1. What are the Stages of Taxation ?

Stages of Taxation (based from Domondon 2017)

1. Levy. This is also known as the imposition of the tax. This stage involves the determination by Congress of the
subject and object of taxation as well as rate.

2. Assessment and collection

a. Assessment. This stage refers to the determination of the amount of tax to be paid.

NOTE: The term "assessment" which here means notice and demand for payment of a tax liability, should not be
confused with "assessment" relative to a real property taxation, which refers to the listing and valuation of taxable real
property.

Assessment and collection may be delegated but not levy since it is exclusively conferred with the Congress.

b. Collection. This stage prescribes the means,process, and method of implementing the tax law for the purpose of
satisfying the tax obligation. The actual effort in obtaining payment of the tax.

3. Payment. Payment by the taxpayer of the tax is compliance with the tax laws including whatever remedies that are
available to him under the law.

GR: Tax shall be paid by the person subject thereto at the time the return is filed. (Sec. 56, NIRC)

XPN: When the tax due is in excess of P2,000, the taxpayer other than a corporation may elect to pay the tax in 2
equal installments in which case, the first installment shall be paid at the time the return is filed and the second
installment, on or before July 15 following the close of the calendar year (Sec. 56 (A) [2], NIRC)

NOTE: If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid
becomes due and payable, together with delinquency penalties.

4. Refund. The process for the return to the taxpayer of previous erroneous, excessive or illegal collection of taxes.

STAGES OR PROCESS OF TAXATION (UP Siklab Notes)

The exercise of taxation involves three stages, namely:

(1) LEVY OR IMPOSITION– This process involves the passage of tax laws or ordinances through the
legislature. The tax laws to be passed shall determine those to be taxed (person, property or

rights), how much is to be collected (the rate and the base of tax), and how taxes are to be
implemented (the manner of imposing and collecting tax). It also involves the granting of tax
exemptions, tax amnesties or tax condonation.

(2) ASSESSMENT AND COLLECTION – This process involves the act of administration and
implementation of tax laws by the executive through its administrative agencies such as the
Bureau of Internal Revenue or Bureau of Customs.

(3) PAYMENT – this process involves the act of compliance by the taxpayer in contributing his
share to pay the expenses of the government. Payment of tax also includes the options,
schemes or remedies as may be legally open or available to the taxpayer.

2. What is double taxation

DOUBLE TAXATION – taxing the same property twice when it should be taxed but once.

IS DOUBLE TAXATION PROHIBITED IN THE PHILIPPINES?

No. There is no constitutional prohibition against double taxation. It is not favored but permissible. (Pepsi Cola
Bottling Co. v. City of Butuan, 1968).

KINDS OF DOUBLE TAXATION

(1) Direct Duplicate Taxation / Obnoxious – double taxation in the objectionable or prohibited sense.
This constitutes a violation of substantive due process.

Elements:
a. the same property or subject matter is taxed twice when it should be taxed only once.
b. both taxes are levied for the same purpose
c. imposed by the same taxing authority
d. within the same jurisdiction
e. during the same taxing period
f. covering the same kind or character of tax.
(Villanueva vs. City of Iloilo)

(2) Indirect Duplicate Taxation – not legally objectionable. The absence of one or more of the above-mentioned
elements makes the double taxation indirect.

(3) Domestic- this arises when the taxes are imposed by the local or national government (within the same state)
(4) International- refers to 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.

REMEDIES OF DOUBLE TAXATION

1. Tax Sparing Rule – same dividend earned by a NRFC within the Phil. is reduced by imposing a lower rate of 15%
(in lieu of the 35%), on the condition that the country to which the NRFC is domiliced shall allow a credit against the
tax due from the NRFC, taxes deemed to have been paid in the Phil. (Sec.28 B 5b) (CIR vs Procter & Gamble) (GR
No. 66838, Dec. 2, 1991)
2. Tax deductions
Example: vanishing deduction under Section 86(A)(2), NIRC
3. Tax credits
Instances under the NIRC:
• For VAT purposes, the tax on inputs or items that go into the manufacture of finished products (which are eventually
sold) may be credited against or deducted from the output tax or tax on the finished product.
• Foreign income taxes may be credited against the Phil. Income tax, subject to certain limitations, by citizens,
including members of general professional partnerships or beneficiaries of estates or trusts (pro rata), as well as
domestic corporations.
• A tax credit is granted for estate taxes paid to a foreign country on the estate of citizens and resident aliens subject
to certain limitations.
• The donor’s tax imposed upon a citizen or a resident shall be credited with the amount of any donor’s tax imposed by
the authority of a foreign country, subject to certain limitations.
4. Tax Exemptions
5. Principle of Reciprocity
6. Treaties with other states

METHODS RESORTED TO BY A TAX TREATY IN ORDER TO ELIMINATE DOUBLE TAXATION

FIRST METHOD: The tax treaty sets out the respective rights to tax by the state of source or situs and by the state of
residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred in
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.
SECOND METHOD: The state of source is given a full or limited right to tax together with the state of residence. In
this case, the treaty makes it incumbent upon the state of residence to allow relief in order to avoid double taxation.

