INCOME TAXATION 2019 EDITION OVERVIEW OF CONTENTS Introductory concepts to taxation The concept of tax, tax laws and tax administration The concept of gross income under taxation Taxation schemes, accounting period, methods and income reporting Final income taxes Capital gains taxes Overview of the regular income tax Exclusions and exempt income Income subject to regular income tax Compensation income Fringe benefits and the fringe benefits tax Dealings in properties subject to regular tax ‘Allowable deductions from gross income Specific regular tax rules applicable individuals Specific regular tax rules applicable to corporations‘THE CONCEPT MAP OF INCOME TAXATION ‘TABLE OF CONTENTS PARTI INTRODUCTORY CONCEPTS Regular Income Taxation ‘Taxation Fringe benefits rape >| Gross income P XXX Less: == Deductions XXX Personal exemptions _XXX ‘Taxable income Eu L Individual Taxpayers Corporate income Taxpayers Saat {Progressive Income Tax) PARTIC i INCOME RECOGNITION, MEASUREMENT | ‘TAXPAYER, CLASSIFICATIONS ORTING, AND ‘Special ndividwal tax rules: Special corporate tax rules: tates Gross income tox Mcit last Branch profit remittanTe / ce station CHAPTER 6 Ct on amare” robes ‘i properties 167-220 167 individual taxpayers ‘Taxable estates and trusts = Corporate taxpayers ‘The genera rules in income taxation Situs of income Exercise Drills CHAPTER 4 Tax Schemes, Periods and Methods and Reporting schemes income tax returns ‘Taxpayers mandated to use the eFPS mento the 6 Groupings of eFPS taxpayers is mentary stamp tox onthe sal of capital assets Payment oo - Penalies for lingo returns and late payment of taxes Exercise Drills — PART OT ‘SPECIAL INCOME TAXATION We annual income tax retuensry UNIT 1 - GENERAL RULES ON GROSS INCOME 264275 26316 The effect of tus 209 val ‘The transier pricing regu sion 295 Beereise Drills 300316 UNIT 2 - SPECIAL RULES ON GROSS INCOME CHAPTER 10 Compensation income Emphoyer-empioyee relationship Elements of at employer employee relationship 318 Types af employees as to funetion and taxablty cuaprer 12 employ meet ae compensatonsneoM= feta sompen fetcrapeeaion tems i compensation ymmonth pay and other benef a Prot taal compensation income ‘wage earners: imam wage status Fringe Benefits Taxation ‘Tureament offing beets ‘Srope ofthe fnge benef tax es \ge benefits to the fringe benefits tax ‘The tnge benefits tax and Dealings in Properties Dealingsin properties subject to regular income tax Determination and treatment of gain or loss Inia acqistton ef cotrot Exchanges not pany for socks Washes Transacons considered exchanges Exercise Drills ve 348-361 362-392 362 363 365 366 367 368 369 377 377 378 379 382-392 393-432 393 394 395 396 398, 399 401 408 408 406 407 413 47 419.432‘UNIT 3 - DEDUCTIONS ON GROSS INCOME CHAPTER 13 Principles or Deductions iesiness Pens vs personal expense Alcaton a common cxpenaes Business expense rs cpl expenditures Releson deducting capital expeotres Deprecation methods ing Rule ‘The Related Party Rule CHAPTER 13-4 Regular Allowable Itemized Deductions remized deductions Interest expense Taxes Foreign income tax credit Depreciation expense ‘Amortization expense on intangible assets Depletion expense lopment and general expenses nt and amusement expenses Freraise Drills CHAPTER 13-8 Special Allowable Itemized Deductions and Net Operating Loss Carry-over ‘special deductions Special expenses under the NIRC and special laws jon incentives under special laws rating Loss Carry-over NOL vs. NOLCO Requisites for te deductibility of NOLCO 476517 476 476 480 482 38 487 506.517 519.582 518 519 sar KoLco 343 raxpav" ger and cons 548 Rulesin carry-over of| mio 545/552 553.578 3st $53 358 356 nds 358 sr 50 Ses ding parners 585 ae 370-578 dard Dedcton rs ndard Deduction (OSD) red to use ntemized deductions Cost of services (OSD for general professional partnership incl Exercise Drills UNIT ~ SPECIFIC REGULAR TAX RULES PER TAXPAYER CLASS ‘Sub-Unit 1 Special Regular Tax Rules for Individual taxpayers 879.617 579 580 580 581 54 506 587 593 ‘Tarable estates and trusts 596 Consolidation oftwo oF more trusts 598 599 red taxpayers 600 fh PERA accounts 601 come Tax Returns 602 meot payment of regular income tax 603 come tax return 605 606-617 ‘Sub-Unit 2 Special Regular Tax Rules for Corporate taxpayers (CHAPTER 15-A Corporate Income Taxation - Special Corporations 618-660 General classification and tax rules for corporations: 618 Sub:classification of corporate taxpayers. 619 Exempt corporations 6 ‘The casieaton rue aRequisites of erption of monprocorporatns Exception to the classifi ul "porate tion rule S22 Tati of cooperatives a “cation of common expenses of exer ‘corporations : Reporting requirements tor exemprecreenert Po Special domestic, ‘corporations ee The Pre-dominance test a Taxation of FCDUs bid ‘Tax on PEZA or Bc oa tore me & Taxation of RHQs: & ees & Taxon special non-resident foreign corporations a Exercise oor.ee0 eer ear eon, Seer Copeiton tak tn teers s Te a Tene 3 Feat kai citi 7 nae 7 a lecia & wn Appendices x1 Table summary for final income tax rates iM2 Withholding tax tables on compensation Appendix 3 Income tax table for Appendix 4 ‘Chapter 1 = Introduction to Taxation CHAPTER 1 INTRODUCTION TO TAXATION ‘Chapter Overview and Objectives ‘This chapter discusses the fundamental principles of taxation. ise ch . iopter, readers must be able to comprehend and demonstrate mastery After this core waiaation and is necessity for every government 2 bid ds onto taxation i : : é , é s Incipes surrounding tration 10, Various escapes from taxation 11, Concept of tax amnesty and condonation (WAT IS TAXATION? Taxation may be defined as a State power, a legislative process, and a mode of government cost distribution 4. Asastate power Toxation is an inherent power of the State to enforce a proportional contribution from its subjects for public purpose. 2 Asaprocess 's a process of levying taxes by the legislature of the State to enforce ional contributions from its subjects for public purpose. 3. Asamode of cost distribution Taxation 1s a mode hy which the State allocates its costs or burden to its Subjects who ae benefited by its spending ‘The Theory of Taxation Every government provides a vast arra public order and safety, health, education, 'y Of pubite services including defense, ‘and social protection among others.