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Taxation 1 Reviewer Dimaampao Lecture No
Taxation 1 Reviewer Dimaampao Lecture No
Taxation 1 Reviewer Dimaampao Lecture No
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Title I 5/23/2017 8:50:00 PM
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Provides for uniform tax rules / tax rates
Income Tax of Corporations (Secs 27 & 28) - generally does not
categorize/classify income
Imposes uniform corporate tax rates
Covers:
i. Domestic Corporations (Sec 27)
ii. Resident Foreign Corporations (Sec. 28A)
iii. Non-resident Foreign Corporations (Sec. 28B)
As amended by RA 9337: corporate rate = 30%
effective Jan 1, 2009
Distinguish: Schedular Tax System v. Global Tax System (p.15 UP Bar Ops
Reviewer)
As to… Schedular Global
Tax Treatment Different tax treatment / Uniform tax treatment /
rules rules
Classification of Income Categorizes / classifies Does not generally classify /
income categorize income
Tax Rates Imposes different tax rates Imposes uniform tax rates
Applicability Applies to individual income Applies to corporate income
taxation taxation
What is the method of income taxation that allows deductions and grants personal
exemptions? (Allows Taxpayers to claim allowable deductions (Sec 34) & Grants
personal exemptions (Sec 35)) (2000 Q.10)
A: Net income taxation - characteristics
o Allows taxpayers to claim deductions and personal exemptions
o The tax base / the basis of the tax rates is net / taxable income
T/F: Our tax system does not use the gross income taxation
Under exceptional cases, we have adopted gross income taxation w/c applies
to:
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o Non-resident aliens not ETB (Sec. 25: B, C, E)
o Non-resident foreign corporations or NRFCs (Sec 28, B 1, 2, 3 & 4)
What is meant / discuss gross income taxation / what is gross income for purposes of
income tax? (Sec. 32A: enumerate 11 different kinds of income; p. 11 Dimaampao
IT)
Gross income does not allow deductions and grants no exemptions.
The tax base is gross income
Distinction between gross income taxation and net income taxation: (p. 13 Dimaampao
IT)
As to… Gross Income Taxation Net Income Taxation
Taxpayer’s claim for Allows no deductions, Allows deductions, grants
deduction / exemption grants no exemptions exemptions
Tax base Gross income Net / taxable income
Applicability 1. NRA not ETB Applies to the following
2. NRFCs individual & corporate
taxpayers:
Individual taxpayers
1. RC: Resident Citizen
2. NRC: Non-resident
Citizen
3. RA: Resident Alien
individual
4. NRA ETB
Corporate taxpayers
1. DC: Domestic
Corporations
2. RFCs: Resident Foreign
Corporations
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o simplifies income tax system
NIT
o Just, fair & reasonable (RA 8424 Sec 2) = equitable relief to taxpayers,
improve levels of disposable income & increase economic activities
Equitable relief = deductions and exemptions
Taxpayers encouraged to engage in income-generating
activities
More revenues to the government
o Minimizes fraud in claiming deductions
Counter-checking by the BIR
Income Situs (Tan v. del Rosario) = Comprehensive income tax situs (RPN)
1. Residence (Sec. 23)
a. Resident citizen
b. Resident alien individual
c. Resident corporation
2. Place / source of income
a. Could only be taxed from sources within:
i. Non-resident citizen (Sec. 23 b & c)
ii. NRA
iii. RA (amendment)
b. Could be taxed from income sources without:
i. RC
ii. DC
Basis: nationality / citizenship
o State-Partnership Theory (Comm v. Liglig) – state shall provide
PRIC: protection, resources, incentives, climate for production of
income
Emanates between the partnership between the State & its
inhabitants
o Protection Theory - Sources of income: PAS - Property, Activity,
Service (British Overseas Airways Corp v. Commissioner)
BOAC was an Offline international airline but due to transfers,
enjoyed protection of Philippine law (place of sale) not
applicable due to modified meaning of GROSS PHILIPPINE
BILLINGS (p.34 UP Bar Ops reviewer)
Origin of passengers (basis of tax) as per Sec 28A3, as
implemented by RR 25-2002
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3. Nationality / citizenship of taxpayer
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If a corporate taxpayer filing tax refund has adopted the fiscal
year period, the deadline for the filing of the final adjustment
corporate tax return is on / before the 15th day of the 4th month
following the close of the fiscal year period. (Sec. 77b)
E.g. accounting period ended on June 30, 2005. The
deadline of the filing of the final adjustment tax return is
on October 15, 2005. The 2yr period / deadline for filing
of claim of refund is on October 15, 2007.
2 Systems
1. Final withholding tax system (Sec 57)
2. Creditable withholding tax system (Sec. 78)
As to… Final withholding tax Creditable withholding
system tax system
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to regular income tax,
not subject to final tax)
3. Winnings – except PCSO
& lotto
4. Interests Income on
Bank deposits
5. Dividends received from
domestic corporations -
If received by a DC or
RFC tax exempt
Received by
individual
taxpayers
Received by
NRFC
6. Share of a partner from
the NIAT of a business
partnership
If received from
a GPP: part of GI
Effect on the Subject Extinguishes taxpayers’ tax Does not extinguish the
Income liability taxpayer’s liability
- need not be reported as - has to be reported as part
part of the gross income of of the gross income of the
the taxpayer taxpayer (thru the ITR)
Filing of IT Return TP is no longer required to Taxpayers are required to
file IT Return if the only file IT returns
sources of income are those
subjected to FWT under
Sec. 57 (Sec. 51A2c)
e.g.
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1. NRA not ETB (Sec. 25
B, C, D, E cf: Sec.
