “shares” Sec. 22 (L), NIRC Sec. 24(C), NIRC Sec. 27(D)(2), NIRC Sec. 28(A)(7)(c), NIRC Sec. 127, NIRC Sec. 55, RR 2 Rev. Regs. 6-2008 Rev. Regs. 6-2013 RMC 73-07 ‘* shares listed and traded in the stock exchange ‘* shares not listed and traded in the stock exchange cc. Other capital assets v. Sale of Principal Residence Sec. 24 (D) (2), NIRC Rev. Regs. No. 13-99 Rev. Regs. No. 14-2000 5. Passive investment income a. Interest income Sec. 32(A)(4) NIRC Sec. 24(B)(1) NIRC Sec. 22(Y) NIRC Sec. 22(FF) NIRC Sec. 28(A)(4), NIRC Sec. 27(D)(3), NIRC Sec. 28 (B) (5) (a), NIRC Sec. 57 RR2 Rev. Regs. 10-98 b. Dividend income i. Dividends, defined fi. Kinds of dividends aa. Cash dividend bb. Stock dividend cc. Property dividenddd. Liquidating dividend Sec. 32 (A) (7), NIRC Sec. 24 (B) (2), NIRC Sec. 25 (A) (2); (B), NIRC Sec. 28 (A) (7) (d) Sec. 28 (B) (5) (a), NIRC Sec. 73, NIRC Commissioner v. Wander Phils. (160 SCRA 573) ce. Disguised dividend Revenue Memo No. 31-90 Secs, 250-253, 58, 71 RR2 CIR v. Manning (66 SCRA 14) Republic v. de la Rama (18 SCRA 861) c. Royalty income Sec. 32(A)(6), NIRC Sec. 24 (B) (1), NIRC Sec. 25 (A) (2), NIRC Sec. 27 (D) (1), NIRC Sec. 28 (A) (7), NIRC Sec. 28 (B) (I), NIRC Sec. 42(A)(4), NIRC RMC 44-05 RMC 77-2003 d, Rental income Sec. 32 (A)(5) NIRC Sec. 28 (B) (2); (3); (4), NIRC Sec. 74, 79, 58 RR 2 Limpan v. CIR (17 SCRA 703) |. Lease of Personal Property ji, Lease of real property ili, Tax Treatment of aa. Leasehold improvements by lessee bb. VAT added to rental/paid by the lessee cc, Advance rental 6. Annuities/Proceeds from life insurance/other types of insurance Sec. 32(A)(8), NIRC Sec. 48 RR 27. Prizes and awards Sec. 32(A)(9), NIRC 8, Pensions/retirement benefits/separation pay Sec. 32(A)(10), NIRC 9. Income from any source whatever a. Forgiveness of indebtedness Sec. 30, Rev. Regs. 2 b, Recovery of accounts previously written off Sec. 34(E)(1), NIRC c. Receipt of tax refunds or credit Sec. 34(C)(1), NIRC d. Income from whatever source D. Situs/Sources of Income (Mamalateo, pp. 64-74) 4. Meaning of situs of income 2. Classification of income as to source Sec. 42, NIRC Sec. 152-165, RR2 a. Gross or taxable income from sources within the Philippines Sec. 42(A), (B), NIRC Sec. 28(A)(3)(a)(b), NIRC Commissioner v. BOAC, Ibid. NDC v. Commissioner (151 SCRA 472), Ibid. Howden v. Collector (13 SCRA 601), Ibid. b. Gross or taxable income from sources without the Phitippines Sec. 42 (C) and (D), NIRC c. Income partly within/ partly without the Philippines Sec. 42 (E), NIRC 3, Source Rules in determining income from within and without a. Interests - residence of debtor b. Dividends - residence of corporation paying dividend c. Services - place of performance of service 4. Rentals and royalties - location of property or interest in such property e. Sale of real property - location of real property f. Sale of personal property - place of sale/title passage rule g. Shares of stock of domestic corporation - place of incorporation of the corporation whose shares are sold 20EXCLUSIONS FROM GROSS INCOME AND EXEMPT CORPORATIONS A. Exclusions From Gross Income (Mamalateo, pp. 149-170) 1. Rationale of the exclusions 2. Taxpayers who may avail of the exclusions 3. Exclusions distinguished from deductions and tax credit 4, Under the Constitution ‘a. Income derived by the government or its political subdivision from the exercise of any essential governmental function Sec. 32 (B)(7) (a); (b), NIRC Sec. 4 (3) Art. XIV Constitution Sec. 4 (4) Art. XIV, Constitution Sec. 28 (3) Art. VI, Constitution 5. Under the Tax Code a, Proceeds of Life Insurance Policies Sec. 32(8)(1), NIRC Sec. 62 RR2Z Return of premium paid Sec. 32(B)(2), NIRC Sec. 48 RR 2 c. Value of property acquired by gift, bequest, devise or descent Sec. 32 (B) (3), NIRC d. Amounts received through accident or health insurance Sec. 32(B)(4), NIRC Sec. 63 RRZ e. Income exempt under tax treaty