2019

BAR OPS NOTES IN TAXATION – Atty. Noel C. Siosan, Jr.

BASIC TERMS AND PRINCIPLES

(taken from Gothic Publications)

1. What is meant by double taxation?

Double taxation means taxing the same property twice when it should be taxed only
once or taxing the same person twice by the same jurisdiction for the same purpose
or thing. It is obnoxious when the taxpayer is taxed twice, when it should be but once.
Otherwise described as “direct duplicate taxation,” the two taxes must be imposed
on the same subject matter for the same purpose, by the same taxing authority,
within the same jurisdiction during the same taxing period- and the taxes must be
of the same kind or character.

2. What is international juridical double taxation? State the rationale in
minimizing double taxation.

International juridical double taxation is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same subject
matter and for identical periods. The rationale for minimizing or doing away with
double taxation is to encourage the free flow of goods and services and the
movement of capital technology and persons between countries, conditions deemed
vital in creating robust and dynamic economies Foreign investments will only thrive
in a fairly predictable and reasonable international investment climate and the
protection against double taxation is crucial in creating such a climate.

3. Is there a constitutional prohibition against double taxation?

There is no constitutional prohibition against double taxation. Double taxation is
not expressly forbidden in the Constitution but the court has recognized it as
obnoxious “where the taxpayer is taxed twice for benefit of the same governmental
entity or by the same jurisdiction for the same purpose.”

4. What are the kinds of double taxations?

The two kinds of double taxation are direct duplicate taxation and indirect duplicate
taxation. Direct duplicate taxation is obnoxious when the taxpayer is taxed twice,
when it should be but once. The two taxes must be imposed on the same subject
matter, for the same purpose by the same taxing authority, within the same
jurisdiction during the same taxing period; and they must be of the same kind or
character. Otherwise it is indirect duplicate taxation.

5. What are the modes of eliminating double taxation?

Double taxation usually takes place when a person is resident of a contracting state
and derives income from, or owns a capital in, the other contracting state and both
states impose tax on that income or capital. In order to eliminate double taxation, a

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 2019 BAR OPS NOTES IN TAXATION – Atty. Noel C. Siosan, Jr.

tax treaty resorts to several methods to wit: (1) It sets outs the respective rights to
tax of the state source or situs and of the state of residence with regard to certain
classes of income or capital. In some cases, an exclusive right to tax is conferred on
one of the contracting states; however, for other items of income or capital, both
states are given the right to tax, although the amount of tax that may be imposed by
the state of source is limited; and (2) It applies whenever the state of source is given
a full or limited right to tax together with the state of residence. In this case the
treatises make it incumbent upon the state of residence to allow relief in order to
avoid double taxation.

6. What is tax pyramiding? What is its basis in law?

Tax pyramiding refers to the imposition of a tax upon a tax. This occurs when the
tax is added as part of the tax base. It has no basis in law.

7. What is a tax treaty?

Tax treat is an agreement entered into between sovereign states “for purposes of
eliminating double taxation on income and capital preventing fiscal evasion,
promoting mutual trade and investment, and according fair and equitable tax
treatment to foreign residents or nationals.”

8. Define tax avoidance and tax evasion?

Tax avoidance is the lessening of tax liabilities through maximization of deductions
exclusions and exemptions and minimization of income by legal means. It is the tax
saving device within the means sanctioned by law. This method should be used by
the taxpayer in good faith and at arm’s length. Tax evasion on the other hand, is a
scheme used outside of those lawful means and when availed of, it usually subjects
the taxpayer to further or additional civil or criminal liabilities.

9. Distinguish tax avoidance from tax evasion.

Tax avoidance is legal while tax evasion is illegal. The objective of tax avoidance in
most instances is merely to reduce the tax that is due while tax evasion the object is
to entirely escape the payment of taxes.

10. Give an example of tax avoidance and tax evasion.

An example of tax avoidance is the sale of a capital asset, other than real property
and shares of stocks, after holding on to it for more than 12 months thereby making
the amount of gain to be recognized only to the extent of 50%. An example of tax
evasion is the deliberate under declaration of sales or income.

