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    InTax Chap1

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    INCOME TAXATION Basic Principles Learning Objectives: After studying this chapter, you should be able to: Define taxation. Describe the nature, basis and objectives of taxation. Differentiate the three inherent powers of the State. Explain the principles of a sound taxation system. Identify and explain constitutional and inherent limitations. Describe various sources of taxation laws. Name and describe the situs of taxation and its application, Define tax and describe its essential characteristics. Identify and distinguish classification of taxes. 10. Have a fair knowledge of the sources of tax authority and the sources of tax laws, © 11. Describe the powers of the Commissioner of Internal Revenue. 12, Distinguish between income and capital. PON avawne INTRODUCTION Most people receive their initial exposure to the Philippine income faced with the responsibility of filing their own tax returns. As sometimes viewed as a robotized process of filing out gover challenging activity. tax system when first 4 result, tax work is TMENE forms--not a very Actually, the perception of tax work as a routine clerical process is a grossly distorted view of the tax profession, Historically, most. professional:level work has. concemed Conceptual issues. In today’s society, that emphasis is gt systems handling an ever-increasing share of the allows tax professionals and business manag time to substantive matters. Heater than ever with computer Mechanical chores of tax practice. This 10 devote an even greater share of their hing the study of taxation, you should try to keep three basic points in ming, In approachi ir i Itis that ability to apply the rules of tax ay lost in the detail of tax rules. Iti t c 1. Do ne situations that is important—not just having the talent to recite such ryjg oy ret studying any area of tax law, you should be alert for possible decision, y rote. making implications. 2. Keep in mind that tax rules are a matter of law. Hence, only legal authority (eg A : statute, a regulation, a court case) can ever be a tax authority, If the ‘correct application” of law to a given set of facts results in a solution at odds with some accounting, economic, social, or moral theory, it is still the aw that controls. As q practical matter, most tax disputes arise over differences in opinion concerning what constitutes the “correct application” of tax law to specific situations. 3. Give close attention to the use of language, particularly the wording of tax authorities. Verbal distinctions are often critical. Terms having similar meanings in everyday speech may have been defined différently in tax law. TAXATION Definition, Nature and Basis of Taxation Taxation is the process or means by which the sovereign, raises income to defray the necessary expenses of the gover of the State, is inherent in sovereignty. through its lawmaking body, rnment. Taxation, as a power Taxes are the lifeblood of the government and their an imperious need (Commissioner vs, Pineda, 21 Continue to exist and operate without financial mes government the right to tax citizens and Properties prompt and certain availability are SCRA 105). A government cannot ans. This inherent power gives the within its jurisdiction, Taxation is indispensable and inevitable price for civilized society; without taxes, the aeaemment would be paralyzed (Commissioner vs. Algue, inc, L-28896, Feb. 17, 1988, 158 SCRA 9). 2 | Income Taxation 2023 Edition by Prof. WIN Balada and Susan Ballada Upon taxation depends the Government's ability to serve the people for whose benefit taxes are collected (Vera vs. Fernandez, 89 SCRA 199). The ultimate beneficiaries in the process are both the government and the citizens. The state collects taxes in the exercise of its sovereign rights for the support of the government, for the administration. of the laws, and as a means for the continued operation of the various legitimate functions of the state. Objectives of Taxation Taxation is much more than just a means of raising revenue for the government. It is also one of the major means by which the national government attempts to achieve various economic and social objectives. These objectives include shifting wealth from the rich to the poor, maintaining price stability, stimulating economic growth, and encouraging full employment. In its efforts to achieve these objectives, Congress tends to use tax provisions in two different ways. First, some tax rules are enacted for the purpose of mitigating certain undesirable economic and social conditions already existing. For instance, low-income individuals often pay little or no national income taxes because of the elaborate system of exclusions, deductions, and credits of current law. Second, other tax rules provide incentives for certain desirable activities. For instance, business can claim deductions for depreciation of productive assets much faster than the assets actually wear out. This provides incentive for businesses to invest in these assets, leading to increased employment of low- and middle-income workers. All too often, the incentive and mitigating aspects of various tax provisions work at cross-purposes. Consider the two examples just mentioned. While the purpose of the rapid depreciation rules may be to increase investments in productive facilities that will lead to increased employment of low- and middle-income workers, rapid depreciation rates may also greatly reduce the tax liabilities of wealthy individual business-owners and thus actually increase, rather than reduce, the concentration of wealth in society. Perhaps it is because of these conflicting objectives that Congress so often seems to exhibit ‘confused’ behavior when writing tax rules. When an incentive provision is enacted, numerous limitations and restrictions will usually prevent its application in many circumstances. There may also be exceptions to the exceptions. Often the congressional process of fine-tuning incentive tax provisions will create a maze of statutory law under which significant tax savings are possible, but only if transactions are carefully planned to fit within statutory requirements. State Powers 1. Taxation. The power of.the state by which the sovereign raises revenue to defray the necessary expenses of the government. 