51A2c)
2. NRFCs (Sec. 28B items
1, 2, 3, 4) – explains
the following concept:
Sec. 52F – Every
corporation except
NRFCs are required to
file quarterly corporate
income tax return
Pay as You File System (Sec. 56A1) – payment is done when you file your income tax
1. Individuals and Estates (Sec. 62) – annual payment on or before Apr 15 (Sec 51c1)
2. Corporate – Domestic corporations file their IT quarterly (Secs 75 & 76) qualify
by:
For the 1st, 2nd, and 3rd quarters, it must file the summary of its gross income
and expenses, which shall be reported on a cumulative basis. Thereafter, it
shall file its final adjustment return, showing the entire income for the whole
taxable year.
Rationale for quarterly payment & filing:
o Ensures timeliness of collection of the corporate income tax
o Payment in installment eases burden on domestic corporations
o Improve the liquidity / cash flow of the government (cf: consistent
with Administrative Feasibility)
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3. Theoretical Justice
Any violation of the first 2 principles will not render the law invalid, because
they have no constitutional basis (unlike the principle of theoretical justice)
Determination of the wisdom, expediency, necessity of the tax-measure
belongs to the law-making body of the State
Substituted Filing of Income Tax Return (RR 3-2002) – if an individual taxpayer has
complied with the following conditions, he is no longer required to file income tax return:
1. Only source of income is compensation income (purely compensation income earner)
2. One employer in the Philippines
3. The tax withheld by the employer should be equal or the same as the income tax due
If income tax due is more than tax withheld: required to file ITR
A compensation owner whose annual income is not more than P60K. (RR 3-
2002) mere BIR regulation
o The tax law, however, imposes no limitation (cf: Sec 51A2b)
o BIR Regulations are valid if they are consistent / in harmony with the
tax code
4. Employer must file BIR form 1604 showing tax withheld on employee’s compensation
income
Such tax withheld is tantamount to a subsequent filing of an income tax
return.
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Title II 5/23/2017 8:50:00 PM
Less: PE
IT Payable
Less: PE
IT Payable
RA W/n3 GI Calendar 5-32% Required
Less: AD (Sec Year Progressive (Sec
24A1c) Rates (Sec 51A1c)
Taxable Inc 24A1c)
1 Secs 34 & 35
2 Effective Jan 1, 1998
IT Payable
Less: PE6
IT Payable
Units
2. Regional HQ of
MNCs
3. Employees of
petroleum
contractors/subcon
4 e.g. Mr..., having stayed in the Phils for more than 180 days could only be taxed on
income from sources within…may claim AD & PE, subject to recip, may be taxed for his
income earned during the CY, applying progressive rates, required to file ITR.
5 aggregate stay in the Philippines for more than 180 days (Sec 25A1) – e.g. June 15-Dec
15 = 183 days
6 but may only claim PE subject to the rule on reciprocity (Sec 34)
7 Effective Jan 1, 2009 (RA 9337)
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RFC8 W/n (Sec GI CY/FY Uniform Required
23F) Less: AD Corporate (Sec 52A)
Taxable Inc IT Rate
(Sec 28A1) 30%9
Films
Citizens
3. NR Lessor of Aircraft,
8Tax Code is silent. But there are tests to determine WON a foreign corp is doing
business in the Phils.
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4. Actual specific, commercial transaction consummated in the Phils. Therefore,
mere exporting of goods does not result in ETB, pursuant to RA 7042 Sec 3B.
(Val. Brothers v. GBTL Mfg Corp)
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Requisites for Validity of BIR Regulations
1. Consistent – in harmony with the Tax Code
2. Reasonable
3. Useful & necessary
4. Published in the OG / NGC
- mere interpretive rules should not change / modify the tax code.
Income
1. Gross Compensation Income – compensation for services in whatever form paid,
may include salaries, commissions & similar items (NIRC)
o Gross Compensation income refers to all renumeration for services
rendered or performed by an employee for his employer, arising
under an employer-employee relationship, unless specifically
excluded by the Tax Code (RR 2-98 Sec. 2.78.1)
o Determinative Test: Presence of the employer-employee relationship
(SPDC)
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Selection
Payment - compensation
Dismissal
Control
o Payment made by a contractor to a contractee, in the absence of an ER-EE
relationship is business / trade income
o Payment made to a professional for services rendered, in the absence of
an ER-EE relationship should be taxed as professional income
- Importance (Sec. 34 cf: Sec. 35): Allowable Deductions
o Personal exemptions
o Premiums on life / hospital insurance (Sec 34 m)
P2400/yr
Gross Annual income P250,000
Claimed by spouse who will claim additional AD
- Taxable compensation income is not only limited to payment made in cash;
payment may be made in kind. (Sec 32A1: in whatever form paid)
o Life Insurance premiums on the life of the insurance policy of the EE
o Cancellation / forgiveness of indebtedness
-
2 Tax Implications of Payment made for services rendered (tax implication = tax
effect = tax consequence = tax incidents):
EE: Income Tax (Sec 32A1)
ER: Ordinary, unnecessary Expense (Sec 34A1) – reasonable allowance for salaries
and wages, and other compensation for personal services actual rendered
o How much can be treated as compensation? Reasonable, and FV of
services rendered (Sec 34A1a.i.)