(Chapter 1 - Introduction to Taxation : sy. However forfunding iste hea The governments ech The Basisof Taxation ‘The government provides benef tothe people nthe ole inthe form of publ se the people provice the finds that fnanee the gaveneee te Support berween the people andthe government Ie refered tse 1y of bast of ‘This mutuality is illustrated as: Public services et [creme t___ tas Receipt of benefits is conclusively presumed Every citizen and resident of the State directly or indit public services rendered by the government, These bene daily free usage of public infrastructures, access to public health or educational services, the protection and security of person and property, or simply the comfort of living in a civilized and peaceful society which is maintained by the ‘government. tion by every fof these benefits bythe 5 cannot avoid payment of taxes lunder the defense of absence of benefit received. The direct receipt or actual availment of government services is not a precondition to taxation, the people. In wing general 1. Benefit received theory 2 Ability to pay theory nto Taxation chapter 1 -tniroductor eer) ee nl ea iit receives from poses that the more benefit one FES a oe ep Parr tatve capacity to sacrifice For the apposes that tra bol be reqs netlovort tthe government they benefit less from hey receive ave more should be taxed more even if they Be Inshort. hase wha tate Te have lest shal contribute less even if bate ‘benefits from the government. more ofthe Aspects ofthe Ability to Pay Theory Se ae that the extent of one’s ability to pay is directly Vertical equity propeses proportional to the level of is fax base. or example. A has F200000 income while 8 rent should tax B more than A because B hi has P400,000. tn taxing income, the as greater mcome; hence, a greater Horizontal equity Horizontal equity requires consideration of the particular circumstance of the taxpayer. the lifeblood of the government, and thelr prompt and certain are an imperious need. Upon taxation depends the government's Fernandes) Peuple for whose benefit taxes are collected. (Vera vs,hapten econ ter 1 = ntodcon to Tava Implication ofthe iteblood doctrine in taxation: comparison ote tee Pers = 1 _ Comparison oo A Font fe | Taxation 3 [_oiperence | ited ‘ awe | om 5. Inivcome nation [set aan apo 2 Income received in advance i taxable upon receipt, pose | Fine government — a 1. Deduction for capital expenditures and prepayments is not allowed as noe Me cilection af income tax wedsk aoe | propery of deductions preferred whe a caimable exp “ pretrred when a caimabe expenseiw | ated Te aout ‘base is preferred when the tax object has multiple tax bases, Frank of imposed. ‘pton INHERENT POWERS OF THESTATE commpensati Tempera rocnchas ha banc nents and igh which co-exist with itscreaton has [orice _ important io sustenance, protection, and properties. The government sustains is ene Superior to th to sustenance roe gua andthe wen of people by pole | wih the ee aS properis tery ot Hs pic series Oye | Eastaton ower of eminent domain Constston Taaven—} Consctavonal ‘These rights, dubbed 25 “powers” ae natura ineparl, and abe Cornet | and due proces sain of eee operte mien government. No government can su powers. Therefore, the exercise of thes Bhderstood and acknowledged by the people from the very mom their government. These powers are naturally exercisable ‘even in the absence ofan express grant of power in the Const se powers by the government is presumed they establish Similarities ofthe three powers of the State the government 1. They are all necessary attributes of sovereignty. ‘The Inherent Powers of the State ‘Taxation power isthe powar ofthe State to enforce proportional contribution rays in which the State interferes with private rights and from ts subjects to sustain self Police power i the general power of the State to enact laws to protec he 1 of the Constitution and are exercisable by the rent even without Constitutional grant, However, the Constitution 2 rettnnget the pest. 4. elinor censor for thet exe “Eminent domain s the power ofthe State to tke private property fr psbte + ‘They all presuppose an equivalent form of compensation 3 ee ing je corners 1, Mista by te exert ofthe power. pensation received by the ie national egsanye, 7 Fst Government units may be himited byJ) chose -itotictntoTecaten SCOPE OF THE TAXATION v0 The scope of taxation ts widely Fe anasupreme regarded as com #atded as comprehensive, plenary unin mites However, despite the seemingly unlimited. Taxation has its 0 the Constitution, ‘THE LIMITATIONS OF THE TAXATION POWER 2. International comity 3. Public purpose 4 Exemption of the government 5. Non-delegation of the taxing power B. Constitutional Limitations 1 ressive system of taxation 1 non-payment of debt or poll tax Non-impairment of obligation and contract Free worship rul Exemption of religious or charitable entities, non-profit cemetene, churches and mosque from property taxes 9. Non-appropriation of public funds or property for the benefit of any church, sect or system of religion wxes of the revenues and assets of non-profit, non-stock ions 11. Concurrence of a majority of all Taw granting tax exemption jon of tax collections ‘of the power of taxation risdiction of the Supreme Court to review 3s ils shal It members of Congress for the passage of* 13. Non-deley 14. Non-impairment of the ju 15, The requirement originate exclusivel 16, The delegation of taxing power that appropriations, revenue, of tari sy m the House of Representatives to local government units —=— peor 1 Irvoducion © Taxaer .T10N OF TAXATION ‘char INHERENT LIMITA jon its 5h ‘only demand (2% pons eign Sublets jurisdiction: Phe government. Furthermore, we gerive benefits (rom oUF re ene eroachent of foreign SOverelENY- -qworfold obligations of taxpayers Figen coeemerinet be demanded and enforet id residents. It cannot entor eine! 1 and its remittance fed by the Philippine ‘ree these upon subjects ‘these obligations can only ineroachment of foreign tener upon ts ins a severe orial urisicton as this would Fest sovereignty. ‘Exception to the territoriality prin 1 tmincome taxation, resident c income derived within and outside the Phil 2. in transfer taxation, residents or citizens such as resident Azer, Te resident citizens and resi ng are taxable on transfers of properties Tocated within or outside jorations are taxable on International comity In the UN Convention, countries of the world agreed to one fundamental concept Ureoequal sovereignty wherein all nations are deemed equal with one another regardless of ace, religion, culture, economic conditien or military power. No county is power than the othe. es by this principle that each coum Ss mail ome a rey or eaprost besn ‘he 1 Goverment donot tae he nce ap ve and properties other governments E: ovenments ge primacy tothe ren ob Serene pe pinay theta pts over how domestic Embassies or consular ofces bess of cnr of orein goverment the Phin ncaing erat irnon-Pipino staff are not subject to ict wees o ner = Under the Neon ternal Revenue Code (NII the ent and foreign government Carperaons remot sabecttoicometax, Snnenwownes. and con 7I> (Chapter 1 - Introduction to Taxation When a state ent agreements as a same conflicts wit te Public purpose tended forthe common good, Taxation public purpose. It cannot be exercised to furth elute fo Exemption ofthe government road. The government can exercise the po "EF Upon does not this will not aise additional funds but wil only impute adivonatconys SAE Under the NIRC, government properties and income from ess functions are not subject to taxation. However, income te properties and activities conducted fo pro ‘owned and controlled corporations is subject to tax abi government fom is from government Non-delegation ofthe taxing power The eiative taxing power vested exclusively in Congres ands non del pursuant to the dotine of separation of the branches of te green ‘ensure a system of checks and balances. . ‘The power of lawmaking including taxation, i delegated by he people tte legislature. So as not to spoil the purpose of delegat held dente has been delegated cannot be further deepsed Exceptions to the rule of non-delegation local government units are allowed to exercse the watonomy. ‘empowered to fi the power to taxto. 