Sec. 32(B)(5), NIRC f. Retirement benefits, pensions, gratuities, etc. Sec. 32(B)(6), NIRC ds Retirement benefits received under R.A. No. 7641, 4917 and Sec. 60(B) of Tax Code ii, Separation pay for causes beyond control of employee iii. Retirement benefits from foreign government agencies iv, Payments under US Veterans Administration g. Certain passive income of foreign governments from their Philippine investments Section 32 (B)(7) (a) NIRC as amended by RA 8424 Com. V. Mitsubishi Metal (181 SCRA 214)h. Winnings/Prizes |. Philippine Charity Sweepstakes and lotto winnings Sec. 24 (B)(1), NIRC ii. Prizes and awards in sports competition Sec. 32 (B)(7) (d), NIRC Reference: RA 7549 fii, Prizes and awards / religious / charitable / scientific / artistic / literary Sec. 32 (B)(7)(c) - Requisites for exclusion i. Gains from sale of Bonds, Debentures and Other Certificate of Indebtedness Sec. 32 (B) (7) (g), NIRC j. Gains from redemption of shares in Mutual Fund Sec. 32 (B) (7)(h), NIRC k. Interest income from long term deposit or investment Sec. 22 (FF), NIRC Sec. 24 (B)(1), NIRC Sec. 25 (A)(2), NIRC Note: Exemption applies only to individual taxpayers except non- resident alien not engaged in trade or business. They are taxed at 25%, For corporate taxpayers no exemption L. Gain derived from buying and selling shares of stocks classified as capital asset listed and traded in the local exchange excluded/exempt from income tax but subject to percentage tax Sec. 127, NIRC Rev. Regs. 6-08 6. Under a Tax Treaty 7. Under special laws B. Exempt Corporations (Mamalateo, pp. 170-177) Sec. 30, NIRC Sec. 27 (C), NIRC RMC 76-2003 Hospital de San Juan De Dios v. Pasay City (16 SCRA 226) Vi, COSTS, DEDUCTIONS AND PERSONAL EXEMPTIONS (Mamalateo, pp. 178-277) ‘A. Deductions from Gross Income, General Rules 1, Deductions construed strictly against taxpayers claiming it 22. Deductions must be paid or incurred in connection with the taxpayer's trade, business or profession 3. Deductions must be supported by adequate receipts or invoices (except for optional standard deduction) B, Return of Capital (Cost of Sales/Services) 1. Sale of inventory of goods by manufacturers and dealers of properties 2. Sale of stock in trade by a real estate dealer and dealer in securities 3. Sale of Services C. Itemized Deductions 1. Business expenses (Sec. 65, RR 2) a. Requisites for Deductibility > Nature: Ordinary and necessary GIR v. General Foods (Phils.), Inc. (401 SCRA 545) > Paid and incurred during taxable year GIR vs. Isabela Cultural Corporation (515 SCRA 556) 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 FBT which tax should have been paid Sec. 34(A), NIRC Secs. 70-73 RRZ Kuenzle & Streiff, Inc. v. CIR (16 Phil 670) C.M. Hoskins v. Commissioner (30 SCRA 434) Aguinaldo industries v. Com. (112 SCRA 33) c. Traveling/Transportation expenses (Sec. 66 RR2; RR 3-98) d. Cost of materials (Sec. 67, RR 2) e. Rentals and/or other payments for use or possession of property (Sec. 74, RR 2) f. Repairs and Maintenance (Sec. 68, RR 2) Com. V. Soriano Cia (38 SCRA 67) Gutierrez v. Collector (14 SCRA 33) g. Expenses under lease agreements (Sec. 74, RR 2) h. Expenses for professionals (Sec. 69, RR 2) i. Entertainment expenses (RR 3-98) Rev. Regs. 10-2002 (Ceilings for entertainment, amusement and recreational expenses (July 10, 2002) j. Political campaign expenses k. Training Expenses 232. Interest Sec. 34 (B), NIRC Rev. Regs. 13-00 Secs. 78-79 RR2 a. Requisites for deductibility Com. v. Prieto (109 Phil 592) Kuenzle v. Coll (28 SCRA 365) b. Non-deductible interest expense c. Interest subject to special rules Sec. 34(B)(2), NIRC aa, Interest paid in advance bb. Interest periodically amortized Sec. 34(B)(3), NIRC cc. Interest expense incurred to acquire property for use in trade/business/ profession 3. Taxes Sec. 34(C), NIRC RAC 13-80 Sec. 80-83, RR2 a, Requisites for deductibility b. Non-deductible