P30K (ER)
P30K compensation income and P20K income derived from whatever
source (EE)
o Claim of Right Doctrine – illegal / unlawful income, profit / gain is subject
to tax
Death Benefit for the EE from the ER (Sec 32B qualifies Sec 32A) – enumerates
exclusions from gross income
o No income there
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Rules on Life Insurance Premiums
o ER:
ER who pays insurance premiums on the LIP of his manager /
supervisor Taxable Fringe Benefit subject to FT (Sec 33B 10)
When insured is a rank & file EE compensation income: in whatever
form paid (Sec 32E.A1)
LIP paid by the taxpayer - May not be claimed as a deductible expense by the
ER if it is designated as the beneficiary (Sec 36A4 Non-deductible items )
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form paid)
ER-Cr Subject to donor’s tax on a Not subject to income tax
EE-Dr direct / indirect donation;
(Sec 32B item 3: donation /
Consideration: Liberality May be claimed as a bad gifts are excluded from GI)
(Donation) debts expense
(Sec 34 e) No more donor’s tax10
Bar Qs
2001 # 1
2003 # 3
10 Abolished by PD 69
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2004 # 5
2007 #
11 asked in 1995
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***Expenses for foreign travel – Requisites / Conditions / Situations under w/c expenses
for foreign travel may not be subject to FBT (RR 3-98):
a. Must be paid / incurred in connection with the business of the ER (business
expense) – e.g. conventions, seminars, business meetings
b. Must be supported by receipts / documents (Substantiation)
c. Exempt only up to $300
d. Cost of airplane ticket:
i. Economic class: exempt
ii. First class: exempt up to 70%
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4,000 (NEW!) Clothing / uniform benefit (increased from P3000 by RR 5-2008,
10-2008)
5,000 Christmas / Anniversary gift (cf: Sec 32 B 7 e – lump sum
limitation of P30K to Christmas bonus / productivity allowance)
10,000 Employees’ achievement award
Medical benefit granted to EEs (cf: P125 limit if granted to
dependents)
No minimum amount Commuted value / monetized of unused VL / SL
(RR 3-98 as amended 1. Govt – exempt from receipt of commuted value of unused
by RR 5-2008, RR 10- VL / SL (no more 10-day rule)
2008) 2. Private – Apply the 10-day rule
VL – unused up to the 10 day VL credits; in excess: taxable
SL – taxable (applying strictissimi juris)
Retiree – exempt from receipt of all monetized VL / SL
benefits (Zialcita case)
Sec 32 (Prof income, Business / Trade Income) cf: Sec 74 – define self-employment
income; what are considered as self-employment income?
1. Business / Trade Income
Is business / trade income the same as gross income from gross sales /
receipts? NO.
Formula:
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Gross sales12/ receipts13:
Less: SD, SRA
Net Sales
Less: CGS & mfg’d/ Cost of Sales
Gross Income from conduct of trade / business
1) Gross income from conduct of trade or business (32.A.2) - to come up with this start with
(2) Gross sales or receipts -. apply to sale of services. Deduct the COST OF INVESTMENT. If
manufacturing, cost of goods sold and manufactured. If merchandising, cost of sales. And also
2. Professional Income
3. Share of a partner from the income of partnership
Gains Derived from Dealings in Property (Sec 32A) / Property Income cf: Secs 39 & 40
Ordinary v. Capital Asset (Memorize Sec 39A1) –
o Ordinary asset – Ordinary assets are limited to the following…
4 Kinds of Ordinary Assets (Expressio unios est exlusio alterius) –
SOUR:
Stock in trade – inventoriable assets (e.g. Mfg)
o Raw materials
o Finished Goods
o Work-in-process Goods
Ordinary course of trade / business – property primarily held for
sale to customers in the ordinary course of trade / business
(e.g. Real Estate dealers)
Used in trade / business – depreciable assets used in trade /
business (e.g. machinery, furniture / fixture in Mfg / Service)
Real Property used in trade / business – if not, it will be a
capital asset
o Capital assets – property held by the TP WON connected to his trade /
business but does not include SOUR (defined by way of exclusion)
Exercises:
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o All properties held by the TP in connection with his trade / business are
ordinary assets FALSE. The definition of a capital asset includes properties
held by a TP in connection to his trade / business, but not covered by SOUR
E.g. Think other assets in B/S: Accounts receivable, collectibles,
marketable securities, investment in stocks, goodwill in business, other
intangible assets from which extra-ordinary gain will be derived if sold,
etc)
o Capital assets are always capital assets FALSE.
Capital assets may also become ordinary assets in certain situations.
E.g. Real estate assets of a real estate dealer inherited by heirs,
property w/c was formerly not used in business but improved to
be used in business
Property primarily held for sale to customers in the ordinary
course of trade / business – TEST: Substantial Improvement:
When a property has been substantially improved / actively
sold, it may be a property primarily held for sale in the ordinary
course of business. The improvement is substantial if the
amount of the improvement is double the original cost of the
property. (Calazans v. Commissioner, 144 SCRA 664)
Valuable improvement: The improvement is considered valuable
if there is an unmistakable intention of the TP, not only to
liquidate the estate of the decedent, but also to make the
property saleable to the general public. (Tuazon Jr v. Lingad, 58
SCRA 170)
o Valuable improvements include: (BASIC)
Broker relationship established between the seller
& the broker – did he really engage in the
business of buy & sell?
Area improved – e.g. 7ha of land in the Tuazon
case
Subdivision – were the lots subdivided? And the
subdivided lots SOLD to the general public?
Improvement – there must be an unmistakable
intention of making the lots attractive to the
general public
Continuity of the business
o Conversely, ordinary assets may also be converted into capital assets.
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o Factors to consider when an ordinary asset may still be considered as
an ordinary asset (RR 7-2003) FENCIA – inconsistent with Sec 39 A1
Failed business of a real estate business (real estate
developer)*
Engaged in R/E business (developer, lessor)
No longer engaged in the business of real estate
Change in business
Involuntary Transfer of Property – may include expropriation or
foreclosure of property
Abandoned, Idle Property
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Period (when Loss 1 yr (only in the succeeding 3 yr period (X: mining
deductible) year) companies – 5 yrs)
Net Capital Loss (definition in Sec 39A3) - the excess of the capital loss over capital
gain. (if the capital loss is more than the capital gain)
Statute of Partial Exemption - Long-term capital asset which may result in the
reduction of capital gain (held for more than 12 months)
How do you construe provisions of the Tax Code re: capital transactions?