TWO METHODS OF RELIEF ARE USED UNDER THE SECOND METHOD:

1. The exemption method- the income or capital which is taxable in the state of source or situs is exempted in the
state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to
the tax payer’s remaining income or capital.(This may be done using the tax deduction method which allows foreign
income taxes to be deducted from gross income, in effect exempting the payment from being further taxed.)
2. The credit method- although the income or capital which is taxed in the state of source is still taxable in the state of
residence. The tax paid in the former is credited against the tax, levied in the latter.(Commissioner of Internal Revenue
v. S.C Johnson and Son, Inc. et al., G.R No. 127105, June 25, 1999)

Exemption Method Credit Method

Focus is on the income or capital itself Focus is on the tax

NOTE: Computational illustration between a tax deduction and a tax credit:

Tax deduction method
Gross income
Less: allowable deductions including
foreign taxes paid
Income subject to tax
Multiplied by rate
Income tax due

Tax credit method

Gross income
Less: allowable deductions excluding
foreign taxes paid
Income subject to tax
Multiplied by rate
Income tax due
Less: foreign taxes paid
Net income tax due

3. Income
a) Religious Income
b) Income from not religious

Sec. 28(3), Art III, 1987 Constitution

Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and non-profit
cemeteries and all lands, buildings and improvements actually, directly, and exclusively used for religious, charitable
or educational purposes shall be exempt from taxation.

Important Principles

a. Exemption of religious, charitable and educational institutions apply to real property tax only. The test is usage, not
ownership.

b. Gifts in favor of educational and/or charitable, religious, cultural or social welfare institutions shall be exempt from
gift tax, provided that not more than 30% of said gift is used for administration purposes.

c. The word “exclusive” means primarily rather than solely. Thus, the admission of pay patients does not detract from
the charitable character of a hospital if all its funds are devoted exclusively to the maintenance of the institution as a
public charity. Where rendering charity is its primary object, the funds derived from payments made by patients able to
pay are devoted to the benevolent purposes of the institution; the mere fact that profit has been made will not deprive
the hospital of its benevolent character.

d. The exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of
said purposes, such as school for training nurses, nurses’ home and recreational facilities.

4. Exclusions From gross income

Exclusions from Gross Income

SEC. 32. Gross income

(B) Exclusions from gross income
(1) Life Insurance
(2) Amount received by insured as return of premium
(3) Gifts, bequests, and devises
(4) Compensation for injuries or sickness
(5) Income exempt under treaty
(6) Retirement benefits, pensions, gratuities, etc.
(7) Miscellaneous items

Brief Explanations :)

1. Proceeds of life insurance policies but not the interest paid to the heirs or beneficiaries;
2. Amount received by the insured as return of premium;
3. Value of property acquired by gratuitous transfer but not the income from such property;
4. Compensation for injuries or sickness including damages received;
5. Income exempt under treaty;
6. Retirement benefits, pensions, gratuities, etc. under certain conditions;
7. Income derived by foreign governments, financing institutions owned, controlled or enjoying financing from foreign
governments, and international or regional financing institutions established by foreign governments, from their
investments in loans, stocks, bonds or other domestic securities or from interest on their deposits in banks in the
Philippines;
8. Income derived from any public utility or from the exercise of any essential government function accruing to the
Philippine government or to any political subdivision;
9. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or
civic achievement but only if the recipient was selected without any action on his part to enter the contest or
proceeding, and is not required to render substantial future services as a condition to receiving the prize or award;
10. Prizes and awards granted to athletes in local and international sports competitions and tournaments held in the
Philippines or abroad and sanctioned by their respective national sports associations
11. 13th month pay mandated by RA 6686 and Presidential Decree (PD) No. 851, as amended and other benefits not
covered by PD 851 and benefits such as productivity incentives and Christmas bonus which should not exceed
PhP82,000.00;
12. GSIS, SSS, Medicare and Pag-IBIG contributions14, and union dues of individuals;
13. Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness,
with a maturity of more than five (5) years; and
14. Gains realized by the investor upon redemption of the shares of stocks in a mutual fund company.

5. Taxability , non - taxability or certain income

Taxable Income (Sec.31, NIRC of 1997)

These are pertinent items of gross income specified in the NIRC which Less the deductions and/or personal and
additional exemptions, if any authorized for such types of income by the NIRC and other special laws.

6. Direct vs. Indirect taxes

Direct and indirect taxes include all the different types of taxes levied by the government. Direct taxes include the
taxes that cannot be transferred or shifted to another person, for instance the income tax an individual pays directly to
the government. In this case, the burden of the tax falls flatly on the individual who earns a taxable income and cannot
shift the tax to others.

Indirect taxes, on the other hand, are taxes which can be shifted to another person. An example would be the Value
Added Tax (VAT) that is included in the bill of goods and services that you procure from others. The initial tax is levied
on the manufacturer or service provider, who then shifts this tax burden to the consumers by charging higher prices
for the commodity by including taxes in the final price.

Both direct and indirect taxes are critical components of governmental revenue and consequently the economy. The
variations in the indirect taxes may come down in the future once the Goods and Services Tax bill is passed by the
parliament, probably by next year.