2. Under the Tariff and C amount of tariffs to be fe 3. Other cases that req {implementation of asse CONSTITUTIONAL LIMITATIONS OF TAXATION Observance of due process of law No one should be deprived of his lif, liberty, or proper law. Tax laws should neither be harsh nor oppressive. ty without due proces caper 1 Inonon 19 Tera? cour nee no by the taxing Trement of due Process: ah le peas the egureme taxes, and the hearing. The law 4 seessments and if rocess rent and collection of race ness in assessment and collec 2. Procedural due There should be m0 overnment shall 0 yvoiished procedures which mus ‘Equal protection ofthe law Io person shall be denied the equal protection oth in terms of rights conferred of the law. Taxpayers should be ‘and obligations imposed. trested equal ani ‘this rule applies where taxpayers are under the same sitcumstanse® ‘his rule appl rcement would mean Congress cannot exempt sellers of bala” while ers of “penoy” to tax since they are essentially the same goods. Uniformity rule in taxation ‘The rule of taxation shall be uniform and equitable. Taxpayers under dissimilar Grvumstanaes should not be taxed the same. Taxpayers should be classified ‘ccording to commonality in attybutes, and the tax classification to be adopted Should be based on substantial distncuon, Each class is taxed differently, but taxpayers falling under the same class are taxed the same, Hence, uniformity is Congress shall evolve a progressive system of taxation. Under the progressive rhe Constitution favors to pay. Moreover, the le distribution of wealth ta society by taxingChapter 1 - Introduction to Taxation Non-imprisonment for non-payment of debt or poll tax ‘Asa policy no one shall be imprisoned because of his poverty, and imprisoned for mere pay debt POVEEY, An D0 one shan However, this Constitutional guarantee applies only when the debt i the debtor in good faith Debt acqured in bad ath constaes ge ey offense punishable by imprisonment. " @ Criminal ‘except poll tax. om Poll tax has two components: a. Basic community tax b. Additional community tax The consttutional guarante of non-imprsonment for non-payment of apples only to the basie community tx Nor-payment of he tea omnuity tax ta act of tax evasion punishable by imprisonment Non-impairment of obligation and contract. ‘The State should set an example of good faith among its constituents, It should not set aside its obligations from contracts by the exercise ofits taxation power. Tar ‘exemptions granted under contract should be honored and should aot be cancelled by a unilateral government action. Free worship rule 1¢ government adc pts free exercise of religion and does not subject. (0 taxation. Consequently, the properties and revenues of religious utions such as tithes or offerings are not subject to tax, This exemption however, does not extend to income from properties or activities of reliposs institutions that are proprietary or commercial in nature Exemption of religious, charitable oF educational ‘cemeteries, churches and mosques, tands, buildings, from property taxes ‘The Constitutional exemption from property tx applies for properties eee directly, and exclusively (ie. primarily) used for charitable educational purposes. fentides, non-profit ‘and Improvements 10 — _ntoaueiono Texan Chapter + Inrocucto rows the doctrine of haritable, oF — eS por : yrties of religious, charitable, oF rs i benefit of any church, ine of omnerip, We Br te wr oF not used oun sno ap Unde educational entities whether secret reper ton TH on-appropraion of publ funds oF property for the we mended to hight the separation of eligion vom ane government should RO V9" on pub ands or PreDETY 18 ‘To support any particular system of religion by appro support thereof, pensation to priests, imams, or religious ry, penal institutions, orphanages, oF ligious appropriation. It should be noted, however, that ‘ministers working with the leprosarium isnot considered Exemption from taxes of the revenues and assets of non-profit, non-stock ‘educational institutions including grants, endowments, donations, or contributions for educational purposes ‘The Constitution recognizes the necessity of education in state building by ting tax exemption on revenues and assets of non-profit educational institutions. This exemption, however, applies only on revenues and assets that are actualy. directly. and exclusively devoted for educational purposes. Consistr NIRC also exempts. govert ssubjeces private educational ation as a necessity, the ns from income tax and 1% income tax. Concurrence of a majority of all members of Congress for the passage of a remption must proceed only A requires the vote of the grant oftax exemption. members of Congress In the approval of an exe ave. an absolute majority or the majority of all ve majority or quorum majority, is required. ‘exemption, only a relative majority is required, Non-liversification of tax collections : ax collections should be used only fo Ahvesied or sed or priate non fOF PUbUC purpose. it should never be However, in the withdrawal aChapter 1 - Introduction to Taxation Non-delegation of the power of taxation ee, Principle of checks and balances ina republican state requires that taxa ion Power as partof lawmaking be vested exclusively in Congress. the expedient ang id collection of taxes slative in character ae Hence, implementing adminstrative agencies such as the Department of Fina and the Bureau of internal Revenue (I issues revenue regulations, isa orders o circulars to interpret and clan the ap their functions are merel law. They are not lative authority serrate rane scoaae ee entons ae ease Non-tmpairment ofthe jurisdiction of the Supreme Court to review tax cases Notwithstanding the existence of the Court of Tax Appeals, which is a special court, all cases iavolving taxes can be raised to and be finally decided by the Supreme Court ofthe