o A: Strictly construed against taxpayer holding the capital asset
(partakes the nature of exemptions. Therefore strictissimi juris)
Not all capital transactions are covered / subject to Special Rules, but are subject to
other certain special rules (Sec 24, 25, 26, 27):
1. Sale of shares of stock – considered as a capital transaction (applies to individual &
corporate taxpayers alike)
Listed – considered as capital asset (Title V, Sec 127a): ½ of 1% of the gross
selling price (GSP)
Not listed – considered as income tax (FIT)
o P100K & below - 5% (before: 10%)
o Any amount in excess of P100K – 10% (before: 20%)
2. (Sec 24D vs Sec 27D sec 5)
Sale / disposition of real Sec 24D Sec 27D5
property not used in trade /
business
Applicability Individual Taxpayers Domestic Corporations
Coverage Real Property (except Land and building
machinery – cf: Sec 199,
RA 716014)
Tax Base Higher amount between: GSP & zonal value
Tax Rate 6% (before 5%)
14
Sec 199 of RA 7160 (LGC) – amplified definition of machinery in the NCC: Machinery –
tend to meet the needs of the business of the owner
1. Whether permanently attached / temporarily attached
2. Must be actually, directly and exclusively used to meet the needs of a particular
business / authority e.g. the business of mining, agricultural, other business
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Option of applying tax rate Option granted to the No option granted to
individual seller domestic corporations
If the buyer is the gov’t –
buyer may apply
progressive rates of 5-32%
Tax Avoidance Scheme Tax avoidance Scheme in
Sec 24D2: Principal
Residence is the subject of
sale
5 Conditions for Exemption under Sec 24D2 (1-4) and RR17-03 (5):
1. Proceeds of the sale must be used to construct / purchase a new principal residence
Dwelling characterized by the element of permanency: animus revertendi (RR
13-99)
2. 30-day notice to the BIR
3. Comply with the 18th month period – within which to construct / purchase a new
principal residence
4. 10 yr limitation – can only be availed of once every 10yrs
5. RDO & authorized agent bank should execute an ESCROW AGREEMENT with the
seller
the 6% CGT should be deposited under the ESCROW ACCOUNT
within 30 days from the lapse of the 18th month period, the seller could
withdraw the amount.
Presumptive Gain Principle (presumed gain) a.k.a. Gain by Legal Fiction (Sec
24D1) – even if the seller incurred a loss, he can still be made to pay the 6% CGT
remember: the tax base is the higher of the GSP / zonal value; cost not
deductible
applies only to sale of real property considered as capital asset; does not take
into account the costs / loss sustained by the seller because as far as the law
is concerned, there is a presumption that the seller acquired gain
exception to the rule that cost is allowed as deduction to the amount realized
(GR: Formula in Sec 40A)
Formula in Determining Taxable Gain from Deductible Loss from Sale of an Asset /
Property (Sec. 40A)
Selling Price / Amount Received or Realized
Less: Cost / Adjusted Basis - (determined by mode of acquisition)
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Taxable Gain / Deductible Loss
How did you acquire the property that you disposed of? (to determine Cost / Adjusted
Basis): PIDI
Purchase (it’s really the cost)
Inheritance – FMV of property at time of death of decedent
Donation – FMV of property at time of donation (same basis for the donor)
Insufficient / inadequate Consideration – same basis in the hands of the 1st
transferor of the property
o If property was acquired way below its FMV
Alternative Tax Treatment: No Gain / Loss Recognized (Sec 40C2, an exeption to Sec
40A) – gain from initial sale is tax-exempt, but the subsequent sale is taxable
Exempt exchanges of property, shares of stock and securities
Situations covered:
o In accordance with a plan of merger / consolidation =another form of
tax-avoidance!
o Corporate control (Sec 40C6c) – 51% (same definition as corporate
control under the Corpo Code) acquired by 5 people (max: a person,
alone or together with others, not exceeding 4 persons in Sec 40C2
last paragraph)
Transactions solely in kind: no cash given
Property for stock
Stock for Stock
Security for Stock
Effect: Gain = tax-exempt; loss = non-
deductible
Transaction not solely in kind - If additional cash is given
Effect: Gain = recognized; loss = not recognized
Merger / consolidation includes the ordinary meaning of merger
/ consolidation and expanded to cover the acquisition / transfer
of all assets in exchange solely for shares of stock (Sec 40C6b)
even if no PLAN of merger/consolidation
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3. Exchange of property/ shares of stock / securities in line with a plan of merger /
consolidation
4. Exchange of property/ shares of stock / securities by maximum of 5 people to gain
control
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Loss Not deductible Treated as capital loss,
which is deductible from
capital gain
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5. Interest income from FCDA system – same whether individual / corporate taxpayer
If depositor is a non-resident - exempt
If depositors is a resident – non-exempt (7.5%)
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Domestic Tax-exempt (Sec
Corporation 27D)
RFC Tax-exempt (Sec
28Ad)
NRFC FIT: 15% (Sec.
28B5b)
FC: Any
Income derived
from sources w/n =
at least 50% of the
NI must be derived
from Phil sources for
the last 3 preceding
taxable yrs (Sec
42A2b)
Stock tax exempt
rationale: no flow
of wealth so no
realized gain:
Transfer from
surplus account to
capital (Sec 73Bb)
Exeption re: Redemption of Shares of stock – may or may not result in taxable stock
dividend
Source: original capital investment / initial capital subscription – redemption does not
result in a taxable gain, as it is merely a return on capital
Source: stock dividend declarations – taxable since it may result in a flow of wealth, in
such time and manner essentially equivalent to the declaration of taxable dividend
There has to be flow of wealth so stock redemption may result into taxable income.
(Commissioner v. Andres Soriano Corp 301 SCRA 152)
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Pennsylvania view: Taxable in accord with Art 566 of the NCC: Usufructruary shall be
entitled to all natural, industrial & civil fruits of the usufruct. Stock dividends are fruits
of the thing in usufruct.