11. When is a taxpayer deemed to have committed tax evasion?

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 2019 BAR OPS NOTES IN TAXATION – Atty. Noel C. Siosan, Jr.

A taxpayer is deemed to have committed tax evasion if there is a concurrence of the

following: (1) Payment of an amount of tax less than that known by the taxpayer to
be legally due or the non-payment of tax when it is shown that a tax is due; (2) An
accompanying state of mind which is described as being evil, in bad faith, willful or
deliberate and not accidental; and (3) A course of action or failure of action which
is unlawful.

12. Explain the nature of tax exemption.

As a general rule tax exemptions are construed strictissimi juris against the taxpayer
and liberally in favor of the taxing authority. The burden of proof rests upon the
party claiming exemption to prove that it is in fact covered by the exemption so
claimed. In case of doubt, non-exemption favored. A tax exemption cannot be
grounded upon the continued existence of a statute which precludes its change or
repeal. Flowing from the basic precept of constitutional law that no law is
irrepealable, Congress, in the legitimate exercise of its lawmaking powers, can enact
a law withdrawing a tax exemption just as efficaciously as it may grant the same
under Section (4) of Article VI of the Constitution which provides. “No low granting
any tax exemption shall be passed without the concurrence of a majority of all the
members of the Congress.”

13. State the constitutional provisions granting exemptions.

The following are constitutional provisions granting exemptions (1) Charitable
institutions, churches and parsonages or convents appurtenant thereto, mosques,
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, 1987 Constitution); (2) 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. Upon the
dissolution or cessation of the corporate existence of such institutions their assets
shall be disposed of in the manner provided by law (Sec, 4 [3 j , Art XIV 1987
Constitution), and (3) Subject to conditions prescribed by law, all endowments,
donations, or contributions used actually, directly, and exclusively for educational
purposes shall be exempt from tax (Sec. 4 [4] , An XIV. 1987 Constitution)

14. What is the rationale for tax exemption of charitable institutions?

An institution does not lose its charitable character, and consequent exemption from
taxation by reason of the fact that those recipients of its benefits who are able to pay
are required to do so, where no profit is made by the institution and the amounts so
received are applied in furthering its charitable purposes and those benefits are
refused to none on account of inability to pay therefor. The fundamental ground
upon which all exemptions in favor of charitable institutions are based is the benefit
conferred upon the public by them and a consequent relief to some extent of the
burden upon the state to care for and advance the interests of its citizens.

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15. What is meant by “actual, direct and exclusive use” of the property for
charitable purposes?

It is the direct and immediate and actual application of the property itself to the
purposes for which the charitable institution is organized. It is not the use of the
income from the real property that is determinative of whether the property is used
for tax-exempt purposes. If real property is used for one or more commercial
purposes, it is not exclusively used for the exempted purpose but is subject to taxation
The words “dominant use” or “principal use” cannot be substituted for the words
“used exclusively” without doing violence to the Constitution and the law- Solely is
synonymous with exclusively.

16. Explain briefly the nature of contractual tax exemptions.

Contractual tax exemptions, in the real sense of the term and where the non-
impairment clause of the Constitution can rightly be involved, are those agreed to
by the taxing authority in contracts, such as those contained in government bonds,
debentures, lawfully entered into by them under enabling laws in which the
government, acting in its private capacity, shed its cloak of authority and waives it
governmental immunity. Truly, tax exemptions of this kind may not be revoked
without impairing the obligations of contracts. These contractual tax exemptions,
however, are not to be confused with exemptions under franchises. A franchise
partake the nature of a grant which is beyond the purview of the non-impairment
clause of the Constitution. Indeed, Article XII, Section 11 of the 1987 Constitution is
explicit that no franchise for the operation of a public utility shall be granted except
under the condition that such privilege shall be subject to amendment, alteration, or
repeal by Congress as and when the common good so requires.

17. What is tax amnesty?

A tax amnesty is a general pardon or intentional overlooking by the State of its
authority to impose penalties on persons otherwise guilty of violation of a tax law.
It partakes of an absolute waiver by the government or its right to collect what is
due it and to give tax evaders who wish to relent a change to start with a clean slate.
A tax amnesty, must like a tax exemption, is never favored nor presumed by law. The
grant of a tax amnesty, similar to a tax exemption, must be construed strictly against
the taxpayer and liberally in favor of the taxing authority.