Philippines, Appropriations, revenue, or tariff bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments. Laws that add income to the nat therein must originate from the concur with amendments. The the House il treasury and those that allows spending of Repres Each local government unit shall exercise the power to create its own sources of revenue and shall have a just share in the national taxes, This is a constitutional recognition ofthe local autonomy of local governments and an express delegation ofthe taxing power ‘STAGES OF THE EXERCISE OF TAXATICN POWER 1. Levy or imposition 2. Assessment and collection ae Intreducton to Taxation oe act dis called ip: Levy orlmpostto a cunent ofa tax law by Congress and is Ee scforreatoas the legislative actin taxa oftoxntion re! ore mgt a neh ttn aces Cort Refer is approved by both bodes, but tx vera dn ne ner icon se Crea coy ‘ Parken ten rl eet Je of ust originate from the Hous us, orravons of proposed aM a orgiate exclusively #FO™ ed ich must be public use 1 2 3 4 bi 6 1 Assessment and Collection ‘men ‘the tax law is implemented by the administrative branch of the government. shaptites of Mejeentaton votes osesenet or the determination of he 2 tenet esta stage referred wo a nedence of fonction oF the samira tf tran, SITUS OF TAXATION ‘Situs isthe place of taxation, It is the tax jurisdiction that has the power to levy taxes upon the tax object. Situs rules serve as frames of reference in gat the tax object is within or outside the tax jurisdiction of the taxing Examples of Situs Rules: 1, Business tax situs: Businesses are subject to tax in the place where the business is conducted. ‘payer is involved in car dealership abroad and restaurant operation in the pines, estaurant business will be subject to business tax in the Phil ess tax in the Philippines since the ess is conducted herein, but the car dealing business is exempt because the B(Chapter 1 - introduction to Taxation 2. Income tax situs on services: Service fees are subject to tox where rendered. fee hey ore istration A foreign cor reign corporation leases a residenta space to a non-reskdent Fp ‘The rent income willbe exempt from Philipine taxation as the lasing se rendered abroad. etree o Income tax situs on sale of goods: The gain on sale is subject to tax in the place of sale ant OFW citizen agreed witha Chinese friend to sell hig ‘They stipulated that the delivery of the item and bbe made a week later in the Philippines. ‘The sale wes ‘consummated as agreed is consensual and is perfected by the meeting of the minds of the contracting parties. The perfection of the contract of China. The sits The gain on the sale ofthe necklace wll be taxable abroad and Property tax situs: Properties are taxable in their location. Mlustration ‘An overseas Filipino worker has a residential lot in the Philippines. pay real property tax despite his absence in the Philippines because his property is located herein. Personal tax situs: Persons are taxable in their place of residence. Mlustration ‘Ahmed Loft isa Sudanese studying medicine in the Philippines. ‘Ahmed will pay personal tax in the Philippines even ifhe isan alien beceuse he is residing in the Philippines. OTHER FUNDAMENTAL DOCTRINES IN TAXATION. 1. Marshall Doctrine -"The power to tax involves the power to destroy.” Taxation power van be used as an instrument of police power. It can be used t0 discourage or prohibit undesirable acuvsties or occupation. As such, taxation power carries with it the power to destroy. However, the taxation power does not include the power to destroy used solely for the purpose of raising revenue. (Roras vs. CTA) 4 ‘Chapter 1 - Introduction to Taxation 2. Holme’s Doctrine 4 while he ation power 1s mot the power to destroy caine power may be used to uid or encourage bene opie rtf on incenves. dict e's Dectine appear to contra peal practice. A good manifestation ofthe a Peeccnve ax on c4aretes while She te erento ot Ecoranes with a sation ncentves such asthe Omimbus investment Code tnd ne barangay co Dusen nterprie(OMBE) Law. ion. An ex post facto law or a law Dn cvely if so intended by Exceptionally, income tax laws may operate retrospectively Congress under certain justifiable conditions. For example, Congress can levy tax on income earned during periods of foreign occupation even after the war. Non-compensation or set-off Taxes are not subje comatic set-off or compensation. The taxpayer cannot delay payme to wait for the resolution of a lawsuit involving his pending claim against the government. Tax is not a debt; hence, its not subject to set-off. This rule is important to allow the government sufficient period to evaluate the validity of the claim. (See Philex Mining Corporation vs. GIR, GR. 125704) Except ‘8. Where the taxpayer's claim has already become due and demandable such as when the goverment already eecognized the same and an appropriation for refund was made '. Cases of obvious overpayment of taxes © Local taxes igned or transferred to another entity by the taxpayer to such effect shall not prejudice of the government to collect. Imprescriptibi Prescription in taxation apsing of a night due to the passage of time. When on en one over an unreasonable period of time, he is presumed to be The government it to collect tae da the self provide for such prescription, es “ORS NOt Prescribe 15— ‘chapter 1 -Introducton to Taxation [Chapter 1 -Inroducton to Taxation Under the NIRC, tax prescribes if not collected within § years from the ies assessment in the absence ofan assessment, ax prescribes ifnot gee by judicial action within 3 years from the date the return is requ filed. However, taxes due from taxpayers who did not flea returm or who fled fraudulent returns do not prescribe lected tobe hoe 7. Doctrine of estoppel ‘against that person who made the misreprest Fhe semeonenis ss scalpel The tO 6 SG Ee Span fue opp, There yeoman See ee eae arate eee gee ee 8. Judicial Non-interference Generally, courts are not allowed to issue injunction against the governments pursuit to collect tax as this would unnecessarily defer tax collection. This rule isanchored on the Lifeblood Doctrine, 9. Strict Construction of Tax Laws ‘When the law clearly provides for taxat there isa clear exemption. Hence the maxi the exception” ‘When the language of the law is clear and categorical, there is no room fer interpretation. There is only room for application. However, when taxation laws are vague, the doctrine of strict legal construction is observed. taxation is the general rule unless “Taxation isthe rule, exemptions Vague tax laws Vague tax laws are construed against the government and in favor of the taxpayers. A vague tax law means no tax law. Obligation arising from law is ‘ot presumed, The Constitutional requirement of due process requires laws be sufficiently clear and expressed in their provisions. Vague exemption laws Vague tax exemption laws are construed against the taxpayer and in favor of the government. A vague tax exemption law means no exemption law. Tht claim for exemption is construed strictly against the taxpayer in accordance with the lifeblood doctrine. 