(Basrach v. SEIFERT 87 Phil Rep)
RPWADS
Royalties
Prizes
More than P10K
Winnings
Exempt:
o PCSO
o Lotto
Annuities
Dividends Received
Share of a partner from the NIAT of a Taxable Partnership (Sec 24B2 & 25A2)
Income subject to FIT – income governed by the Final W/holding Tax system. Under
this system, the w/holding agent shall deduct and w/hold such tax on income. The
recipient of such an income is not required to report the same as part of his income
because such final tax w/held shall serve as full payment / settlement of the tax liability
on income.
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Income subject to CWT – income governed by the Creditable W/holding Tax System.
Under this system, the w/holding agent shall deduct and w/hold such tax on income. The
recipient of such an income is required to report the same as part of his gross income.
Such tax w/held will not extinguish TP’s tax liab on such income. The tax w/held can be
claimed by the TP as creditable tax.
Cash dividend received by an RC/RA from a DC is subject to FIT & not progressive
rates of 5-32% (Sec 24B2)
Rationale:
1. Ensure collection of tax on dividend, which will immediately go to the coffers of gov’t.
(NIT: no assurance that individual TP’s will report dividend income.
2. Easier compliance: By shifting responsibility to the corporations, the BIR could easily
monitor the compliance. (NIT: It would be extremely difficult for the BIR to check
compliance with individual TP)
3. Sure revenue to the government
4. Reportable income which could be offset against a loss
5. Lessen the burden on the taxpayer
Same reasons why Interest Income from bank deposits is subject to FIT (just
qualify individual TPs w/ the term depositors, and substitute banks for
corporations)
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Exclusions from GI 5/23/2017 8:50:00 PM
Donation: Donor-Donee
Tax Implication of Donation Inter Vivos
1. Donor – subject to donor’s tax
2. Donee – not subject to donee’s tax (abolished by PD 69)
- also not subject to income tax (because donation is excluded from GI)
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Cf: Estate Tax (Sec 85e: WON proceeds of life insurance policy will be
included / excluded from the Gross Estate)
o Included:
Beneficiary is estate, executor, administrator (irrevocable /
revocable designation)
Third person (may include ER) is revocably designated
beneficiary (determine WON revocable)
Irrevocable designation will exclude LIP proceeds from
the GE
o Excluded: Received by any beneficiary
Proceeds of group insurance policy
LIP taken on own life
Irrevocable designation will exclude LIP proceeds from the GE
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Length of service: at least 10yrs
Limitation: can only be availed of once
o All retirement benefits received from the GSIS (given to public / gov’t
EEs) are EXEMPT.
B. Separation pay
o Must be received on account of causes BEYOND the control of the EE /
official
Includes termination due to labor-saving devices, losses
incurred by the ER
o Kinds
Death benefit (Sec 32B6)
Physical disability benefit
Sickness benefit
o Compulsory retirement is considered a cause beyond the control of the
EE, hence all benefits received, including the so-called terminal leave
pay is exempt. The terminal leave pay covers monetized value of
unused VL/SL credits. (Zialcita case)
A:
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All of the payments are not subject to income tax and should not also be subject to
withholding tax. The employees were laid off, hence separated for a cause beyond their
control. Consequently, the amounts to be paid by reason of such involuntary separation
are excluded from gross income, irrespective of whether the employee at the time of
separation has rendered less than ten years of service and/or is below fifty years of age.
(Section 32(B), NIRC)
Does it necessary follow that retirement benefits are exempt from estate tax? (Sec
86A7) – YES. An allowable deduction from Gross Estate, by virtue of RA 7641 in relation
to the LC.
Q: What are tax implications of receipt of GSIS benefits and their subsequent deposit in
the bank?
A: GSIS benefits are EXEMPT; If deposited in the bank, interest income therefore will be
subject to tax. (Same as SSS benefits)
****Miscellaneous Items
A. Interest income that derived / may be received by a foreign government, , ,
B. financing institution
C. finance controlled by a foreign gov’t
D. regional financial institution established by a foreign government
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P20M Sale – Atlas will purchase mining equipment to be sold to Mitsubishi for P50M.
BIR: Mitsubishi is taxable. CTA: Mitsubishi is an agent of the EXIM Bank.
SC: Interest on the loan is taxable. The source is tax-exempt, therefore the interest
should not be taxed. However, there was no clear & convincing evidence that Mitsubishi
was indeed an agent of Japan. When the contract between Mitsubishi & EXIM was
consummated, the money ceased to belong to EXIM 15; it was already owned by
Mitsubishi. The other contract of loan was executed between Mitsubishi & Atlas.
Exemptions should be construed strictly against the TP, hence it could claim no
exemption.
Of course, different answer if Mitsubishi were indeed an agent
15Citing Art. 1953: When such contract is consummated, the borrower acquires
exclusive ownership over the thing borrowed.
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Scientific, charitable, participated in a
religious, artistic, literary, competition – whether here
educational, civic or abroad
achievement
No action on his part to Sanctioned by the National
enter the contest Sports Association – The
Philippine Olympic
Committee must approve
(Law creating the Philippine
Sports Commission)
Unconditional receipt:
should not be required to
render future services
cf: RA 7549:
The recipient of such an award, exempt from Income Tax.
The donor of such an amount, exempt from Donor’s Tax. (not yet in the Tax
Code; not in Sec 101A3)
Such amount can be claimed as a deductible contribution. (not yet in the Tax
Code; not in Sec 34H)
Informer’s Reward
No longer an exclusion from GI (Sec 32B)
Taxable with 10% FIT (Sec 282)
FCDA
Recipient
o resident individual / corporate: 7.5%
o non-resident: exempt
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Corporate Income Taxation 5/23/2017 8:50:00 PM
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SC: Rent income from lease of property subject to tax, regardless of
purpose for the income.
Art VI, Sec 28 par 3 of the Constitution only applies to real
property.
Art XIV, Sec 4, par 3 only applied to non-stock non-profit
educational institution, to which YMCA does not belong.