2. Eminent Domain. The power of the state to take private property for public use upon payment of just compensation. Chapter 1: Basic Principles | 3 ae ON + of the state to enact laws to promote public health, Pubji the general welfare of the people. lic 3. Police Power. The powe! morals, public safety and Aspects of Taxation 1. Levying of the tax, The imposition of tax requires legislative intervention. tn the Philippines, itis Congress that levies taxes; and / 2. Collection of the tax levied. This is essentially an administrative function. Basic Principles of a Sound Tax System 1. Fiscal adequacy. Sources of revenue are sufficient to meet government expenditures; 2. Equality or theoretical justice. The tax imposed must be proportionate to taxpayer's ability to pay; and 3. Administrative feasibility. The law must be capable of convenient, just and effective administration, Limitations on the Power of Taxation The power of taxation is, however, subject to constitutional and inherent limitations Constitutional limitations are those provided for in the constitution or implied from its provisions while inherent limitations are restrictions to the power to tax attached to its nature. The following are the inherent limitations: Purpose. Taxes may be levied only for public purpose; 1 2. Territoriality. The State may tax persons and properties under its jurisdiction; 3. International comity. The property of a foreign State may not be taxed by another; 4 Exemption. Governmental agencies performing governmental functions are exempt from taxation; 5. _Non-delegation. The power to tax being legislative in nature may not be delegated. Some Doctrines in Taxation Prospectivity of Tax Laws SI Of the Supreme Courts "taren statute must state so explicitly and clearly. In the words pram by such law, these i be imposed retroactively by law but, unless 5° sour 4 (es 1, ” "C2545. Court of Appeals, G.n BoD ye per fon nee prospectively.” (Hyde » Dec. 21, 1990, 192 SCRA 604). 4 | Income Taxation 202 3 Edition by Prof. WIN Ballad 19 and Susan 9.1)... Double Taxation Double taxation standing alone and not being forbidden by our fundamental law is not a valid defense against the legality of a tax measure. However, if double taxation amounts toa direct duplicate taxation, in that the same subject is taxed twice when it should be taxed but once, in a fashion that both taxes are imposed for the same purpose by the same taxing authority, within the same jurisdiction or taxing district, for the same taxable period and for the same kind or character of a tax, then it becomes legally objectionable for being oppressive and inequitable. Indirect double taxation is one other than the direct double taxation. Though this type may not prove unconstitutional, it is being avoided so as not to bring injustice to the taxpayer. An example of this occurs when business taxis imposed by the municipal government prior to the issuance of a business license to a taxpayer for engaging in an advertising business. His income from his advertising business shall later be imposed income tax by the national government. When an item of income is taxed in the Philippines and the same income is taxed in another country, there is only a case of indirect duplicate taxation which is not legally prohibited because the taxes are imposed by different taxing authorities, The usual methods of avoiding the occurrence of double taxation are: 1) allowing reciprocal exemptions either by law or by treaty; 2) allowance of tax credit for foreign taxes paid; 3) allowance of deduction for foreign taxes paid; and 4) reduction of the Philippine tax rate. Set-off of Taxes Taxes are not subject to set-off or legal compensation under Article 1279 of the Civil Code. This has been the Supreme Court ruling in Republic vs. Mambulao Lumber Co. (6 ‘SCRA 622). However, the high court reversed itself in the subsequent case of Domingo vs. Garlitos (8 SCRA 443), when it decided that legal compensation can take place when the taxes and the taxpayer's claim are fully liquidated, due, and demandable. Ina more recent case the Supreme Court echoed the Mambulao Lumber doctrine: “We have consistently ruled that there can be no offsetting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the Bovernment” (Philex Mining Corporation vs. Commissioner of Internal Revenue, Court of Appeals and The Court of Tax Appeals, G.R, 125704, Aug. 28, 1998). Chapter 1: Basic Principles | 5 i > ON i Escape from Taxation ers resort to tax avoidance and tax evasion in order t 0 ese; a It is common for taxpay! from taxation, Tax avoidance happens when the taxpayer minimizes his tax liabij deri avantage of legally available tax planning opportunities. This is otherwise ky, vio; others call it tax planning. It is the process of controling 7 : as tax minimiza iy to avoid undesirable tax consequences. Tax avoidance is a completely eal actions so activity. Just as the penalties of criminal law can be avoided by not committing a cri seer be avoided by not engaging in those activities that are taxed. The law ie vx savings are achieved by arranging one’s affairs, an violated in any way. Rather, t by controlling the facts, so as to ger tax liability. there! avoid the application of those rules of law