18. Distinguish tax amnesty from tax exemption?

Tax amnesty is an immunity from all criminal, civil and administrative liabilities
arising from nonpayment of taxes; while a tax exemption is an immunity from civil
liability only. It is an immunity or privilege, a freedom from a charge or burden to
which others are subjected. Tax amnesty applies only to past tax periods, hence of
retroactive application; while tax exemption has prospective application.

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19. Who may avail the tax amnesty program? Who may not avail the tax
amnesty program?

The following taxpayers may avail of the Tax Amnesty Program (i) Individuals; (n)
Estates and Trusts; (iii) Corporations; (iv) Cooperatives and tax-exempt entities that
have become taxable as of December 31, 2005; and (v) Other juridical entities
including partnerships.

The following taxpayers may not avail of the Tax Amnesty Program: (1) Withholding
agents with respect to their withholding tax liabilities; (2) Those with pending cases
falling under the jurisdiction of the PCGG; (3) Those with pending cases involving
unexplained or unlawfully acquired wealth or under the Anti-Graft and Corrupt
Practices Act; (4) Those with pending cases filed in court involving violation of the
violation of the Anti-Money Laundering Law; (5) Those with pending criminal cases
for tax evasion and other criminal offenses under Chapter II of Title X of the National
Internal Revenue Code of 1997 as amended, and the felonies of frauds, illegal
exactions and transactions, and malversation of public funds and property under
Chapters III and IV of Title VII of the Revised Penal Code; (6) Issues and cases which
were ruled by any court (even without finality) in favor of the BIR prior to amnesty
availment of the taxpayer; (7) Cases involving issues ruled with finality by the
Supreme Court prior to the effectivity of RA 9480 (e.g. DST on Special Savings
Account), (8) Taxes passed on and collected from customers fro remittance to the
BIR; (9) Delinquent Accounts/Accounts Receivable considered as assets of the
BIR/Government, including self-assessed tax; and (10) Tax cases subject of final and
executory judgment by the courts.

20. What are taxes covered by the tax amnesty program?

The following taxes are covered by the Tax Amnesty Program: (i) income tax; (ii)
estate tax; (iii) donor’s tax; (iv) capital gain’s tax; (v) value-added tax; (vi) excise
tax; (vii) documentary stamp tax; and (viii) other percentage taxes.

21. What is tax assumption? What is difference between tax assumption and tax
exemption?

Tax assumption means to take on, become bound as another is bound, or put oneself
in place of another as to a tax obligation or liability. This means that the tax
obligation or liability remains, although the same is merely passed on to a different
person. In this light, the concept of an assumption is therefore different from an
exemption, the latter being the freedom from a duty, liability or other requirement
or a privilege given to a judgment debtor by law, allowing the debtor to retain a
certain property without liability.

22. Define “taxable (net) income” and “gross income”

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 2019 BAR OPS NOTES IN TAXATION – Atty. Noel C. Siosan, Jr.

Taxable income means the pertinent items of gross income specified in the Tax Code,
less the deductions and/or personal and additional exemptions, if any, authorized
for these types of income. Gross income means all items of income less exclusions.
Under the Tax Code, gross income means all income derived from whatever source.

23. What are the requisites for income to be taxable?

The requisites for income to be taxable are as follows: (1) there must be gain or
profit; (2) the gain or profit must be realized or received actually or constructively;
and (3) the gain or profit must not be exempted or excluded by law or treaty from
income tax.

24. What is the “Doctrine of Constructive Receipt of Income?”

Under the “Doctrine of Constructive Receipt of Income,” income which is credited to
the account of and set apart for a taxpayer and which may be drawn by him at any
time is subject to tax for the year during which it was so credited or set apart
although not yet then actually received or reduced to his possession.