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Is…exempted Income Tax Property Tax Donor’s Tax Estate Tax
from… (Sec 30 NIRC)
Religious YES ADE: Actually, YES. Provided NO
directly, complies with
exclusively* conditions
used for
religious
purposes
Educational Institution
Private NO. ADE: Actually, NO NO
Subject to 10% directly,
preferential exclusively*
corporate rate if used for
income from its educational
unrelated purposes
activities is not
more than 50%
of its income.
Government YES (Sec 30i) May be exempt NO
from donor’s
tax
Non-stock, non- Yes (Sec 30h, YES. Provided NO
profit Art XIV Sec 4 complies with
par 3 Consti) conditions
Charitable YES (Sec 30e, ADE: Actually, YES. Provided YES, provided
subject to last directly, complies with the 30%
par) exclusively* conditions requirement is
used for complied with
charitable
purposes
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9 Donations Exempt from Donor’s Tax (QARTIER-CPS) – with conditions for
exemption
Qualified Donees
Accredited Non-government organizations (RA 8424)
Religious organization
Trust foundations
Educational institutions – non-stock non-profit
Research institution
Cultural organization
Philanthropic organization
Social welfare organization
Donations Mortis Causa (Sec 87D CSC) – subject to condition: Not more than 30% of
the donation shall be used for admin purposes
Charitable Institution
Social welfare institution
Cultural
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o There was no unregistered taxable partnership formed / organized.
(Obillos, 139 SCRA 136, 1985) – sold property to divide proceeds only,
not for profit
o There was no unregistered taxable partnership formed / organized.
(Pascual & Dragon, 166 SCRA, 1988) – 5 parcels of land were
purchased & later on sold by heirs. SC applied test in Art 1769; heirs
shared in gross receipts of sale. Mere sharing in the gross receipts
does not in itself establish partnership.
Significant Rules:
MCIT
IAET
Branch Profits Remittance Tax
Tax sparing credit rule (Sec 28B5b)
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o Now included in the quarterly IT return (new! Before annual reporting)
Scope of Application:
o Does not apply to NRFCs
o DCs
X but can still be taxed under the 10% Preferential Corporate
Rate
Private educational institution (RR 9-98)
Non-profit hospitals
o RFCs
X:
International carriers exempt from MCIT subject to
2.5% FIT
Regional HQ of MNCs, OBUs still subject to 10% FIT
Registered under the PEZA (RA 7916) and BCDA (RA
7227) still subject to the preferred corporate tax of
5%
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All undistributed earnings reserved for distribution in the
Philippines by the subsidiaries of a foreign corporation
o Prohibited: Dividend declaration is prohibited by a provision in a loan
agreement
Rationale (RR 2-2001): Regulation – IAET of 10% is in the form of penalty to
corporations who should declare dividends when warranted by circumstances
– presence of unrestricted R/E. It is a deterrent to possible tax avoidance on
the part of SHs. (Had dividends been distributed, the government could have
imposed a FIT of 10% on stockholders)
Exclusions from coverage:
o Bank, other non-bank financial intermediaries
o Public corporations
o Insurance companies
Scope of application:
o Closed corporations – not more than 20 stockholders
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investment by the mother company in the company has no direct
connection with conduct of trade/business of Marubeni-Philippines.
Tax sparing credit rule (Sec 28B5b) – 15% of dividends from DCs
Contemplated situation: NRFC received cash / property dividend from a
domestic corporation
Income covered: Dividend income
Tax Rate: 15% FIT
Rationale for reduction of corporate rate from 30% to 15%: To attract /
encourage foreign investments by reduction of the income tax rate (P&G v.
Commissioner) non-revenue purposes of the Philippines
o Subject to the condition that the country in which such foreign country
is domiciled shall allow credit against the tax due from NRFC, taxes
deemed paid in the Philippines (Deemed Paid Tax Credit)
P&G-US (NRFC) established P&G-Phils (DC). Because of such
investment made in the Philippines, the rate was reduced so
that the dividend declared by P&G Philippines and distributed to
P&G-US could be taxed at only 15%.
Since P&G established a business in the Philippines, it is
deemed to have paid tax under the Philippines (Sec 902 US IRC
allows American corporations to claim credit as against taxes
deemed paid in other countries).
o Other cases: Is proof of amount actually granted required?
SC: There must be proof of actual amount granted as tax
credit so we could impose the reduced credit of 15%. (P&G v.
Commissioner – 2nd division)
Motion for recon: The Tax Code does not allow actual
grant (Sec 28B5b). It merely says, shall adopt. No such
word as actual. Nor does any RR provide for this.
PREVAILING VIEW
Proof allowed: enough to prove that there is such a
provision under the Revenue Code of the foreign
government allowing such tax credit
P&G Phils was the w/holding agent insofar as the dividends was
concerned. Does it have legal personality to file a written claim
for refund? NO legal personality
M/R: YES, w/ legal personality. Withholding agent is
not only an agent of the government, but also an agent
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of the taxpayer wrt to filing of return & payment of the
tax. Withholding agent is technically considered as
taxpayer, therefore has the personality to file a
written claim of refund.
SC: There is no need of proof of actual amount granted as tax
credit so we could impose the reduced credit of 15%. (Wonder
v. Commissioner – 3rd division)
Does the Philippine branch, as w/holding agent of
dividends, have legal personality to file a written claim
for refund? YES.
o Withholding agent (Sec 22) v. Taxpayer
Withholding agent Taxpayer
Required to deduct & Subject to tax imposed
w/hold the tax under S. 57 under this title
Can file written claim for
refund (S. 204c)
Sec 28A3: Definition of Gross Philippine Billings – modified: origin of passengers, cargo
& baggages determines situs of income (no longer the place of sale), partially amending
rule on situs on sale of personal property (Sec 42A6 provides that situs is place of sale)
Therefore an offline international airline may no longer be taxed, even if it
sells tickets here, if there is no proof that passengers originated in the
Philippines (RR 15-2002)
o Come to think of it, an offline international airline has no landing rights
in the Philippines in the first place
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Allowable Deductions 5/23/2017 8:50:00 PM
16 As amended by RA 9504
17 As amended by RA 9504
Re: Wisdom behind RA 9504: It has been held valid in a long line of cases, the court
cannot question the motive, object, expediency, necessity behind the passage of a tax
law.