th; would otherwise trigger a lar at axpayer resorts to unlawful means to lessen or to ge, ‘also known e* fax dodging. Examples of tax evasion are nd backdating an importan, Tax evasion occurs when the t away with his tax liability. This is under-declaration of sales, overstatement of expenses ai document. sometimes become hazy in practice, the basic notions of tay are conceptually distinct. Both avoidance and evasion seek But the means by which that goal is sought are f not conducting taxable transactions. On the | process of not complying with applicable provision sion connotes the integration of While the dividing line may avoidance and tax evasion the same objective, namely saving taxes. different. Avoidance is the legal process o! other hand, tax evasion is the illegal of the law once the transactions already exist. Tax eva! three factors: ved (ie., payment of less than the amount known by the 1. The end to be achie\ n it is shown that a taxis taxpayer to be legally due, or nonpayment of the tax whe! due); ‘An accompanying state of mind that is described as being in bi deliberate and not accidental; and 3. A course of action or failure of action that is unlawful (Commissione! Revenue vs, The Estate of Benigno P. Toda, Jr., G.R. 147188, Sept. 14, 2004). ad faith, willful, or 1 of Internal Situs of Taxation The situs or pa eierieies is the place of taxation. The rule is that the State may rightfully e" Seer ‘ax where the subject being taxed has a situs under its jurisdiction. 'on is determined by a number of factors: 1. Subject mat ter — or what is bei anactor activi, tS Being taxed. He may be a person or it may be 2 properth 2. Nature of tax ~ or which i real property tax; tax to impose. it may be an income tax, an import duty ? 6 | income Taxation 202 3 Edition by y Prof. WIN Ballad fa and Susan Ballada Escape from Taxation ‘ax avoidance and tax evasion in order to Bets eommman fo eats when the taxpayer minimizes his tax agape trom taxation Toy epaly availabe tax planning opportunities. Ths is otherwise knee in aya e ey others call it tox planning. It is the process of controlling gy” 2 fox eis undesirable tax conséquences. Tax avoidance is a completely, lee actions eee ethe penalties of criminal law can be avoided by not committing a crime, taxes can be avoided by not engaging in those activities that are taxed. The law i vated in any way. Rather, tox savings are achieved by arranging one’s ata, oo thereby controlling the facts, so as to avoid the application of those rules of law tha, would otherwise trigger a larger tax liability. Tax evasion occurs when the taxpayer resorts to unlawful means to lessen oF to gy away with his tax liability. Ths is also known e« ‘ax dodging. Examples of tax evasi ion are under-declaration of sales, overstatement of expenses and backdating an important document. While the dividing line may sometimes become hazy in practice, avoidance and tax evasion are conceptually distinct. Both avoi the same objective, namely saving taxes. But the means by whit the basic notions of tay idance and evasion seek ch that goal is sought ae ‘able transactions, On the 1. The end to be achieved or nonpayment of the tax when it is shown that a tax is 2. An accompanying state of m ind that is described as by in faith, willful, or i lescribed as being in bad faith, willful, Sourse of action or failure of acti i - action that is unlawful issic Venue vs. The Estate of Benigno p, Toda, Jr, G.R, aris, sepe amet of mn Situs of Taxation 3, Citizenship of the taxpayer; and 4, Residence of the taxpayer. The following situs of taxation apply: 1. Persons ~ Residence of the taxpayer. 2. Real property or tangible personal property — Location of the property. 3. Intangible personal property — As a rule, situs is the domicile of the owner unless he has acquired a situs elsewhere. 4, Income ~ Taxpayer's residence or citizenship, or place where the income was earned. 5. Business, occupation and transaction - Place where business is being operated, occupation being practiced and transaction completed. 6. Gratuitous transfer of property ~ Taxpayer's residence or citizenship, or location of the property. TAXES Taxes are enforced proportional contributions from persons and property levied by the lawmaking body of the State by virtue of its sovereignty for the support of the government and all public needs. Tax, in a general sense, is any contribution imposed by the government upon individuals, for the use and service of the state, whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name. Tax, in its essential characteristics, is not a debt (Black’s Law Dictionary). Essential Characteristics of a Tax It is an enforced contribution; It is levied by the lawmaking body; Itis proportionate in character; It is generally payable in money; It is imposed for the purpose of raising revenues; and Itis to be used for public purpose. On wN Ee Chapter 1: Basic Principles | 7 FS | Types of Tax Rate Structures i nal, Or progress; ten described a ether regressive, proportional, or pre ers Tax systems are erie if the average rate decreases as tl a oa eee n : : proportional tones (also called fat or uniform taxes), the svrage rate rent constant for all levels ofthe tax base, whereas a progressive wet ae increases. average rate increases as the amount of the tax bases Notice that the definitions of regressive, proportional, and aes fea On thy direction of change in tax rates with respect to an eee aia se Wid held political view that the rich should pay a larger amount of ta tra could yy upheld under any of the three rate structures—even a regressive one. Before a tax system can be classified as either regressive or Progressive, Ge MUst bg expressed as a percentage of some base amount. In the previous technical definition, the base used for this purpose is the base