25. What is meant by “deposit substitutes?”

Deposit substitutes are defined as an alternative form of obtaining funds from the
public (the term “public” means borrowing from (20) or more individual or
corporate lenders at any one time), other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrower’s own account, for
the purpose of relending or purchasing of receivables and other obligations, or
financing their own needs or the needs of their agent or dealer. These instruments
may include, but need not be limited to, banker’s acceptances, promissory notes,
repurchase agreements including reverse purchase agreements entered into by and
between the BSP and any authorized agent bank, certificates of assignment or
participation and similar instruments with recourse.

26. What is the tax treatment of “deposit substitutes?”

Congress specifically defined “public” to mean “twenty (20) or more individual or
corporate lenders at any one time.” Hence, the number of lenders is determinative
of whether a debt instrument should be considered a deposit substitute and
consequently subject to the 20% final withholding tax.

27. What is a “bracket creep?” What is its effect?

“Bracket creep” is the process by which inflation pushes individuals into higher tax
brackets, occurs, and its deleterious results may be explained as follows: An
individual whose dollar income increases from one Year to the next might be obliged
to pay tax at a higher marginal rate (say 25% instead of 15%) on the increase, this
being a natural consequence of rate progression. If, however, due to inflation the

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benefit of the increase is wiped out by a corresponding increase in the cost of living,
the effect would be a heavier tax burden with no real improvement in the taxpayer’s
economic position. Wage and salary-earners are especially vulnerable. Even if a
worker gets a raise in wages this year, the raise will be illusory if the prices of
consumer goods rise in the same proportion. If her marginal tax rate also increased,
the result would actually be a decrease in the taxpayer’s real disposable income.

28. What is the rationale for the imposition of improperly accumulated
earnings tax?

The underlying purpose of the additional tax on a corporation’s improperly
accumulated profits or surplus is to avoid the situation where a corporation unduly
retains its surplus earnings instead of declaring and paying dividends to its
shareholders or members who would then have to pay the income tax on such
dividends received by them.

29. To what kind of corporation is Improperly Accumulated Earnings Tax
imposed?

The 10% Improperly Accumulated Earnings Tax is imposed on improperly
accumulated taxable income earned starting January 1, 1998 by domestic
corporations which are classified as closely-held corporations. Closely-held
corporations are those corporations at least fifty percent (50%) in value of the
outstanding capital stock or at least fifty percent (50%) of the total combined voting
power of all classes od stock entitled to vote is owned directly or indirectly by or for
not more than twenty (20) individuals.

30. What is the purpose of Minimum Corporate Income Tax (MCIT)?

The purpose of MCIT is to forestall tax evasion by corporations that declare losses
despite their business operations. Thus, even if a corporation incurs net loss in its
business operations, it is still subject to an MCIT of two percent (2%) of its gross
income.

31. What are the conditions for the imposition of the MCIT?

The conditions for the imposition of the Minimum Corporate Income Tax are as
follows:
a. The taxpayer is either a domestic or a resident foreign corporation;
b. It is subject to the normal corporate income tax of 30% based on its net
income;
c. It is imposed beginning on the fourth (4th) taxable year immediately
preceding the commencement of its business operation;
d. The MCIT of 2% of its gross income is greater than normal corporate income
tax of 30% of its net income where the comparison is made on a quarterly
returns required to be filed; and

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e. Excess MCIT shall be carried forward and credited against the normal
corporate income tax for the 3 immediately succeeding taxable years.

32. Distinguish normal corporate income tax from minimum corporate income
tax?

The normal corporate income tax is a tax on net profits while the minimum
corporate income tax is in effect, a tax on gross profits.

33. What is the carry forward provision under the MCIT?

Any excess of the MCIT over the normal income tax may be carried forward on an
annual basis and be credited against the normal income tax for 3 immediately
succeeding taxable years.

34. What is tax credit?

A tax credit generally refers to an amount that may be “subtracted directly from
one’s total tax liability.” It is therefore an “allowance against the tax itself” or “a
deduction from what is owed” by a taxpayer to the government. In IRR 5-2000, a tax
credit is defined as “the amount due to a taxpayer resulting from an overpayment of
a tax liability or erroneous payment of a tax due.”

35. What is tax deduction?

Tax deduction is defined as a subtraction from income for tax purposes, or an
amount that is allowed by law to reduce income prior to the application of the tax
rate to compute the amount of tax which is due. A tax deduction reduces the income
that is subject to tax in order to arrive at taxable income.