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GR: Capital expenditures are not allowable deductions; they should be
capitalized and amortized.
X: (Sec 34A2)
Capital expenditure incurred by private educational institution – during the
year when the same was incurred (with option to capitalize & claim allowance
for depreciation)
Capital asset19 purchased from proceeds of Interest on loan
Intangible drilling & development costs
Research & development expenditures, subject to certain conditions (NEW!)
Tax Benefit Rule – applies to tax refund, recovery of bad debts written off
Provision on deductible tax (Sec 34C)
o Taxes when refunded shall be included in the GI in the year of
recovery / receipt to the extent of income tax benefit of said deduction
Must be a deductible tax: Must have been claimed as a
deduction in the preceding taxable year.
Non-deductible taxes: (SIDE)
Special assessment tax
Income tax
Donor’s tax
Estate tax
Must have been actually claimed as a deduction
Illustration:
NIBT
Less: Tax refund granted the following year
NIAT
x Tax Rate
Income Tax Payable
[Tax
X Tax Rate applied
Tax Benefit]
Provisions on bad debts expense (Sec 34E) - included in the gross income
in the year of receipt or recovery to the extent of income tax benefit of said
reduction
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Requisites for deductibility of Bad debts expense (PRC v. Commissioner):
(CUBANO)
o Charged off - Amount must be charged off / against the books /
accounts of the taxpayer during the taxable year
o Uncollectible – not only in the current taxable year but also in the
future
o Business / Trade / Exercise of profession – must arise from…
o Ascertained to be worthless during the taxable year
o Not involving related taxpayers (remember: expenses involving
related taxpayers are not deductible)
o Obligation must be subsisting, valid & enforceable
If bad debts were written off during a year when the corporation incurred net
loss, subsequent recovery of the bad debt does not result in taxable income,
because it will merely be a return on capital. (RR 5-99)
When a Bad Debt may be said to be worthless in accordance with sound business
Judgment: BIDS-SAID (RR 5-99)
Bankruptcy of the taxpayer / insolvency
Insufficiency of collaterals
Death of the debtor
Statute of limitations – application of the…
Success of judicial action
Amount – if only P1K & debtor is residing faraway, the cost of collection will
be more than the amount
Injury that may be sustained by the debtor
Destruction of properties, documents & the like
Change of Taxpayer’s Status (Sec 35C): 8 (2 fr 1st par, 2 fr 2nd par, 4 fr last par)
Marriage of the taxpayer during the taxable year ineffectual due to the
uniform personal exemption
Additional dependent
Death of taxpayer P/E can be claimed by his estate
Death of spouse ineffectual due to the uniform personal exemption
Death of dependent as if the dependent died at the close of the taxable
year, by legal fiction
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Dependent becoming more than 21yrs of age during the taxable year as if
the dependent became more than 21yrs old at the close of the taxable year,
by legal fiction
Marriage of dependent during the taxable year (NEW!) as if the dependent
married at the close of the taxable year, by legal fiction (before: automatic
disqualification in the old tax code)
Gainful employment of dependent during the taxable year (NEW!) as if the
dependent became gainfully employed at the close of the taxable year, by
legal fiction (before: automatic disqualification in the old tax code)
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General Principles 5/23/2017 8:50:00 PM
Sec 42: Income Tax Situs / Location / Place (last asked: 1957)
Services - where such services are performed / rendered
Sale of real property – location of real property
Sale of personal property – place of sale (GR; X: Gross Philippine Billings)
Interest income – residence of the debtor (National Development Corporation
v Commissioner)
GENERAL PRINCIPLES
Nature
Inherent –
Simple: The power to tax co-exists with the State. It exists independently of
the Constitution. Such Constitutional limitations merely regulate imposed
limitations on the exercise of the power to tax. (p.14 footnote 17)
Authoritative: The power to tax is inherent in the sovereign state because it is
a necessary attribute of sovereignty. Without this power, no state can exist
nor enjoy. The power to tax proceeds from the theory that the existence of
the government is a necessity.
It is an essential and necessary attribute belonging as a matter of right to
every independent state or government. No state can exist w/o the means to
pay its expenses, hence the power to compel the payment of taxes
(Emergence of the power to tax)
As a principal attribute of sovereignty, the exercise of the power to tax
derives its source from the very existence w/ the State, whose social contract
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with the citizens obliges it to promote the common good. It emanates from
the theory of necessity; without taxes government cannot fulfill its mandate
of promoting the general welfare and well-being of the people. (Yuchengco,
BPI v. Commissioner)
Legislative
Why is the power to tax legislative in character: (p.15, footnote 18)
Simple: It is legislative because the power to tax is vested exclusively in the
law-making body of the State. It is Congress that has the power to enact tax
laws.
Impressive: It is based on the theory that taxes are a grant of the people,
and this grant shall be made by the immediate representatives of the people.
And where the people have laid this power, then it shall remain to be
exercised.
Explain the Symbiotic Relationship Theory between the State & its inhabitants as
espoused in Commissioner v. Algue
Despite the natural reluctance to surrender part of one’s income to the taxing
authorities, every person who is able to must contribute his share in the
burden of running the government. The government for its part is expected
to re-spend in the form of tangible & intangible benefits intended to improve
the lives of the people, and enhance their material & moral values.