on which the tax is computed. Constitutional Provision on Progressive System of Taxation The Supreme Court declared Republic Act (R.A.) 9337 or the VAT Reform Act constitutional. In the same decision, it clarified the constitutional Provision on progressive system of taxation, The increase in corporate income tax rate and the removal of certain.exemptions are meant to distribute the burden of taxation. Although indirect taxes, e.g. VAT, are regressive by nature, the constitution does not prohibit the imposition of indirect taxes. When the Constitution mandated Congress to evolve a Progressive system of taxation, it simply meant that direct taxes should be preferred and that the regressive indirect taxes can be minimized with exemptions and differentiated rates (G.R. 168056, G.R. 168207, G.R. 168461, G.R. 168463, and Gp. 168730, Sept. 1, 2005). Classification of Taxes 1. Asto subject matter oF object ‘a Personal, poll or capitation — Whether citizens OF not, residii i their Property or the Occupation in which they may whether real or Personal, in proportion value or j , 'N accordance with Some other reasonable method of Example: real estate tax, As to who bears the burden a. Direct ~ Tax demanded from persons who are intended or bound by law to pay the tax. Examples: community tax, income tax, estate tax, donor's tax. b. Indirect - Tax which the taxpayer can shift to another. Examples: customs duties, value-added tax, some percentage taxes. As to determination of amount a. Specific - Tax imposed based on a physical unit of measurement, as by head or number, weight, or length or volume. Examples: tax on distilled spirits, fermented liquors, cigars, wines, fireworks, etc. b. Ad valorem ~ Tax of a fixed proportion of the value of property; needs an independent appraiser to determine its value. Examples: real estate tax, certain customs duties, excise taxes on cigarettes, gasoline and others. Excise taxes on certain specific goods imposed under the National Internal Revenue Code are either specific or ad valorem taxes. As to purpose a. General, fiscal or revenue ~ Tax with no particular purpose or object for which the revenue is raised, but is simply raised for whatever need may arise. Examples: income tax, value-added tax. b. Special or regulatory ~ Tax imposed for a special purpose regardless of whether revenue is raised or not, and is intended to achieve some social or economic end. Example: protective tariffs or customs duties on certain imported goods to protect local industries against foreign competition. As to authority imposing the tax or scope a. National - Tax imposed by the national government. Examples: internal revenue taxes, tariff and customs duties. b. Municipal or local - Tax imposed by municipal governments for specific needs. Examples: real estate taxes, municipal licenses. As to graduation or rate a. Proportional - Tax based on a fixed percentage of the amount of property income or other basis to be taxed. Examples: percentage taxes, real estate taxes. Chapter 1: Basic Principles | 9 b. Progressive or graduated ~ Tax rate increases as the tax base ng, eas, Examples: income tax, estate tax, donor's tax. 5 ©. Regressive ~ Tax rate decreases as the tax base increases. Example: valyg "add tax Tax Distinguished from Other Fees 1. From toll. Tollis a sum of money for the use of something, generally applied tg consideration which is paid for the use of a road, bridge or the like, of » ia Me nature. A tolls. a demand of proprietorship, is paid for the use of another's property ng may be imposed by the government or private individuals or entities; while tay demand of sovereignty, is paid for the support of the government and may 4, imposed only by the State. From penalty. Penalty is any sanction imposed as a punishment for violation of lay or acts deemed injurious. Violation of tax laws may give rise to imposition of penalty. A penalty is designed to regulate conduct and may be imposed by the government or private individuals or entities. Tax, on the other hand, is primarily aimed at raising revenue and may be imposed only by the government. From special assessment. Special assessment is an enforced proportional contribution from owners of lands for special benefits resulting from public improvements. Special assessment is levied only on land, is not a personal liability of the person assessed, is based wholly on benefits and is exceptional both as to time and place. Tax is levied on persons, property, or exercise of privilege, which may be made a personal liability of the person assessed, is based on necessity and is of general application. 4. From permit or license fee. Permit or license fee is a charge imposed under the police power for purposes of regulation. License fee is j i taxislewsss:tP0se for regulation and involves the exercise of police power while i aa Beane and involves the exercise of the taxing power. Failure to pay necessarily maken. 2” oct OF a business illegal while failure to pay a tax does not '¥ Make an act or a business illegal. 10 | Income Toxation 20: 23 Edition by Prof. wy Ballada and Susan Ballada fa b. Progressive or graduated ~ Tax rate increases as the tax base ing, eas, Examples: income tax, estate tax, donor's tax. 5, c. Regressive ~ Tax rate decreases as the tax base increases. Example: valu, tax. Saddeg Tax Distinguished from Other Fees 1. From toll, Toll is a sum of money for the use of something, generally applied t consideration which is paid for the use of a road, bridge or the like, of 3 nature, 0 the Pubji A toll is a demand of proprietorship, is paid for the use of another's property an may be imposed by the government or private individuals or entities; while tax is demand of sovereignty, is paid for the support of the government and may 5; imposed only by the State. 