Direct Tax Vs Indirect Tax:

Direct taxes are paid in entirety by a taxpayer directly to the government. It is also defined as the tax where the liability
as well as the burden to pay it resides on the same individual. Direct taxes are collected by the central government as
well as state governments according to the type of tax levied. Major types of direct tax include:
• Income Tax: Levied on and paid by the same person according to tax brackets as defined by the income tax
department.
• Corporate Tax: Paid by companies and corporations on their profits.
• Wealth Tax: Levied on the value of property that a person holds.
• Estate Duty: Paid by an individual in case of inheritance.
• Gift Tax: An individual receiving the taxable gift pays tax to the government.
• Fringe Benefit Tax: Paid by an employer that provides fringe benefits to employees, and is collected by the
state government.
Indirect tax, as mentioned above, include those taxes where the liability to pay the tax lies on a person who then shifts
the tax burden to another individual.
Some types of indirect taxes are:
• Excise Duty: Payable by the manufacturer who shifts the tax burden to retailers and wholesalers.
• Sales Tax: Paid by a shopkeeper or retailer, who then shifts the tax burden to customers by charging sales
tax on goods and services.
• Custom Duty: Import duties levied on goods from outside the country, ultimately paid for by consumers and
retailers.
• Entertainment Tax: Liability is on the cinema owners, who transfer the burden to cinemagoers.
• Service Tax: Charged on services rendered to consumers, such as food bill in a restaurant.
Therefore, the prime difference between direct tax and indirect tax is the ability of the taxpayer to shift the burden of
tax to others. Direct taxes include tax varieties such as income tax, corporate tax, wealth tax, gift tax, expenditure tax
etc. Some examples of indirect taxes are sales tax, excise duty, VAT, service tax, entertainment tax, custom duty etc.
However, this is not an exhaustive list of taxes and more types of taxes are levied by the government on specific
cases.

Difference between Direct Tax and Indirect Tax:

There are different implications of direct and indirect taxes on the country. However, both types of taxes are important
for the government as taxes include the major part of revenue for the government.
Key differences between Direct and Indirect Tax are:
1. Direct tax is levied and paid for by individuals, Hindu undivided Families (HUF), firms, companies etc.
whereas indirect tax is ultimately paid for by the end-consumer of goods and services.
2. The burden of tax cannot be shifted in case of direct taxes while burden can be shifted for indirect taxes.
3. Lack of administration in collection of direct taxes can make tax evasion possible, while indirect taxes cannot
be evaded as the taxes are charged on goods and services.
4. Direct tax can help in reducing inflation, whereas indirect tax may enhance inflation.
5. Direct taxes have better allocative effects than indirect taxes as direct taxes put lesser burden over the
collection of amount than indirect taxes, where collection is scattered across parties and consumers’ preferences of
goods is distorted from the price variations due to indirect taxes.
6. Direct taxes help in reducing inequalities and are considered to be progressive while indirect taxes enhance
inequalities and are considered to be regressive.
7. Indirect taxes involve lesser administrative costs due to convenient and stable collections, while direct taxes
have many exemptions and involve higher administrative costs.
8. Indirect taxes are oriented more towards growth as they discourage consumption and help enhance savings.
Direct taxes, on the other hand, reduce savings and discourage investments.
9. Indirect taxes have a wider coverage as all members of the society are taxed through the sale of goods and
services, while direct taxes are collected only from people in respective tax brackets.
10. Additional indirect taxes levied on harmful commodities such as cigarettes, alcohol etc. dissuades over-
consumption, thereby helping the country in a social context.

Direct and indirect taxes are defined according to the ability of the end taxpayer to shift the burden of taxes to
someone else. Direct taxes allow the government to collect taxes directly from consumers and is a progressive type of
tax, which also allows for cooling down of inflationary pressure on the economy. Indirect taxes allow the government
to expect stable and assured returns and brings into its fold almost every member of the society – something which
the direct tax has been unable to do.

Both direct and indirect taxes are important for the country as they are intricately linked with the overall economy. As
such, collection of these taxes is important for the government as well as the well-being of the country. Both direct
taxes and indirect taxes are collected by the central and respective state governments according to the type of tax
levied.

Tax Amnesty
Tax Exemptions

Tax Exemption is an immunity from the civil liability only. It is an immunity or privilege, a freedom from a charge or
burden to which others are subjected.

Tax Amnesty is an immunity from all criminal, civil and administrative liabilities arising from non-payment of taxes. It is
a general pardon given to all taxpayers. It applies only to past tax periods, hence, of retroactive application.

*** The salaries of justices and judges in the judiciary are taxable. The clear intent of the Constitutional Commission
was to delete the proposed express grant of exemption from payment of income tax to members of the judiciary, so as
to give substance to equality among the three branches of Government. (Nitafan vs. Commissioner of Internal
Revenue, G.R. No. L-78780, July 23, 1987).

*** The exemption from income tax on base-connected income of non-resident American base personnel under the
U.S. Bases Treaty does not extend to the income realized from the sale by an American civilian base employee of his
car inside the base to another American national. (Reagan vs. CIR, G.R. No. L-26379, December 27, 1969).

MANILA INTERNATIONAL AIRPORT AUTHORITY vs.

COURT OF APPEALS
495 SCRA 591, G.R. No. 155650, July 20, 2006
FACTS: Upon the enactment of the 1991 Local Government Code, the tax exemption on real property tax enjoyed by
the government-owned and controlled corporations like MIAA has been withdrawn. The City of Parañaque filed notice
of assessment to MIAA to settle its tax obligations.

ISSUE: Whether or not the land and buildings of MIAA are exempt from real property tax.