Ability to Pay
Taxes must be based on taxpayer’s ability to pay. Basis of equitable
taxation
Constitutional Basis: Art VI Sec 28 (1)
o Uniform & equitable
o The government on its part emphasizes the reciprocal duty of the
government
Purposes:
Primary: Raise Revenue
Secondary: PIER
Protect local industries against unfair foreign competition (TCCP)
o Countervailing and dumping duties
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Inequalities (reduce…) – to promote social justice, it must adopt a system
which must impose just, fair & reasonable taxes: progressive system of
taxation
Encourage the growth of local industries & manufacturers – Power to tax
includes the power to grant exemptions, tax amnesties, tax condonations
Regulatory purposes – as an implement of the police power of the State
Justice Holmes is also correct. If it is used solely for the purpose of…
The power to tax may be used as an implement of the power of eminent domain.
Taking / expropriation of private property
o E.g. RA 7432 as amended by RA 9257: Covered establishments are
mandated to grant 20% to Senior citizens. It is now a deductible tax,
no longer a tax credit.
For public use / purpose – Has no concrete definition; Test cited: the ultimate
result, general welfare of the people. Special care and attention to Senior
Citizens may create social problems. Thus, it will in effect redound to the
general benefit of the people.
o If the beneficiary is any of the following, it within the contemplation of
public purpose (Art XIII Sec 11 as cited in Carlos Rach Co. v.
Commissioner):
Elderly
Underprivileged
Women
Children
Disabled
Payment of just compensation – Could be claimed as a deductible tax.
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Tax Credit Deductible Tax
Reduces TP’s tax liab Reduces TP’s taxable
income
City Trust v. CA 234 SCRA 348 – improved version of the lifeblood doctrine in
Commissioner v. Molina, etc
Taxes are the lifeblood of the nation, through which government agencies
continue to operate, and which the State continues its functions…
City Trust - 499 SCRA 77: different answer – no, it will not bar such claim for refund.
Claim for refund and protest are governed by different rules. If the government made
an assessment, and subsequently the taxpayer files a written claim for refund,
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Exercised thru the local legislative council
Subject to guidelines & limitations (Memorize: Fundamental
principles of LG / RP Taxation: Sec 130 – principles of local
gov’t taxation & Sec 198 – fundamental principles of LG
taxation, LGC)
Imposes / provides 15 limitations (Sec 133)
Local government units cannot impose national, donor’s,
estate taxes
No tax may be imposed on instrumentality of the NG, its
agencies, LGUs
Based on sound public policy that the State may
not tax itself (no constitutional prohibition; mere
statutory provision in RA 7160, which Congress
can repeal)
Mactan Cebu Int’l Airport Authority v. Marcos (261 SCRA
667, 1996): MCIAA is subject to RPT
Mla Int’l Airport Auth case (495 SCRA): MIAA is exempt
from RPT on its airport lands & buildings
Distinctions: MCIAA is a GOCC. All exemptions
granted to GOCCs are withdrawn upon effectivity
of RA 7167 – considered as an instrumentality.
MIAA is not an instumentality of the national
government is not qualified under Sec 2 Par XIII
of the Revised Admin Code.
o Meaning of instrumentality v GOCC
MIAA v. Pasay City
Justice Tinga & Justice Nachura:
Adopted the majority view. MIAA is not
considered as a GOCC (Sec 2 Title X – Definition
of instrumentality)
Now: Exempt from R/PT.
Instrumentalities of National Government
Bangko Sentral ng Pilipinas
UP
PPA
MCIAA – instrumentality of the government.
Therefore, exempt
P
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Exemption from tax of Government
Territoriality
Tax Evasion (Estate of Benigno Toda Jr. v. Commissioner) – 3 Factors that concurs for
tax evasion to arise:
Unlawful
State of mind – must be coupled with bad faith, evil, deliberate
End to be achieved – reduce taxpayer’s liability / evade payment of tax
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Previous taxation
Inclusion of the property in the prior estate
No previous VD
GR: Taxes are not subject to set-off (Mambulao Doctrine 1961, Francia v. Sia doctrine
1997)
Taxes are not subject to set-off / compensation. A pending claim for tax
credit / tax refund can not be set off against the tax deficiency of the
taxpayer. It may only be allowed if the claim is demandable, due and
liquidated. (Phoenix Mining v. Commissioner)
X: There was already a law appropriating an amount in payment of the claim of the TP.
[TP and government are not considered Drs-Crs of each other.] (Domingo v. Garlitos,
1962)
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Religious privity must be respected – free exercise of religious profession &
worship (Art III Sec 5)
Equal protection clause (Art III Sec 1)
Veto power of the president re: appropriation, revenue & tariff bills (Art VI
Sec __, Par 2)
Exemption from property taxation of REC: religious educational charitable
institutions, provided actually, directly & exclusively used for REC purposes
(Art VI, Sec 28 par 3)
Non-impairment clause (Art III Sec 10)
Uniformity of taxation (Art VI Sec 28 par 1)
Exemption shall be approved by majority of all members of Congress
(absolute majority - according to Art VI Sec 28 par 4)
Local government units are constitutionally conferred / constitutionally
delegated with the power of taxation (Art X Sec 5)
Exemption from income tax, property tax, custom’s duties of non-stock, non-
profit educational institutions (Art XIV, Sec 4 Par 3 of the Constitution)
Special Fund collected, levied under special law shall only be used for such
purpose (prevents juggling of funds – Art VI Sec 29 par 3)
Supreme Court has the jurisdiction to review, reverse, affirm on appeal
decisions of lower courts involving legality, validity of tax, imposts,
assessments or penalties (Art VIII Sec 5 (2b))
Due Process must be observed in the imposition of tax (Art III Sec 1)
Appropriation, revenue and tariff bills shall originate exclusively in the house
of representatives. (Art VI Sec 24)
No public money / property shall be used directly / indirectly for religious
purpose. (Art VI Sec 29 par 2) – in line with separation of church and state
Press (freedom of…) – Art III Sec 4
Tariff power of the president (Art VI Sec 28 Par 2)
Non-imprisonment: No person shall be imprisoned for non-payment of poll
tax / community tax certificate under Sec 156 RA 7167 (Art III Sec 20)
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