2. From penalty. Penalty is any sanction imposed as a punishment for violation of lay or acts deemed injurious. Violation of tax laws may give rise to imposition of penalty. A penalty is designed to regulate conduct and may be imposed by the government or private individuals or entities. Tax, on the other hand, is primarily aimed at raising revenue and may be imposed only by the government. 3. From special assessment. Special assessment is an enforced proportional contribution from owners of lands for special benefits resulting from public improvements. Special assessment is levied only on land, is not a personal liability of the person assessed, is based wholly on benefits and is exceptional both as to time and place. Tax is levied on persons, property, or exercise of privilege, which may be made a personal liability of the person assessed, is based on necessity and is of general application, From permit or license fee. Permit or license fee is a charge imposed under the Police power for purposes of regulation. License fee is im taxis levied for a license fee m, Necessarily ‘posed for regulation and involves the exercise of police power while Fevenue and involves the exercise of the taxing power. Failure to pay ‘ mee mares a” act or a business illegal while failure to pay a tax does not an act or a business illegal, 10 | incom ' Taxation 2023 egiy, 23 Edition by Prof. WIN Ballada and Susan Ballada 5. From debt. A debt is generally based on contract, is assignable and may be paid in Kind while a tax is based on law, cannot generally be assigned and is generally payable in money. A person cannot be imprisoned for non-payment of debt while he can be for non-payment of tax (except poll tax). From revenue. Revenue is broader than tax since it refers to all funds or income derived by the government taxes included. Other sources of revenues are government services, income from public enterprises and foreign loans. From customs duties. Customs duties are taxes imposed on goods exported from or imported to a country. Customs duties are actually taxes but the latter is broader in scope. TAX LAWS Sources of Tax Authority The three branches of the national government are the President and his administration (executive), the Congress (legislative), and the Courts (judicial). Congress creates statutory law. Republic Act 8424, The National Internal Revenue Code (NIRC) of 1997, is a statutory law. The administrative branch of the national government includes the Department of Finance (DOF), of which the Bureau of Internal Revenue (BIR) is a bureau. Two commonly encountered types of administrative tax authorities are Revenue Regulations and Revenue Rulings. Most Revenue Regulations are administrative interpretations of the statutes enacted by Congress and tend to be somewhat more detailed than the Code itself. Revenue Rulings are much more detailed, as they are issued in order to explain the tax results of very specific transactions. Court decisions occur when the BIR and taxpayers are unable to agree on what constitutes the correct application of the tax statutes to specific situations. While Congress writes the statutes an administrative branch implements them, the judiciary branch has the final say on what the words of the statutes really mean in actual application. In summary, tax ‘law,’ in general, is composed of all three elements: (1) the Code, (2) Regulations and Rulings, and (3) decisions of various courts that hear tax cases. Sources of Tax Laws 1. Constitution; 2. Statutes and Presidential Decrees; 3. Revenue Regulations by the Department of Finance; Chapter 1: Basic Principles | 11 4. Rulings issued by the Commissioner of internal Revenue and Opinions by the Secretary of Justice; 5. Decisions of the Supreme Court and the Court of Tax Appeals; The “rational basis test” is applied to in the face of an equal protection! ¢ social and economic policy, suspect lines nor fauge the constitutionality of an assailed jay hallenge. it has been held that “in areas 4) * Statutory classification that neither proceeds algp, infringes constitutional rights must be upheld again al provide aan alcnee if there is any reasonably conceivable state of facts that cou provide a rational basis for the classification." Under this test, itis sufficient that th legislative classification is rationally related to achieving some legitimate State oe es American Tobacco vs, Jose Isidro Camacho, et al, G.R. 163583, Ap, 6. Provincial, city, muni icipal, and barangay in the Local Governm, Y ordinances subject to limitations set for, lent Code; and 7. Treaties or international agreements the purpose of which is to avoid or Minimize double taxation, Republic Act 9282 R.A. 9282 expanded the jurisdiction of the Court effect on Apr. 22, 2004. It a features of R.A. 9282 follow: of Tax Appeals (CTA). This law took mended R.A. 1125—the law creating the CTA. Some salien The CTA shall be of the same level as the Court of Appeals (CA). It shall be composed of a presiding justice a sessions, four justices shall constitute a members shall be necessary to render a deci nd five associate justices. For en banc Quorum, The affirmative vote of four ision or resolution, * There shall be two divisions (with three members each); presiding justice and the most senior associate. Two justice sessions of a division. In order to render a decision/resol of two members of a division is necessary. the chairmen shall be the es constitute a quorum for lution, the affirmative vote The CTA has exclusive original jurisdiction over all criminal offenses arising from violations of the NIRC and other laws administered by the BIR where the principal amount of taxes and fees (exclusive of charges and Penalties) claimed is P1 million and ' Equal protection is a constitutional guarantee which means that no person or class of persons shall be denied the same protection of the laws which is enjoyed by other persons or other classes in like , circumstances in their lives, liberty, property, and in their pursuit of happiness. Equal protection with respect to classification for taxation purposes, does not require identity of treatment, but oily ae ha classification rests on real and not feigned differences, (2) that the distinction have some id oa purpose for which classification is made, and (3) that the difference treatments be Pas ea to difference in classification, as to be wholly arbitrary (Walters vs City of St. Louis, Mo., U.S. Supreme Court Reporter 505, 509, 98 Lawyer's Edition 660). 