HELD: YES. MIAA is not a government-owned and controlled corporation but an instrumentality of the national
government and thus exempt from local taxation. The real properties of MIAA are owned by the Republic of the
Philippines and thus exempt from real estate tax. Only the portions of the Manila International Airport Authority leased
to private parties are subject to tax.

LUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY

433 SCRA 119, G.R. No. 144104, June 29, 2004

FACTS: The Lung Center of the Philippines was established by virtue of PD 1823 as charitable institution. It is the
registered owner of a parcel of land with a hospital in the middle, located at Quezon City. A big space at the ground
floor is being leased to private parties, for canteen and small store spaces, and to medical or professional practitioners
who use the same as their private clinics. A big portion of the land is being leased for commercial purposes to a
private enterprise.

The Lung Center accepts paying and non-paying patients. It also renders medical services to out-patients, both paying
and non-paying. It also receives annual subsidies from the government. Both the land the hospital building were
assessed for real property taxation.

ISSUE: Whether Lung Center of the Philippines is a charitable institution within the context of the Constitution and
thus its real properties are exempt from real property taxes.

HELD: YES. To be exempt from real property tax, the land and buildings of Lung Center of the Philippines should be
used actually, directly and exclusively for charitable purposes. Lung Center of the Philippines as a charitable institution
does not lose its character as such and its exemptions from taxes¬ simply because it derives income from paying
patients, rentals of private persons and receives subsidies from the government so long as the money received is
devoted or used altogether to the charitable object which it is intended to achieve and no money inures to the private
benefit of the persons managing or operating the institution.

Tax amnesty is a limited-time opportunity for a specified group of taxpayers to pay a defined amount, in exchange for
forgiveness of a tax liability (including interest and penalties) relating to a previous tax period or periods and without
fear of criminal prosecution. It typically expires when some authority begins a tax investigation of the past-due tax. In
some cases, legislation extending amnesty also imposes harsher penalties on those who are eligible for amnesty but
do not take it.[1] Tax amnesty is one of voluntary compliance strategies to increase tax base and tax revenue. Tax
amnesty is different from other voluntary compliance strategies in part where tax amnesty usually waives the
taxpayers' tax liability
Tax exemption refers to a monetary exemption which reduces taxable income. Tax exempt status can provide
complete relief from taxes, reduced rates, or tax on only a portion of items. Examples include exemption of charitable
organizations from property taxes and income taxes, veterans, and certain cross-border or multi-jurisdictional
scenarios.

Tax exemption generally refers to a statutory exception to a general rule rather than the mere absence of taxation in
particular circumstances, otherwise known as an exclusion. Tax exemption also refers to removal from taxation of a
particular item rather than a deduction

International duty free shopping may be termed "tax-free shopping". In tax-free shopping, the goods are permanently
taken outside the jurisdiction, thus paying taxes is not necessary. Tax-free shopping is also found in ships, airplanes
and other vessels traveling between countries (or tax areas). Tax-free shopping is usually available in dedicated duty-
free shops. However, any transaction may be duty-free, given that the goods are presented to the customs when
exiting the country. In such a scenario, a sum equivalent to the tax is paid, but reimbursed on exit. More common in
Europe, tax-free is less frequent in the United States, with the exception of Louisiana. However, current European
Union rules prohibit most intra-EU tax-free trade, with the exception of certain special territories outside the tax area.

7. Validity and Invalidity of non certain impositions of the LGU - LOPEZ

8. What are the available income taxes in the Philippines ?

9. What are the different types of deductions from gross income ?

10. Resident Alien -

Non resident Alien Exceptions if Any

INCOME TAX ON RESIDENT AND NON-RESIDENT ALIEN

Citizenship & Residency Taxable Income Inside RP Taxable Income Outside RP
Resident Citizen Yes Yes
Non-resident Citizen Yes No
Overseas Contract Worker Yes No
Resident Alien Yes No
Non-resident alien Yes No
Domestic Corporation Yes Yes
Foreign Corporation Yes No

(I) Who are RESIDENT ALIENS? [Sec. 22 (F)]

Resident alien is an individual:

(1) Whose residence is within the Philippines.

(2) Who is not a citizen of the Philippines.

Note: Resident alien may avail of OPTIONAL STANDARD DEDUCTION (OSD) under Sec. 34 (L) in an amount not
exceeding 40% of his gross sales (accrual basis) or gross receipts (cash basis); Nonresident alien cannot avail of
OSD!!!

(II) Who are NON-RESIDENT ALIENS [Sec. 22 (G)]

(1) An individual whose residence is not within the Philippines.

(2) Not a citizen of the Philippines.

They are: (a) Those engaged in trade or business within the Philippines; and (b) Those who are not so
engaged [Sec 23-25]

For (a) non-resident alien individual engaged in trade or business in the Philippines – subject to the income tax in the
same manner as an individual citizen and a resident alien on taxable income derived from sources within the
Philippines.
- a nonresident alien who stays in the Philippines for an aggregate period of more than 180 days shall be deemed as
nonresident alien doing business in the Philippines.