16 DOUBLE TAXATION aprer eta te inherent to te State Isa prerogative assent) Te int of organ oF statute Ia SOR ‘No. 167260. February 27, te must be shown indubuably (0 exist AE the Oc st A welfounded doubt is fatal tothe re opestaon can be supported. (82) ‘When exemp ‘every presumption is agains any other construction hat 4 fom vague ference Tax exemption must be Scpoverelaming a tax exempsion must point confer fe taRDaver, in clear and ‘terms, eubt wheter a tox exertion exists al Telecommunications, ne Vs C1 ‘Tax exemption cannot ans ‘Sfeec provision of law conferng. on ‘rempuon om a common burden Anya {feived agains the taxpayer (see Dig Government of Baangos etl) Double taxation occurs when the same taxpayer 1s taxed twice by the same tax jurisdiction for the same thing. Elements of double taxation 1, Primary element: Same object 2. Secondary elements: a, Same type of tax , Same purpose of tax Same taxing jurisdiction dd. Same tax period ‘Types of Double Taxation 1. Direct double taxation ‘This occurs when all the element of double taxation exists for both impositions. Earmples: 2 An income tax of 10% on monthly sales and a 2% income tax on the ann ‘sales (total of monthly sales) m the annual Ate taxon bank reserve deiiency and another 19% penalty per day as a consequence of such reserve deficiency, penalty ” 2. Indirect double taxation This occurs when atleast one ofthe secondary elemen " ‘not common for both impositions. Ny elements of double taxation is "7NE! (Chapter 1 - Introduction to Taxation Examples: ‘4 The national government levies busines tax on the sas oF gross recep business while the local government levies business tax upon the same sac, or receipts. % Wvernment collects community tax upon the same income, Se erate ne gre es te opt {international double taxation). Nothing in our law expressly prohibits double taxation. In fact, indirect double taxation is prevalent in practice. However, direct double taxation 1s discouraged because it is oppressive and burdensome to taxpayers. It is also believed to ‘counter the rule of equal protection and uniformity in the Constitution. Mow can double taxation be mintmized? ‘The impact of double taxation can be minimized by any one oF a combination of the following: 14 Provision of tax exemption - only one tax aw is allowed to apply to the tax ‘object while the other tax law exempts the same tax object Bb. Alfowing foreign tax credit ~ both tax laws of the domestic country and + foreign country tax the tax abject but the tax payments made inthe foreign ux law s deductible against the tax due of the domestic tax law Allowing reciprocal tax ereotment - provisions in tax laws imposing a reduced tax rates or even exertion if te country of the foreign taxpayer also give the same treatment to Filipino non-residents therein 4. neering ino trevees or bilateral agreements ~ countries may stipulate fora lower tax rates for their residents if they engage in transactions that 2 taxable by both of them ESCAPES FROM TAXATION Escapes from taxation are the means available to the taxpayer to limit or even avoid the impact of taxation, Categories of Escapes from Taxation A. Those that result to loss of government revenue 1. Tax evasion, also known as tax dodging, refers to any act or tick that tends to illegally reduce or avoid tie payment of tax. 18 — Chapter 1 - Invoducton to Taxation Examples a Th és b. Misrepresent advantage of lower taxes. “can be achieved by gross understatement of income, nom ration of income, overstatement of expenses or tax credit. ‘he nature or amount of transaction to take 2. Tox avoidance iso wxown a8 or minimisation refers to ay acto ek Fer guteae ay csapes tae any eal permissible means Bane: aon and executon of transaction that would expose taxpayer tower une b.Nisimang options tx cary-overs ort reais cota pnning 2. Tar exemption, so known a tax holay, refers tothe immunity rantege se teedom rom ing subject toa tx which eters ae subject 2 ateempsns mayb granted he Cnsonton aw, or contact Ai forms of exemptons can be ceveked by Congress except those Gray the Consain aad hove rated er cna Tose that donot resut tos of goverment revenue sning This Is the proves of transtersng tax burden to other copays Forms of siting 2 Pooward shifting Tiss the shiing fox which follows the normal and services such as food and fuel. ° Backward shifting - This is the reverse of forward shifting. Backward shifting is common with non-essential commodities where buyers have considerable market power and commodities with numerous substitute products. '© any tax shifting in the distribution iftng or backward shifting. Shiting \s common with business taxes where taxes imposed on busines Tevenue can be shifted or passed-on to customers, aa . 2 Capitalization ~ This pertains tothe adjustment of the v caused by changes tn tax rates. es 19chapter {= Introduction to Taxation For instance the value of a mining property will correspondingly decrease Fer mining output is subjected to higher taxes. This is a form of backward shifting of tax 44. Transformation ~ This pertains tothe elimination of wastes or losses by the taxpayer to form savings to compensate for the tax imposition o¢ sncrease in taxes. Tax Amnesty ‘Amnesty is 2 general pardon granted by the government for erring taxpayers to fave them a chance to reform and enable them to have afresh start to be part of Sooty with a clean slate. It 15 an absolute forgiveness or waiver by the {government on its right to collect and is retrospective in application. ‘Tax Condonation ‘Tax condonation is forgiveness of the tax obligation of a certain taxpayer under certain justifiable grounds. This is also referred to as tax remission. Because they deprive the government of revenues, tax exemption, tax refund, tax amnesty and tax condonation are construed against the taxpayer and in favor of the government. ‘Tax Amnesty vs. Tax Condonation ‘Amnesty covers both civil and crimi civ habllites of the taxpayer. ss, but condonation covers only Amnesty epertes reirospecovely by forging past vol Zope rospectvel to any unpaid balance of theta en aldby the taxpayer note ended “Amnesty isto conditions upon the taxpayer paying the government a portion thetnwherasunfonaoorequresrepemene ements poruen of 6. Condonation portion already ‘Chapter 1 = Introduction to Taxation CHAPTER 1: SELF-TEST EXERCISES Discussion Questions 4. Define taxation, 2 the theory and the basis of taxation. 3 ‘the theories of government location? Explain each. 4 fate vertical and horizontal equity: 5. 6 zi 8 scope of the power of taxation. 