12 | Income Taxation 2023 Edition by Prof. WIN Ballada and Susan Ballada abo coll pen The Cor refi cas ina Th jur co Ca va pe In = above. For the same amount of claim, the CTA has exclusive original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties. The CTA has the exclusive jurisdiction to review on appeal decisions of the Commissioner of Internal Revenue (CIR) in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties, or other matters. In case of inaction by the BIR where the NIRC provides a specific period of action, the inaction shall be deemed a denial and the CTA has the jurisdiction to review the same. The Supreme Court has ruled that while the Revised Rules of the CTA confers on the CTA jurisdiction to resolve tax disputes in general, this does not include cases where the constitutionality of a law or rule is challenged (British American Tobacco vs. Jose Isidro Camacho, et. al., G.R. 163583). The regular courts have jurisdiction to pass upon the validity of a law, or a rule or regulation issued by an administrative agency in the performance of its quasi legislative function. Interpretation and Construction of Tax Statutes The recognized rules in statutory construction also apply to tax statutes. As in other statutes, the legislative intent is the primary concern. However, where there is doubt in determining the legislative intent, the doubt must be resolved liberally in favor of taxpayers and strictly against the taxing authority, Exemptions in taxation are highly disfavored in law; they are not to be presumed nor implied but must be clearly expressed. A tax exemption, when granted, shall be strictly construed against the grantee. Thus, he who claims the tax exemption must be able to justify his claim or right. As decided by the Supreme Court: “The exception contained in the tax statutes must be strictly construed against the one claiming the exemption because the law does not look with favor on tax exemptions and that he who would seek to be, thus, privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted.” (Commissioner of Internal Revenue vs. J. Kiener Company, Ltd., 65 SCRA 143) Philippine Tax Laws and Taxes 1, National Internal Revenue Code of 1997 (P.D. 1158, as amended); income taxes (individual and corporate); estate and donor’s taxes; value-added tax; other percentage taxes; excise tax; and f. documentary stamp tax. aos Chapter 1: Basic Principles | 13 ee | 2. Tariff and Customs Code of 1978 (P.0. 1464, as amended); a. import duties; and b. export duties. 3. Local Government Code of 1991 (R.A. 7160); real property tax; business taxes, fees and charges; professional tax; community tax; and tax on banks and other financial institutions. paose 4. Special Laws a. Motor Vehicle Law (R.A. 4136) - motor vehicle fees; b. Private Motor Vehicle Tax Law (P.D. 1958) — private motor vehicle tax; Philippine Immigration Act of 1940 (C.A. 613, as amended) — immigration tax and d. Travel Tax Law (P.D. 1183, as amended) — travel tax. Tax Laws Versus GAAP and GAAS All returns required to be filed by the Tax Code shall be prepared always in conformity with the provisions of the Tax Code, and the rules and regulations issued implementing said Tax Code. Taxability of income and deductibility of expenses shall be determined strictly in accordance with the provisions of the Tax Code and the rules and regulations issued implementing the said Tax Code. In case of difference between the provisions of the Tax Code and the rules and regulations implementing the Tax Code, on one hand, and the generally accepted accounting principles (GAAP) and the generally accepted auditing standards (GAAS) on the other hand, the provisions of the Tax Code and the rules and regulations issued implementing the said Tax Code shall prevail (Revenue Memorandum Circular 22-04, Apr. 12, 2004). Internal Revenue Laws Revenue law is a law passed for the purpose of authorizing the levy and collection of taxes in some form to raise revenue. A revenue law is said to be a national revenue la when itis applicable all over the country. Internal revenue laws are neither political nor penal in nature although there 2 Penalties in case of violations. Tax laws are civil in nature. u : 4 | Income Taxation 2023 Edition ‘by Prof. WIN Ballada and Susan Ballada History of the Philippine Internal Revenue Law ned after that existing in the United The first Philippine Internal Revenue Law, patter 2, 1904 as Act 1189 effective states, was approved by the Philippine Commission on July Aug. 4, 1904, Subsequent internal revenue laws were approved in 1913, 1916 and 1917. On june 15, 1939, the National Assembly approved the National Internal Revenue Code (NIRC) as Commonwealth Act 466, which took effect on July 1, 1939. The Code was amended by Republic Act 6110 otherwise known as The Omnibus Tax Law in 1969, Presidential Decree 69 in 1972, NIRCs of 1977 and 1986, and various presidential decrees and executive orders. Enacted on July 28, 1997 by the Philippine Congress was Republic Act 8424, An Act [Amending the National Internal Revenue Code, As Amended, And For Other Purposes, otherwise known as the “Tax Reform Act of 1997." The Act declares