For (b) non-resident aliens not so engaged, the tax is:

(1) 25% of the entire or gross income received from sources within the Philippines and
(2) 15% of the gross income received as compensation, salaries, and other emoluments by reason of his employment
by:
a) regional or area headquarters and regional operating headquarters of multinational
corporations;
b) offshore banking units established by a foreign corporation in the Philippines; or
c) by foreign petroleum service contractor or subcontractors operating in the Philippines.
[Sec. 25 (A-E)]

Tax Rate on Certain Passive Income on CITIZENS and FINAL TAX

RESIDENT ALIENS

1. Interest under the expanded foreign currency deposit system 7.5% (EXEMPT for nonresident
aliens engaged in business, trade
or exercise of profession)

2. Royalty from books, literary works, & musical compositions 10%

3. Royalty other than above 20%

4. Interest on any current bank deposit, yield or other monetary 20%
benefits from deposit substitute, trust fund & similar arrangement

5. Prize exceeding P10,000 20%

6. Other winnings, except Phil Charity Sweepstakes & Lotto 20%

7. Dividend from a domestic corporation, or from a joint stock 10% (20% for nonresident aliens
company, insurance or mutual fund company, & regional operating engaged in business, trade or
headquarters of multinational company or share in the distributive exercise of profession)
net income after tax of a partnership (except general professional
partnership), joint stock or joint venture or consortium taxable as a
corporation
- Dividends from foreign corporations: - EXEMPT because
Resident/nonresident aliens are not
taxed worldwide!

8. Interest on long-term deposit or investment in banks (with EXEMPT

maturity of 5 years or more)

9. Gross income from cinematographic films & similar works 25%

PERSONAL EXEMPTION ALLOWABLE TO NONRESIDENT ALIEN INDIVIDUALS [Sec. 35 (D)]

Personal Exemptions allowable to Nonresident Alien
Individuals

If engaged in trade, business or in the exercise of profession Entitled to a personal exemption in

the amount equal to the exemptions
in the income tax law of his country
for Filipinos, but it shouldn’t exceed
the amount fixed here for exemptions

If not engaged in trade, business or in the exercise of profession NONE, because Sec 25 (B) states
that he will be taxed based upon his
entire income (25%).

Tax Rate on Capital Gains (same with residents, and

nonresident aliens not engaged in business)

1. On sale on shares of stock of a domestic corporation NOT

listed and NOT traded thru a local stock exchange held as a
 capital asset,
- Capital gains not over P100,000 5% of the net capital gains
-Capital gains in excess of P100,000 10% of the net capital gains
2. On sale of real property in the Philippines held as CAPITAL 6% of the gross selling price, or the
ASSET current market value at the time of
sale, whichever is higher

Note: Nonresident aliens not engaged in business are taxed 25% of their entire income within the Philippines. They
have no deductions!!! Their capital gains are the same with nonresident aliens engaged in business.

Tax Rate on Income from Sale, Barter, Exchange or other

Disposition of Shares of Stock

If shares of stock are listed and traded through the local stock 1/1 of 1% (or 0.005%) of the gross
exchange selling price or gross value in money
of the shares of stock

If shares not traded through the local stock exchange

(i) Capital gains not over P100,000
(ii) Capital gains in excess of P100,000 5% of the net capital gains
10% of the net capital gains
Note: Individual taxpayer, whether citizen or ALIEN, is liable!!!

SPECIAL ALIENS

1. Employed by Regional or Area Headquarters & Regional 15% on gross income

Operating Headquarters established in the Philippines by
multinational;

2. Employed by offshore banking units 15% on gross income

3. Permanent resident of a foreign country but who is employed 15%

and assigned in the Philippines by a foreign service contractor or
by a foreign service subcontractor engaged in petroleum
operations in the Philippines

11. Laws limitation Rule

Capital Loss Limitation Rule (applicable to both corporations and individuals)

General Rule: Losses from sales or exchanges of capital assets shall be allowed ONLY TO THE EXTENT OF THE
GAINS from such sales or exchanges (Sec. 39 C, NIRC).

Exception for Banks and Trust Companies: If a bank or trust company incorporated under the laws of the Philippines,
a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, certificate or other
evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision
thereof) with interest coupons or in registered form, ANY LOSS RESULTING FROM SUCH SALE SHALL NOT BE
SUBJECT TO THE FOREGOING LIMITATION and shall not be included in determining the applicability of such
limitation to other losses (Sec. 39 C, NIRC).

Source: NIRC and UP Siklab Notes

--
Just in case makatulong for additional understanding on Capital Losses, an excerpt from China Banking Corporation
vs. CA, CTA, and CIR [G.R. No. 125508, July 19, 2000]

"An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in either a
capital gain or a capital loss. The gain or the loss is ordinary when the property sold or exchanged is not a capital
asset. A capital asset is defined negatively in the NIRC; viz:

(1) Capital assets. - The term 'capital assets' means property held by the taxpayer (whether or not connected with his
trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly
be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or
business, of a character which is subject to the allowance for depreciation provided in subsection (f) of section twenty-
nine; or real property used in the trade or business of the taxpayer."

Thus, shares of stock; like the other securities defined in Section 20(t)4 of the NIRC, would be ordinary assets only to
a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own account) in,
securities.

In the hands, however, of another who holds the shares of stock by way of an investment, the shares to him would be
capital assets. When the shares held by such investor become worthless, the loss is deemed to be a loss from the
sale or exchange of capital assets.