taxes ¢. Treatments of surcharges/interests/fines for delinquency d. Treatment of special assessment e. Tax Credit v. Deduction RA 7432 RA 9257 CIR v. Lednicky, et al. (11 SCRA 603) CIR v. Bicolandia Drug Corp. (496 SCRA 176) Carlos Superdrug Corp. et. al. v. DSWD (526 SCRA 130) 4, Losses Sec. 34 (D), NIRC Sec. 93-101 and 104, RR2 Rev. Regs. 12-77 Rey. Regs. 14-2001 Rev. Regs. 6-2008 Plaridei Security v. Com (21 SCRA 1187) Com. y. Priscilla Estate (11 SCRA 130) Fernandez Hermanos v. Com (29 SCRA 552)a, Requisites for deductibility b. Other types of losses i Capital losses ii, Securities becoming worthless iti. Shrinkage in value of stocks iv. Losses from wash sales of stocks or securities v. Losses from short sales vi. Wagering losses vii. NOLCO 5. Bad Debts Sec. 34(E), NIRC Secs. 102-103, RR 2 Rey. Regs. 25-2002; Rev. Regs. 5-99 a. Definition b. Requisites for deductibility Collector v. Goodrich (21 SCRA 1336) PRC v. CA (256 SCRA 667) 6, Depreciation Sec. 34(F), NIRC Sec. 110-115, RR2 a. Definition b. Requisites for deductibility c. Methods of computing depreciation allowance i, Straight-tine method fi. Declining-balance method iii, Sum-of-the-years-digit method fv. Working-hours method Vv. Units of production method Basilan v. Com (21 SCRA 17) 7. Depletion Sec. 34(G), NIRC Sec. 3, Rev. Regs. 5-76 a. Definition b. Requisites for deductibility8. Charitable and Other Contributions Sec. 34(H), NIRC Rev. Regs. 13-98 RMC No, 88-07 EO 720 dated 11 April 2008 a. Definition b. Requisites for deductibility Roxas v. CTA (23 SCRA 276) 9. Resource and Development Sec. 34 (1), NIRC 10. Contributions to Pension Trusts Sec, 34(J), NIRC a. Definition b. — Requisites for deductibility D. Optional standard deduction Sec. 34(L), NIRC Rev. Regs. 16-08 Rev, Regs. 2-2010 The following may claim OSD in lieu of itemized deductions a. Individuals f Resident Citizen Non-resident citizen iff, Resident Alien iv. Estates and Trusts b. Corporations E. Personal and additional exemption 1. Basic personal exemption 2. Additional exemption for taxpayer with dependents 3. Status-at-the-end-of-the-year rule R.A. 9504 (Minimum Wage Earner Law) Rev. Regs. 10-2008 F. Items not deductible 1. Personal, living or family expenses 262. Amount paid for new buildings or for permanent improvements (Capital expenditures) 3. Amount expended in restoring property 4, Premiums paid on life insurance policy covering life or any other officer or employee financially interested 5, Interest expense, bad debt and losses from sales of property between related parties Sec. 36 NIRC Vil, TAX BASE AND TAX RATES (Mamalateo, pp. 278-300) ‘A. Computation of Tax ‘Tax payable by a taxpayer is computed as follows: Applicable Tax Base Multiplied by: Applicable Tax Rate Income Tax Less: Any Tax Credit (either creditable withholding tax or foreign taxes paid) Tax Payable B. Tax Base 1, Taxable income a. Compensation Income, Business and Professional Income, Capital gain not subject to Final Tax, Passive income not subject to final tax and other ‘income LESS b. Deductions c. Exemptions (in case of individuals) 2, Gross Income a. Under NIRC - Generally, passive income subject to final tax b. Under special laws - PEZA, SBMA registered entities 3. Highest between Gross selling price, fair market value per tax declaration and zonal value per BIR in case of capital asset Section 6(E), NIRC 4, Gain from sale of Real property 5. Net capital gain - in case of sale of shares not listed and traded in the stock exchangeC. Tax Rates 1. Individuals a, Graduated income tax rates on taxable income b. Capital gains - Flat rate i. on sales of shares of stock of domestic corporation (except dealers in securities aa. % of 1% Gross selting price - listed shares bb. 5% for 1" 100,000 and 10% in excess of 100,000 of Net Capital Gains - shares not listed and exchanged in stock exchange on sale of real property classified as capital asset