the policy of the State to promote sustainable economic growth through the rationalization of the Philippine internal revenue tax system, including tax administration; to provide, as much as possible, an equitable relief to a greater number of taxpayers in order to improve levels of disposable income and increase economic activity; and to create a robust environment for business to enable firms to compete better in the regional as well as the global market, at the same time that the State ensures that Government is able to provide for the needs of those under its jurisdiction and care. the Code imposes progressive rates of income taxes on citizens and resident aliens The progressive scheme of income taxation was introduced in our tax system af measure Ff raising more revenues to meet adequately the increasing needs of the government snd at the same time to correct inequalities in taxation by equitably distributing the tax burden based upon the principle of ability to pay. The Bureau of Internal Revenue the Bureau of Internal Revenue (BIR) functions under the supervision and control of the Department of Finance (DOF). The Bureau was created by Commonwealth, Act 466, approved by the National Assembly on June 15, 1939, effective July 2, 1939, which revised and codified the then internal revenue laws of the Philippines. The mission of the BIR is “to collect taxes efficiently and effectively, for and at the least cost to the government, through impartial and consistent enforcement of internal revenue laws, and convenient and honest service to taxpayers.” BIR collection accounts for more than 60% of the national government's total revenues. The BIR carries the bulk of the burden of solving the country’s budget deficit problem. Chapter 1: Basic Principles | 15 C-.... EE Tax Collection system With a growing taxpayer population and limited resources, the BIR adopted the “self. assessment system” when Republic Act 2343 was enacted in 1959. Republic Act 8424 otherwise known as the Tax Reform Act of 1997 retained this principle. .e taxpayer calculates the tax by himself or through files it with the proper tax office, and pays the tay is computed and determined is sulting tax a “self-assessed” tax, Under the self-assessment system, th an accountant, fills up his tax return, due thereon upon filing. The process by which the tax What is called the “self-assessment” method, and the re Over the years, the BIR has employed various collection methods, amending processes or introducing innovations as the need arises. On the whole, however, the methods of collection utilized by the BIR may be classified into two (2) major categories: collection through voluntary compliance and collection by enforcement. ‘The act of tendering the payment of the self-assessed tax is referred to as “voluntary compliance” or “voluntary payment.” Collection by enforcement, on the other hand, is conducted through the identification of sectors of business or industries, and/or segments of economic activities where the degree of compliance is low, and the subsequent audit or investigation of enterprises and companies that are part of these selected industries. The Attrition Act of 2005 Republic Act 9335, otherwise known as the Attrition Act of 2005, was enacted to improve the revenue collection performance of the BIR and the Bureau of Customs (BOC) through the creation of a Revenue Performance Evaluation Board and of 2 Rewards and Incentives Fund. This Act shall cover all officials and employees of the BIR and the BOC, regardless of employment status; with at least six months of service. ‘The Board has the following powers and functions: 1. to prescribe the rules and guidelines for the allocation, distribution and release of the Fund; 2. to set the criteria and procedures for removing from service officials and employees whose revenue collection falls short of the target by at least 7.5%; 3. to terminate personnel in accordance with the criteria adopted; and 4, to prescribe a system for performance evaluation. 16 | Income Taxation 2023 Edition by Prof. WIN Ballada and Susan Ballad. jallada The Fund is to be respective revenue t Excess of Ce the Reve 30% More R.A. 9335 took effe to June 2006. Th Teves, et al, Supre Policy Directions « With the promulg the legal recog transactions, it ni existing tax admit The BIR is leanin Commerce trans 1. Tax neutralit that the ta transactions conventiona 2. All other tax commerce, transactions 3. BIR will har raising reve 4, BIR will rat which E-Cor economic c 5. The tax tre acceptance Philippines view to ave The Fund is to be sourced from the collection of BIR and BOC in excess of their respective revenue targets for the year as provided below: Excess of Collection Over Percent (96) of the Excess the Revenue Targets Collection to Accrue to the Fund 30% or below = 15% More than 30% = 15% of the first 30% plus 20% of the remaining excess R.A. 9335 took effect on Feb. 11, 2005. However, its implementation has been deferred to June 2006. This law and its IRR are constitutional (BOCEA vs. Hon. Margarito B. Teves, et al, Supreme Court (En Banc) G.R. 181707, Dec. 6, 2011). Policy Directions on E-Commerce With the promulgation into law of R.A. 8792 or the E-Commerce Law, which provides for the legal recognition and use of electronic commercial and non-commercial transactions, it now becomes imperative for the BIR to introduce this concept into its existing tax administration system. The BIR is leaning towards the following policy directions insofar as they relate to E- Commerce transactions: 1. Tax neutrality should be the governing principle in the interim. This presupposes that the taxing authority should impose no more taxes upon E-Commerce transactions than what is imposed upon the same activity conducted by conventional means. All other taxation