The loss sustained by the holder of the securities, which are capital assets (to him), is to be treated as a capital loss
as if incurred from a sale or exchange transaction. A capital gain or a capital loss normally requires the concurrence of
two conditions for it to result: (1) There is a sale or exchange; and (2) the thing sold or exchanged is a capital asset.
When securities become worthless, there is strictly no sale or exchange but the law deems the loss anyway to be "a
loss from the sale or exchange of capital assets."5 A similar kind of treatment is given, by the NIRC on the retirement
of certificates of indebtedness with interest coupons or in registered form, short sales and options to buy or sell
property where no sale or exchange strictly exists.6 In these cases, the NIRC dispenses, in effect, with the standard
requirement of a sale or exchange for the application of the capital gain and loss provisions of the code.

Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived from the sale or
exchange of capital assets, and not from any other income of the taxpayer."

12. Doctrine of Operative Fact

13. CIR vs. Puregold

CIR vs Puregold Duty Free

Facts:
 Puregold is engaged in the sale of various consumer goods exclusively within the Clark Special Economic
Zone (CSEZ), and operates its store under the authority and jurisdiction of Clark Development Corporation
(CDC) and CSEZ.
 As an enterprise located within CSEZ and registered with the CDC, Puregold had been issued Certificate of
Tax Exemption No. 94-4, The certificates were issued pursuant to Sec. 5 of Executive Order No. (EO)
80, extending to business enterprises operating within the CSEZ all the incentives granted to enterprises
within the Subic Special Economic Zone (SSEZ) under RA 7227, otherwise known as the "Bases Conversion
and Development Act of 1992."
 Notably, Sec. 12 of RA 7227 provides duty-free importations and exemptions of businesses within the SSEZ
from local and national taxes. Thus, in accordance with the tax exemption certificates granted to respondent
Puregold, it filed its Annual Income Tax Returns and paid the five percent (5%) preferential tax, in lieu of all
other national and local taxes for the period of January 1998 to May 2004
 In the case of Coconut Oil Refiners v Torres, however, this Court annulled the adverted Sec. 5 of EO 80, in
effect withdrawing the preferential tax treatment heretofore enjoyed by all businesses located in the CSEZ.
 Kim Jacinto-Henares issued a Preliminary Assessment Notice regarding unpaid VAT and excise tax on wines,
liquors and tobacco products imported by Puregold from January 1998 to May 2004. In due time, Puregold
protested the assessment.
 Pending the resolution of Puregold's protest, Congress enacted RA 9399, specifically to grant a tax amnesty
to business enterprises affected by this Court's rulings in John Hay People's Coalition v. Lim and Coconut Oil
Refiners. Under RA 9399, availment of the tax amnesty relieves the qualified taxpayers of any civil, criminal
and/or administrative liabilities arising from, or incident to, nonpayment of taxes, duties and other charges.
Puregold availed itself of the tax amnesty under RA 9399, filing for the purpose the necessary requirements
and paying the amnesty tax.
 Puregold received a formal letter of demand from the BIR for the payment of ₱2, 780,610, 17 4.51,
supposedly representing deficiency VAT and excise taxes on its importations of alcohol and tobacco products
from January 1998 to May 2004.
 Puregold requested the cancellation of the assessment on the ground that it has already availed of the tax
amnesty under RA 9399.
 BIR did not relieve Puregold of its liability for deficiency VAT, excise taxes, and inspection fees under Sec.
13l(A) of the 1997 National Internal Revenue Code (1997 NIRC).
 Puregold filed a Petition for Review with the CT A questioning the timeliness of the assessment and arguing
that the doctrines of operative fact and non-retroactivity of rulings bar the Commissioner of Internal
Revenue (CIR) from assessing it of deficiency VAT and excise taxes.
 CTA ruled in favor of PureGold

Issue: W/ON Puregold is entitle to avail Tax amnesty?

Held:
 It is well settled that matters that were neither alleged in the pleadings nor raised during the proceedings
below cannot be ventilated for the first time on appeal and are barred by estoppel. To allow the contrary would
constitute a violation of the other party's right to due process, and is contrary to the principle of fair play.
 It is well established that issues raised for the first time on appeal and not raised in the proceedings in the
lower court are barred by estoppel. Points of law, theories, issues, and arguments not brought to the attention
of the trial court ought not to be considered by a reviewing court, as these cannot be raised for the first time
on appeal. To consider the alleged facts and arguments belatedly raised would amount to trampling on the
basic principles of fair play, justice, and due process.
 During the proceedings in the CT A, the CIR never challenged Puregold's eligibility to avail of the tax amnesty
under RA 9399 on the ground that its principal place of business, per its Articles of Incorporation, is in Metro
Manila and not in Clark Field, Pampanga. Neither did the CIR present the supposed Articles of Incorporation
nor formally offer the same in evidence for the purpose of proving that Puregold was not entitled to the tax
amnesty under RA 9399. Hence, this Court cannot take cognizance, much less consider, this argument as a
ground to divest Puregold of its right to avail of the benefits of RA 9399.
 Court subscribes to the doctrine of operative fact, which recognizes that a judicial declaration of
invalidity may not necessarily obliterate all the effects and consequences of a void act prior to such
declaration. The seminal case of Serrano de Agbayani v. Philippine National Bank. discusses the application
of the doctrine, thus:

The decision now on appeal reflects the orthodox view that an unconstitutional act, for that matter an
executive order or a municipal ordinance likewise suffering from that infirmity, cannot be the source of any
legal rights or duties. Nor can it justify any official act taken under it. Its repugnancy to the fundamental law
once judicially declared results in its being to all intents and purposes a mere scrap of paper. As the new Civil
Code puts it: "When the courts declare a law to be inconsistent with the Constitution, the former shall be void
and the latter shall govern. Administrative or executive acts, orders and regulations shall be valid only when
they are not contrary to the laws of the Constitution." It is understandable why it should be so, the Constitution
being supreme and paramount. Any legislative or executive act contrary to its terms cannot survive.