9 substantive due process from procedural due process 10. of equality from the concept of uniformity i TL Distinguish non-payment of debt versus non-payment of tax in from real property tax in the Const ins are also classified as inherent limitations? taxation power, 15, Explain the concept of situs. 16. Distinguish the Marshall Doctrine from the tfolme's Doctrine. Explain double taxati ype: 19. What are the categories of escapes from taxation? Enumerate and explain each means of escape under each category. 20, Distinguish tax amnesty from tax condonation. Exercise Drills ‘Exemption of the revenues and assets of nomspr stock educational institutions Pomene igious purpose a 8 ne requireme ak in eemmpiane Sonn T#RNY Te peemge ors | 1 (Bon: inpnonment Torani fora | rae a(Chapter 1 - Introduction to Taxation = To, | Taxpayers under 0 matance should be treated equal both in terms of privileges and obligations. TE | Exemption from property taxes of religious, educational and chat Ti | Government ineome and properties are not objects of axation, 5." | Each local government shall have the power to create its ‘own sources of revenue. i 15, | 16. _| Guarantee of proportional system of taxation. 17. {Imernational courtesy 8. | Non-impairment ofthe jurisdiction ofthe Supreme Court toreviewtaxcases. T3_| The governments Hot subject to estoppel. 20. Imprisonment for non-payment of poll tx. False 1 inent domain involves confiscation of prohibited commodities to protect the ingof the people. 2 inal equity requires consideration ofthe circumstance ofthe taxpayer, 3 Taxes are the lifeblood of the government. 4 5. ‘Taxation isa mode of apportionment of government costs to the peopl ‘There should be direct receipt of benefit before one could be compelled to pay taxes. 6. ‘The exercise of taxation power requires Constitutional grant. 7. Taxation is inherent in sovereignty. 8 Police power is the most superior power of the government. Its exercise needs \ctoned by the Constitution. erent powers presuppose an equivalent form of compensation. 10, The reciprocal duty of support between the government and the people underscores the bass of taxation. True or False 2 1. The Constitutional exemption of ri churches and mosques refers to income tax and real property tax. ‘Taxpayers under the same circumstance should be taxed differenti. ‘Taxation 1s subject ¢9 herent and Constitutional limitations. International comity connotes courtesy between nations. Colleciun af taxes in the absence of a law is violative of the Constitution’! requirement for: 6. The scope of taxation is regarded as comprehensive, plenary, unl supreme. 7. Noone shall be imprisoned for non-payment of tax. jous, charitable, and non-profit cemeteries, 2 ood doctrine requires the government to override tts obligations and ‘when necessary. Trembers of Congress is required to pass atax exemption law. samen should tax itself ‘Multiple Choice - Theory: Part 1 which tax is levied i: 2 legislative function inherent and constitutional limitation @. Generally for public purpose 3, Which is correct? 3. Tax condonation {s ageneral pardon granted by the government. b. The BIRhas five deputy The government can because taxes arethe 4. The Presid necessity of pines can change tariff or imposts Congress to pass alaw for that purpose. 4. A The power to tax in B. The power tolicens the power to exempt. cludes the power to tax Which is true? a Aonly. b. Bonly, ©. AandB 4.Neither A nor B 5, International double taxation can be mitigated by any ofthe following except ‘2. Providing allowance for tax credit Provision of reciprocity provisions in tax laws Provision of tax exemptions Entering into treaties to form regional trade blockage against the rest of the world 6. Which is not an object of taxation? a. Persons Transactions Business 4 Public properties Tat courts cannot issue injunction agains the governments Patou governments etfort to collect taxes 2 theliebood doctrine. —_c.the bility to pay theory. 3 Imprescripbity of taxes. the doctrine estoppel 2B(Chapter 1 - Introduction to Taxation 8. The power to enforce proportional contribution from the peo of the government is a. Taxation b. Police power PI oF the spp ¢ Eminent domain Exploitation 9. This theory underscores that taxes areindlspensabetothe ex a Doctrine of equitable recoupment me sence ofthe ae b. The ifebioed Doctrine The benefit received theory 4. The Holmes Docrine 10. A Taxation isthe rule, exception isthe exemption. B. Vague taxation laws are interpreted liberally in favor ofthe government, Which is false? a Aonly b. Bonly 11, Select the incorrect statement. a ‘The power to tax includes the power to exempt Exemption is construed against the taxpayer and in favor ofthe government ¢ Taxstatutes are construed against the government in case of doubt. d._ Taxes should be collected only for public improvements. Both A and B Neither Annor B a Publiceducation National defense None of these 113, Which does not properly describe the scope of taxation? a Comprehensive «Discretionary b Supreme Unlimited 14, Allof these are secondary purposes of taxation except 4. To reduce social inequality 1b. To protect local industries To raise revenue for the support ofthe government . Toencourage growth of local industries 15, Whatis the theory of taxation? ‘a. Reciprocal duties of support and protection b. Necessity e Constitutionality d Public purpose 16. A.Taxes should not operate retrospectively. B.Tax is generally for public purpose. 2 = “chapter 1 Introducton to Taxation eAand8 4 Neither Anor B 17, Which provision of te Const is double taation believed to violate? 2. Equal protection gua usive scheme of taxation 4. Bither Aor oftweation isthe concept of “sus of taxation” based? ‘International comity ‘Exemption of the government 19, which ax exemption is irevocable? Wr Sdempton based on cnerat fee Sktmpton tase on the Conssation Tet etempron based on G pomames Isincorrec? scans ater ut coerbue his sharein goverament os a Every person torment isexpeted to mprove the lives of te POP e Threaten of sides protcron and other benefits wile the people rovide support a ade PRT able to pay taxcan enjoy the piles and protection of the govern 2, whichis the mostincortet statement egarding taxes? We eesary for the conn existence ofthe government. aoe eet py tan does net ces upon the privilege enjoyed by or the aan aon the cien ofthe government but upon the neces of Money for he support ofthe State. TREE alte personal bene enjoyed from the government before one is rete to pay te 4. Tater should be col rote aie th 20, Which statem without unnecessary delay but its collection should ofthe objects of taxation, the cours have no power to catty motive expediency, or mecesityof ax law be both tax and a regulation, Taxes nay be levied SSprivide means for ehbitaion and stabilaation of threatened Industry. Which