by individual - Flat rate of 6% c. Passive income subject to final tax at preferential rates 2. Corporations a. Domestic i. Regular of normal income tax rate - flat rate (30% starting 2009) ii. MCIT Sec, 27, NIRC Rev. Regs. 9-98 Rev. Regs. 12-07 RMC 30-08 iii, Improperly Accumulated Earnings Tax (IAET) (Mamalateo, pp. 463-470) Sec. 29, NIRC Rev. Regs. 2-2001 Cyanamid Phils. v. CA (322 SCRA 639) iv. Domestic corporations entitled to preferential tax rates aa. Proprietary educational institutions - 10% of taxable income Sec. 27 (B), NIRC bb. Foreign Currency deposit unit of local universal or commercial bank - 10% final tax Sec. 27 (D) (3), NIRC cc. Firms taxed under special income tax regimes (e.g., registered entities under PEZA law (RA 7916) and Bases Conversion and Dev’t. Act (RA 7227) - 5% final tax on gross income v. Resident Foreign Corporations (RFC) 10% of net taxable income from sources within the aa. General Rule: Philippines Sec. 22 (H), NIRC;Sec. 28 (A), NIRC bb. Exempt entities 1. Regional or Area Headquarters Sec. 22 (DD), NIRC Sec. 28 (A) (6) (c), NIRC 2. Representative Office cc. RFCs subject to preferential tax rates 1. International Carrier - 2 %4% on Gross Philippine billings Sec. 28 (A) (3) (a), NIRC R.A. 10378 2. Offshore banking units (OBUs) - 10% final tax Sec. 28 (A) (4), NIRC 3. Regional Operating Headquarters - 10% net taxable income Sec. 28 (A) (6) (b), NIRC 4, Foreign currency deposit unit in Philippines of foreign bank - 10% final tax Sec. 28 (A) (7) (b), NIRC 5, Branch of foreign corp. registered with PEZA, SBMA, CDA, etc. ~ 5% final tax on gross income 6. Qualified Service Contractor and sub-contractor engaged in petroleum operations in the Philippines ~ 8% of gross income in lieu of any and all local and rational taxes P.D. 87 P.D, 1354 dd, Branch profits remittance tax (BPRT) Sec. 28 (A) (5), NIRC 1. Entities exempt from BPRT: PEZA, SBMA-registered entities 2. Not deemed remittance of profit: remittable profit transferred to Philippine Corporation; remittance of assigned capital 3. Deemed Profit remittance Review Memorandum Ruling No. 1-2001 Marubeni v. CIR (177 SCRA 500) vi. Non-resident Foreign Corporations (NRFC) 29‘aa. General Rule: 30% of gross income Sec. 22 (1), NIRC Sec. 28 (B), NIRC CIR v. Procter and Gamble (204 SCRA 377; 160 SCRA 560) bb. NRFCs subject to preferential tax rates 1. Nonresident Cinematographic Film owner, lessor or distributor - 25% of Gross Income Sec, 28 (B) (2), NIRC 2. Nonresident owner or lessor of Vessels chartered of Philippine nationals - 4.5% of gross rentals or charter fees Sec. 28 (B) (3), NIRC 3. Nonresident owner on Lessor of Aircraft Machineries and other Equipment - 7.5% of gross rentals or fees Sec. 28 (B) (4), NIRC Vill, RETURNS AND PAYMENT OF TAX (Mamalateo, pp. 354 - 379) ‘A. Individual return (Sec. 51, Sec. 56, Sec. 74 NIRC) Who are required to file Those not required to file Where to file When to file Where to pay Capital gains on shares of stocks and real estate Quarterly declaration of income tax (Sec. 74, NIRC) Moos ens B. Corporate regular returns (Sec. 52, Sec. 53, Sec. 56, NIRC) 1. Quarterly income tax (Sec. 75, NIRC) 2. Final adjustment return (Sec. 76, NIRC) 3. When to file (Sec. 77 (B), NIRC) 4, Where to file (Sec. 77 (A), NIRC) 5. When to pay (Sec. 77 (C), NIRC) 6. Capital gains on shares of stock 307. Return of corporations contemplating dissolution / reorganization Rev. Regs. 9-01 Rev. Regs. 02-02 Rev. Regs. 09-02 Rev. Regs. 16-02 Rev. Regs. 26-02 Rev. Regs. 05-04 IX, WITHHOLDING TAX (Mamalateo, pp. 380-440) ‘A. Final withholding tax at source (Sec. 57, NIRC) B. Creditable Withholding Tax 1. Expanded withholding tax 2. Withholding tax on compensation Rev. Regs, 1-98 Rey. Regs.2-98 Rev. Regs. 7-95 RMC 1-98 Rev. Regs. 6-01 Rev. Regs. 12-01 Rev. Regs. 03-02 Rev. Regs. 19-02 Rev. Regs. 36-2003 C. Fringe benefits tax Rev. Regs. 2-98 Rev. Regs. 3-98 TS emaparminten 31