Additional Research:
Doctrine of Operative Fact – Acts done pursuant to a law which was subsequently declared unconstitutional remain
valid, but not when the acts are done after the declaration of unconstitutionality.
The operative fact doctrine is a rule of equity. As such, it must be applied as an exception to the general rule that an
unconstitutional law produces no effects. It can never be invoked to validate as constitutional an unconstitutional act.

The general rule is that a void law or administrative act cannot be the source of legal rights or duties. Article 7 of the
Civil Code enunciates this general rule, as well as its exception: "Laws are repealed only by subsequent ones, and
their violation or non-observance shall not be excused by disuse, or custom or practice to the contrary. When the
courts declared a law to be inconsistent with the Constitution, the former shall be void and the latter shall govern.
Administrative or executive acts, orders and regulations shall be valid only when they are not contrary to the laws or
the Constitution."The doctrine of operative fact is an exception to the general rule, such that a judicial declaration of
invalidity may not necessarily obliterate all the effects and consequences of a void act prior to such declaration.
(Philmex vs CIR)

14. Adjusted net Asset of valuation of Capital Asset with regard to valuation of properties ( BIR RULING )

15. case digest CREBA case - Valente ( Spot the issue regarding taxation and kindly highlights the doctrine
which is related to taxation ) .

G.R. No. 160756 March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,

vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF FINANCE
JUANITA D. AMATONG, and THE HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO,
JR., Respondents.

Facts:
In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders’ Associations, Inc.
is questioning the constitutionality of the following:
1. Section 27 (E) of Republic Act (RA) 8424; and
2. Revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement the above-mentioned
provision and those involving creditable withholding taxes.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and
creditable withholding tax (CWT) on sales of real properties classified as ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. Petitioner argues
that the MCIT violates the due process clause because it levies income tax even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section
4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on the
sale of real properties categorized as ordinary assets. Petitioner contends that these revenue regulations are
contrary to law for two reasons:

First, they ignore the different treatment by RA 8424 of ordinary assets and capital assets and

Second, respondent Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross
selling price or fair market value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process clause
because, like the MCIT, the government collects income tax even when the net income has not yet been determined.
They contravene the equal protection clause as well because the CWT is being levied upon real estate
enterprises but not on other business enterprises, more particularly those in the manufacturing sector.

Overview of the Assailed Provisions

I. MINIMUM CORPORATE INCOME TAX (MCIT – Sec. 27(E) RA 8424)

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT
of 2% of its gross income when such MCIT is greater than the normal corporate income tax imposed
under Section 27(A).4 If the regular income tax is higher than the MCIT, the corporation does not pay
the MCIT. Any excess of the MCIT over the normal tax shall be carried forward and credited against
the normal income tax for the three immediately succeeding taxable years. Section 27(E) of RA 8424
provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

(1) Imposition of Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the taxable
year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the
fourth taxable year immediately following the year in which such corporation commenced its business
operations, when the minimum income tax is greater than the tax computed under Subsection (A) of
this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. – Any excess of the [MCIT] over the normal income tax as
computed under Subsection (A) of this Section shall be carried forward and credited against the normal
income tax for the three (3) immediately succeeding taxable years.

(3) Relief from the [MCIT] under certain conditions. – The Secretary of Finance is hereby authorized to
suspend the imposition of the [MCIT] on any corporation which suffers losses on account of prolonged
labor dispute, or because of force majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the

Commissioner, the necessary rules and regulations that shall define the terms and conditions under
which he may suspend the imposition of the [MCIT] in a meritorious case.

(4) Gross Income Defined. – For purposes of applying the [MCIT] provided under Subsection (E) hereof,
the term ‘gross income’ shall mean gross sales less sales returns, discounts and allowances and cost
of goods sold. "Cost of goods sold" shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.

II. RR 2-98 Implementing certain provisions of RA 8424 involving the withholding taxes as amended by RR 6-
2001 on July 31, 2001 (Sec. 57 of RA 8424)
 Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the
sale, exchange or transfer of real property classified as ordinary asset. - A [CWT] based on the gross
selling price/total amount of consideration or the fair market value determined in accordance with
Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange
of real property, other than capital asset, shall be imposed upon the withholding agent,/buyer, in
accordance with the following schedule:

Where the seller/transferor is exempt from Exempt

[CWT] in accordance with Sec. 2.57.5 of
these regulations.
Upon the following values of real property,
where the seller/transferor is habitually
engaged in the real estate business.
With a selling price of Five Hundred 1.5%
Thousand Pesos (₱500,000.00) or less.
With a selling price of more than Five 3.0%
Hundred Thousand Pesos (₱500,000.00)
but not more than Two Million Pesos
(₱2,000,000.00).
With a selling price of more than two Million 5.0%
Pesos (₱2,000,000.00).