sconrest 2 Statement 1 only Statement 2 nly ¢ Both statements Neither statement 2s(Chapter 1 - introduction to Taxation i: Fata, anette amount to be imposed. bi naaes? fearon ® MSHS Me Oe 4. Satonmg eae apy rte col thetarto impose 24. This reles to the priviege Ths brilege oF munity om a tx barden whieh tes ay 2 Excsion Taxi B. Deduction Reciproy je benef ecived Dresupposes that some taxpayers withis nes wl be een hey donot receive Denes from te gverement nn PE Ee Statement 2: The ity to pay theory suggests that some taxpayers ‘exempted from tax eae Bhat some taxpayers may be vided they do not have the ability to pay the same, Which statement is true? Only statement 1 b. Only statement 2 € Both statements 1 and 2 4. Neither statement I nor 2 26. Which is nota legislative act? Determination of the subject of the tax bb. Setting the amount ofthe tax ©. Assessment ofthe tax d._ Determining the purpose of the tax 27. Statement 1: Taxation is the rule; exemption is the exception. ‘Statement 2: Taxation may be used to implement the police power ofthe state. a listrue Land llare true b, Mistrue 28. Which of the following powers ofthe Commissioner of Internal Revenue cannot = delegated? ee Fhe examination of tax return and the determination of tax due thereon 3. Torrefund or crecit tax abilities in certain cases The power to compromise or abate any tax lability Involving basle defile tax of P500,000 and minor criminal violations a. The power to reverse aruling oft e Bureau of Interna Revenue 4 Land I are not rue 29, When exemption from a tax imposition islet or not cleaty stated, wAeN# Ceci ie enn te Singers cgnnt coda 26 chapter 1 -Invoduction to Taxation scout sigation arising from law cannot Be P government. eaemption pies a ‘hence construed #Rai whatisthe basis of on 1 duties a. Necessity of an iter, which is +31, when the provisions of ax laws are sent 350 2 Taxation applies since: & Exemption applies since ¥ anation the eae exempion ste exception. atom sabe es are construed, agtinst the 1e.o the Lifeblood doctrine 1 on gation arising from law is presumed: ignorance excuse statements does not support the principle that tax is not 32, Which ofthe fo subject to compe 2. The government and the taxpayer are not the nature of contract Bi jtors and debtors of each other. rows out of a duty wherein the personal consent of the taxpayer Taser arise from law, nt from contracts. Both tax and debt partake the nature ofan obligation, tenable in refusing to pay tx? © Preserl 4. Allofthese 34, Whats the primary purpose of taxation? 1. To.enforce contribution frem its subjects for public purpose b. Toraiserevenue economic and social stably jeory: Part 2 cemption of religious or charitable institutions refers only to «. Property tax and incom 4.Business tax ss b. Income tax 7(Chapter 1 = Introduction to Taxation ‘The agreement among nations o lessen ax burden of thee respective su called " petra bts, S Reciprocity i Inremational comity ‘Av educational insttution operated by 2 religious organization wat beng 4. No, with respect to properties not actually devoted to educational purposes Which is nota Constitutional limitation? No tax law shall be passed without the concurrence of a majri members of Congress, ver oft 4. Exemption of government agencies and instrumentalitis. ‘The following are inherent limitations to the power of taxation except one Chose the exception. a. Territoriality of taxes b.Legislative in character For public purpose 4. Non-appropriation for religious purpose ‘That all taxable articles or properties ofthe same class shall be taxed atthe sim rate underscores | Equality ncaxation —_¢ Uniformity m taxation None of these Non-impairmentof contracts B. Taxation is for public purpose. D. £.Non-delegation ofthe power totax 28 chapter 1 - Introduction to Taxation ese are classified as both constitutional ana ia Cand E d.DandE erent limitations? Which ofthe a AandB b Bande in the Constitution regarding taxation are § Gtteonsapainec double taxation ronal exemption of nonstock, non-profit educational IASHRuROns 10, The Const «¢ Property tax and income tax b. Ineome tax Business tax 11, Which ofthe following a leg iolative of the principle of non-delegation? rcement must exclusively pertain to Congress: te fix the amount of impost on imported and Allowing the Secretary of ‘which go beyond the scope ofa tax law 12, Which of the fllowing violates Constitutional provisions? to priests of religious ministers employed by the Armed. Forces of the Philippines Imposing tax on properties of religious institutions which are not directly and Authoria Imposts hase-out a huge devit, che President of the Philippines passed a law rs with previous tax delinquency to rom a aiesment inthe period of delinquency. s his vaid ‘aus the measure adopted is grounded upon necessity. 'b Yes: because the President is merely exercising his presidential discretion, No, because the power of taxation s non delegated " 4: No. because only the Department of Finance ean issue such ruling 14 Concerned with increasing une ‘the Pt ~ loyment rates in the country, the President of enate to pase lar romting ‘tablish businesses in the um ‘Passed to Congress for approval. ia afted the bill and 23Ram is the only practicing lung transplant Ram isthe oly 1g lung transplant special transplant to 2% tax based on re dent to adopt any me necessary to alleviate poor co athe coun iy Yes. Any means beneficial to the public ae able interest should Be gen optima ee. The President's proposs will have be ally approve the logetature The ruleonnondlegation of taxation would ot bene is shall originate from the House of Represem viet in Baguio Cty, The nance subjecting the race of Ram objected claiming thet oth Baguio passed a local transplant specialists in other regions ofthe country are not subjected to tax, Is Ram's contention valid? b. 4 ‘With the country ur enacted a law provid |. No, because there is na uniformi Yes, because te rule of taxation should be uniform and should be uniform and equitably eno Yer because Ram ithe only one subject Other protiones who woudl practice would not be covered by the ordinance. er the ordinance would cover all transplant sped practice in Baguio ity. The uniformity rule would not be vi Ro. because subjecting the new industry taxation would hamper economie growth incessant shortage of sugar. the x exemptions and incentives to can exemptions to rice farmers who produce the the new law valid? a atid clasication of the taxpayers who woud be ‘exempted from tax. Yes, since sugar is more important than rice. Nov since the grant of exemption is construed in favor of taxpayers. inthe grant of tax exemption. Congress passed alaw subjecting governmentowned and controlled corporations a Which of the following b. Yer, because GOCCs are not government agencies and ar No, because govern: income tax. s the aw valid?” Jeo necouse all government agencies and instrumentals are sublet 9 essential commercial in nature ‘are exempt. This would pose a violation of the equality clause in the constitution. se ony GOCCs ae constitutionally exempted fom Paying es ytation ofthe power to tax? 