36. Distinguish tax credit from tax deduction.

A tax credit is an amount subtracted from an individual’s or entity’s tax liability to
arrive at the total tax liability. A tax credit reduces the taxpayer’s liability, compared
to a deduction which reduces taxable income upon which the liability is computed.
A credit differs from deduction to the extent that the former is subtracted from the
tax while the latter is subtracted from income before the tax is computed.

37. Explain the “Irrevocability Rule” under the Tax Code.

A corporation entitled to a tax credit or refund of the excess estimated quarterly
income taxes paid has two options: (1) to carry over the excess credit or (2) to apply
for the issuance of a tax credit certificate or to claim a cash refund. If the option to
carry over the excess credit is exercised, the same shall be irrevocable for that
taxable period.

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38. What is the purpose of the withholding tax system?

The purpose of the withholding tax system is three-fold: (1) to provide the taxpayer
with a convenient way of paying his tax liability; (2) to ensure the collection of tax,
and (3) to improve the government’s cashflow. Under the withholding tax system,
the payor is the taxpayer upon whom the tax is imposed, while the withholding agent
simply acts as an agent or a collector of the government to ensure the collection of
taxes.

39. Is withholding agent a tax collector or a taxpayer? Discuss its liability.

It is indisputable that the withholding agent is merely a tax collector and not a
taxpayer. The liability of the withholding agent is independent from that of the
taxpayer. The former cannot be made liable for the tax due because it is the latter
who earned the income subject to withholding tax. The withholding agent is liable
only insofar as he failed to perform his duty to withhold the tax and remit the same
to the government. The liability for the tax, however, remains with the taxpayer
because the gain was realized and received by him.

40. Explain Withholding Tax on Compensation.

Withholding Tax on Compensation is the tax withheld from income payments to
individuals receiving purely compensation income arising from an employer-
employee relationship.

41. Explain Expanded Withholding Tax.

Expanded Withholding Tax is a kind of withholding tax which is prescribed only for
certain payors and is creditable against the income tax due of the payee for the
taxable quarter/year.

42. Explain Final Withholding Tax.

Final Withholding Tax is a kind of withholding tax which is prescribed only for
certain payors and is not creditable against the income tax due of the payee for the
taxable year.

43. State the nature and object of the Value Added Tax.

Value Added Tax is a tax on spending or consumption. It is levied on the sale, barter,
exchange or lease of foods or properties and services. The VAT is a uniform tax
ranging, at present, from 0 percent to 12 percent under the RVAT levied on every
importation of goods, whether or not in the course of trade or business, or imposed
on each sale, barter, exchange or lease of goods or properties on each rendition of
services in the course of trade or business as they pass along the production and

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distribution chain, the tax being limited only to the value added to such goods,
properties or services by the seller, transferor or lessor.

VAT is an indirect tax. The VAT being and indirect tax on expenditure, the seller of
goods or services may pass on the amount of tax paid to the buyer, with the seller
acting merely as the tax collector. The burden of VAT is intended to fall on the
immediate buyers and ultimately, the end-consumers.

44. How does a VAT system operate? Explain.

VAT is ultimately a tax on consumption, even though it is assessed on many levels of
transactions on the basis of a fixed percentage. It is the end user of consumer goods
or services which ultimately shoulders the tax, as the liability therefrom is passed on
to the end users by the providers of these goods or services who in turn may credit
their own VAT liability (or input VAT) from the VAT payments they receive from the
final consumer (or output VAT).

45. Explain the “destination principle” under the VAT system.

The VAT system generally follows the “destination principle,” which means that
exports are zero-rated whereas imports are taxed. However, there is an exception
to this principle. This exception refer to the 0% VAT on services enumerated in
Section 102 and performed in the Philippines. For services covered by Section
102(b)(1) and (2), the recipient of the services must be a person doing business
outside the Philippines. Thus to be exempt from the destination principle under
Section 102(b)(1) and (2), the services must be (a) performed in the Philippines, (b)
for a person doing business outside the Philippines, and (3) paid in acceptable
foreign currency accounted for in accordance with BSP rules.

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