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT] due on the
sale, transfer or exchange of real property other than capital asset has been fully paid.

Note: This CAR is a requirement in order for registry of deeds to register the torrens certificate of title in the name of the
new owner (buyer/purchaser).

Issue:

WON Sec 27(E) of RA 8424 and the issuance of BIR Revenue regulations in implementing RA 8424 provisions involving
withholding taxes are unconstitutional for it violates due process and equal protection clause of the Constitution.

Held:

Sec 27(E) of RA 8424 and the BIR Revenue regulations issued in implementing RA 8424 provisions involving
withholding taxes are CONSTITUTIONAL.

I. On MCIT (sec. 24(E))

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation system. It came
about as a result of the perceived inadequacy of the self-assessment system in capturing the true income of
corporations.21 It was devised as a relatively simple and effective revenue-raising instrument compared to the normal
income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some
minimum contribution to the support of the public sector.

Domestic corporations owe their corporate existence and their privilege to do business to the government. They also
benefit from the efforts of the government to improve the financial market and to ensure a favorable business climate.
It is therefore fair for the government to require them to make a reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report minimal
or negative net income resulting in minimal or zero income taxes year in and year out, through under-declaration
of income or over-deduction of expenses otherwise called tax shelters.

The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after operations of a
corporation or consistent reports of minimal net income render its financial statements and its tax payments suspect.
For sure, certain tax avoidance schemes resorted to by corporations are allowed in our jurisdiction. The MCIT serves
to put a cap on such tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax avoidance
schemes achieved through sophisticated and artful manipulations of deductions and other stratagems.
MCIT is not violative of Due Process. Taxes are the lifeblood of the government. Without taxes, the government can
neither exist nor endure. The exercise of taxing power derives its source from the very existence of the State whose
social contract with its citizens obliges it to promote public interest and the common good. 33

Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative.35 Essentially, this means that
in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate),
coverage (subjects) and situs (place) of taxation.36 It has the authority to prescribe a certain tax at a specific rate for
a particular public purpose on persons or things within its jurisdiction. In other words, the legislature wields the power to
define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it
shall be imposed and where it shall be imposed.

45 Income is gain derived and severed from capital.46 For income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation.47

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other
words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of
its goods, i.e., the cost of goods48 and other direct expenses from gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of (alternative) the normal net income
tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax
due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporation’s gross
income.

II. On CWT (sec. 57)

The withholding tax system is a procedure through which taxes (including income taxes) are collected.

Under Section 57 of RA 8424, the types of income subject to withholding tax are divided into three categories:

(a) withholding of final tax on certain incomes;

(b) withholding of creditable tax at source; and
(c) tax-free covenant bonds.

Petitioner is concerned with the second category (CWT) and maintains that the revenue regulations on the collection
of CWT on sale of real estate categorized as ordinary assets are unconstitutional.

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents cannot
disregard the distinctions set by the legislators as regards the tax base, modes of collection and payment of taxes on
income from the sale of capital and ordinary assets.

Petitioner’s arguments have no merit.

The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets are not
treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are distinguished as follows:

FWT CWT

a) The amount of income tax withheld by the a) Taxes withheld on certain income payments are
withholding agent is constituted as a full and final intended to equal or at least approximate the tax due
payment of the income tax due from the payee on the of the payee on said income.
said income.
 b)The liability for payment of the tax rests primarily
on the payor as a withholding agent.
b) Payee of income is required to report the income
and/or pay the difference between the tax withheld
and the tax due on the income. The payee also has
the right to ask for a refund if the tax withheld is more
than the tax due.

c) The payee is not required to file an income tax c) The income recipient is still required to file an
return for the particular income.73 income tax return, as prescribed in Sec. 51 and Sec.
52 of the NIRC, as amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the
sale of ordinary assets. The inherent and substantial differences between FWT and CWT disprove petitioner’s
contention that ordinary assets are being lumped together with, and treated similarly as, capital assets in contravention
of the pertinent provisions of RA 8424.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to CWT. The
former covers the kinds of passive income enumerated therein and the latter encompasses any income other than those
listed in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section 57(B). RR
2-98 merely implements the law by specifying what income is subject to CWT. It has been held that, where a statute
does not require any particular procedure to be followed by an administrative agency, the agency may adopt any
reasonable method to carry out its functions. 77 Similarly, considering that the law uses the general term "income," the
Secretary and CIR may specify the kinds of income the rules will apply to based on what is feasible. In addition,
administrative rules and regulations ordinarily deserve to be given weight and respect by the courts 78 in view of the rule-
making authority given to those who formulate them and their specific expertise in their respective fields.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that what
distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT,
is not their production processes but the prices of their goods sold and the number of transactions involved. The income
from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome
for the parties to comply with the withholding tax scheme.

Conclusion

The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to understand is the
income tax."92 When a party questions the constitutionality of an income tax measure, it has to contend not only with
Einstein’s observation but also with the vast and well-established jurisprudence in support of the plenary powers of
Congress to impose taxes. Petitioner has miserably failed to discharge its burden of convincing the Court that the
imposition of MCIT and CWT is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.