'Non-impairment Due process and equal Non appropriation for re caper t-tovouclon 12 TaN of police power «4, Non-deleation acted alae requiring foreign Banke op with ese enacted 3 country and to Femi one #2 sof cara gil anisicon of the opine Cones eal elipno.e ea vali exer ind government Pog ce Treg banks are wh nthe Cercitor pects of foreign mn enforce tax requirements €0 re outside the county. ey ment of foregn sover ete ‘he Constitution: ly pays real property (ax? oft charitable institution. oe eligi institution 7 yprietary ‘educational institution sperty development company Which ofthe following 90 eM pantay Bata, a non-pre i jesus Crusade mover é 20. seswersity of Pangasinan a private Pro vor property Holdings a registered PFC 21, Taxexemption bills are approved by Tax ony of all members of COnBEESS the President of the Republic bers of Congress resentatives constituting 2 QUOFuIM © 2/3ot Majority of the rr 1 The lapanese government invested P'100,000,000 in 2 Phitirping tocal bank and ‘Tamed P10,000,000 interest. Which is correct? The income is exempt on grounds The income is exempt due to intern P The income is subject co tax on the basis wt sovereignty. F TMe MRtome i subject to tax because the income is earned within the Philippines. ‘Multiple Chotce ~ Theory: Part3 1. when a legislative body taxes persons and property, rights and privileges under the came taxable category at the same rate, this is referred to as compliance with ‘the conshtutional imitation of «Due process 4. qual protection clause «Determination of the subject ofthe tax 1b. Sectingtheamount of the tax d, Determining the purpose of the tax an(Chapter 1 - Introduction fo Taxation b. They areexercisable ¢Allare not exercised by pr 1. Which is mandatorily observed in Implementing police power? Public use 6. The general power to enact laws to protect the well-being ofthe people a Police power ¢. Taxation a PeoPleiscaes % Eminentdomain Alot these 7. Which of the following entities wil domain? a. Electric cooperatives b. Water cooperatives ast likely exercise the power of eminent © Telecommunication business 4. Transportation operators, 8 In exercising taxation, the government need not consider ‘a. Inherent limitations, Due process of BL Justcompensation —_. Constitution 9. Licensing of business or profession isan exercise of a Police power Eminent domain b, Taxation 4.Allof these 10, Select the correct statement. a. Eminent domain refers to the power to take public property for private ust ‘paying just compensation. ‘ower being the mest superior power of the State is not subject any Taxation power shall be exercised by Congress even without an expres Consticutional grant lected even in the absence of a law since obligation arising sys presumed. 14, Which is principally limited by the requirement of due process? a. Eminent domain ¢ Taxation ' Police power All of these ‘chapter 4 - Introdvenon to Taxation mnt 1. Congress can exercise the power of taxation ome oF to tax. 12, Seartutiona) delegation of the power Sgotement 2: only the legislature can exercise the power o domain, and police power. Which statement is correct? a. Statement 1 b Statement 2 13, Which power of the State affects the least number of 2 pole power Taxation roles rrfomain Taxation and police power wen without f taxation, eminent ¢ Statements 1 and 2 4 Neither statement 1 n0F 2 people? lect the correct statement 14. See or eed teary explains tat the government is oblige to serve the people since itis benefiting from the tax collection from its subjects: ‘The hfeblood theory underscores that taxation is the most superior power of the State, ‘The police power of the State is superior to the non-impairment clause of the Constitution. 4. ‘The power of taxation is superior to the non-impairment clause of the Constitution. following isnot exercised by the government? ‘¢.Eminent domain 4. Exploitation 16, Select che incorrect statement. a Since there is compensation, eminent domain raises money for the government, >. Once a government is established, taxation is exercisable. & Themes important ofthe powers taxation, wer fs more superior than the non-impairment poe pss che wpairment clause of the 17. The following statements reflect the dif pe fect the diferences among the inherent powers 2 Te properey taken under eminent domai i that of police power is destroyed. sed ation ery preterit bit 1% Eminent domain and & Taxation, police power, and fovernment interferes with private right and peg ate right and property, 3Chapter 1 - Introduction to Taxation 18. Statement 1: The Taxation power can be used to destroy ifthe law is valid, Siotement 2: A tax law which destroys things business, oF enters Purpose of raising revenue is an invalid tax law. Sere or he Which is incorrect? a Statement 1 € Both statements Statement 2 4. Neither statement 19. Select the correct statement. 3 The provisions on taxation in the Philippine Constitution are grants ofthe powerts {ax includes the power to destroy is used asa too! for general and economic welfare, ths is called fiscal purpose, ‘The sumptuary purpose of taxation isto raise funds for the government 20. Which of the following powers is inherent or co-existent with the creation ofthe government? a Police power b._ Eminent domain 21, Which of the follo Taxation GLAlLofthese taxpayer and in Favor of the government. st the government in case of doubt. ‘d,_ Taxes should be collected only for public improvement b. Police power; Taxation © Eminent domain; Police power L_Allthe powers are equally superior and important 4 rminvstration cnapter 2 Taxos, Tax Laws and Tax Admini CHAPTER 2 TAXES, TAX LAWS, AND. TAX ADMINISTRATION “Thus Chapter discusses tax laws, taxes, and their distinction from sim! and the administration of the tax system. jaws, revenue regulations, and rulings Jements, and classifications ction of tax from similar items he Bureau of Internal Revenue (BIR) and the Commissioner of Internal Revenue (CIR) and the non-delegated powers of the CIR “The critena for selection of large taxpayers TAXATION LAW Taxation law cefers to any law that arises from the exercise of the taxation power ofthe State ‘Types of taxation laws 4. Tax laws - These are laws that provide for the assessment and collection of taxes, Examples . The Tariff and Customs Code ? © TheLocalTarcnce The Re Property Tax Code 2 Tax exemption lows ~ These are eames = These ate laws shat grat certain immunity from Ranges 2 The Moimim Wage aw 2 Be Oa nese Code o 1987 (60226) gay Micro Busnes Enter he 4 Cooperatis evelopment Act mee (BSE) Lave 35