principles, which guide the government in relation to conventional commerce, should be the same guiding principles applicable to E-Commerce transactions. BIR will harness the potential of E-Commerce in bringing about greater efficiency in raising revenues and an improved taxpayer service. BIR will rationalize its role in providing an appropriate fiscal environment within which E-Commerce may flourish, ensuring that business decisions are influenced by economic considerations rather than by tax considerations. The tax treatment for E-Commerce transactions should have a high international acceptance, but it must strike a balance between the fiscal sovereignty of the Philippines and the fair sharing of the tax base on its counterpart countries with a view to avoiding double taxation. Chapter 1: Basic Principles | 17 we | BIR Issuances and Rulings Defined igned by the Secretary of Finance, upon Revenue Regulations (RRs) are issuances signe recommendation of the Commissioner of Internal ccm eee or define rules and regulations for the effective enone the National Internal Revenue Code (NIRC) and related statutes. . ish perti Revenue Memorandum Circulars (RMCs) are leer tht tae Hee mene applicable portions, as well as amplifications, of laws, rules, 8! nts, issued by the BIR and other agencies/offices. Revenue Memorandum Orders (RMOs) are issuances that provide directives o, instructions; prescribe guidelines; and outline processes, operations, activities, workflows, methods and procedures necessary in the implementation of stated policies, goals, objectives, plans and programs of the Bureau in all areas of operations, except auditing. Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of the Commissioner of Internal Revenue with respect to the provisions of the Tax Code and other .tax laws, as applied to a specific set of facts, with or without established Precedents, and which the Commissioner may issue from time to time for the purpose of providing taxpayers guidance on the tax consequences in specific situations, BIR Rulings, therefore, cannot contravene duly issued RMRs; otherwise, the Rulings are null and void ab initio. BIR Rulings are official positions of the BIR on inquiries of taxpayers, who request clarification on certain provisions of the Tax Code, other tax laws, or their implementing regulations, usually for seeking tax exemptions. Rulings are based on particular facts and circumstances presented and are interpretations of the law at a specific point in time. Tax rulings cannot be cited as precedent, but can provide useful information on how the BIR may treat a similar transaction. They are also issued to answer questions of individuals and juridical entities regarding their status as taxpayers, and the effect of their transactions for taxation purposes. The BIR does not give planning advice or “approve” tax planning arrangements or resolve an issue through a ruling if the matter can be determined through another process (i.e., appeal). The Law and Legislative Division wi to a request in the following instances: 1. The taxpayer has directed a simi 2. The same issue involving the sa litigation; 3. The same issue involving the same tax ongoing audit, administrative protest, claj collection proceeding (R ar inquiry to another office of the BIR; ime taxpayer or a related taxpayer is pending in a case in ‘ayer is the subject of a Pending investigation. im for refund or issuance of tax credit certificate, ‘evenue Memorandum Order 9-2014, Feb. 6, 2014) 18 | Income Taxation 2023 Edition by Prof. WIN Ballada and Susan Balk an Ballada revenue Bulletins (RBs) refer to periodic issuances, notices and official announcements of the Commissioner of Internal Revenue that consolidate the Bureau of Internal Revenue’s position on certain specific issues of law or administration in relation to the provisions of the Tax Code, relevant to tax laws and other issuances for the guidance of the public. The BIR also issues Revenue Audit Memorandum Orders (RAMOs). Revenue Regulations 5-2012 was published on April 4, 2012. Then, the Commissioner, thru RMC 22-2012, clarified that: 1. AIlBIR rulings issued prior to Jan. 1, 1998 (the effectivity date of R.A. 8424) — a. Are not to be used as precedent by any taxpayer as a basis to secure rulings for themselves for current business transaction/s or in support of their position against any assessment; : b. Are not to be used by any BIR action lawyer in issuing new rulings for request for rulings involving current business transaction/s. 2. BIR rulings issued prior to Jan. 1, 1998 remain valid but only: a. To the taxpayer who was issued the ruling; and b. Covering the specific transaction/s which is the, subject of the same ruling. 3, BIR rulings issued prior to Jan. 1, 1998 shall remain valid as mentioned above, unless expressly notified of its revocation or unless the legal basis in law for such issuance has already been repealed/amended in the current Tax Code. A BIR issuance cannot be applied retroactively if it will prejudice the interest of taxpayers (COL Financial Group, Inc. vs. Commissioner of Internal Revenue, CTA (3rd Division) Case 8454, Apr. 15, 2014). Powers and Duties of the Bureau of Internal Revenue The chief officials of the Bureau are the Commissioner and seven (7) Deputy Commissioners. The Deputy Commissioners are tasked to handle particular groups within the Bureau such as information systems, legal and inspection, operations, resource management, tax reforms administration, special concerns and large taxpayers. Its powers and duties follow: 1. Assessment and collection of all national internal revenue taxes, fees and charges; Enforcement of all forfeitures, penalties, and fines; Execution of judgments in all cases decided in its favor by the Court of Tax Appeals and ordinary courts; and 4. Administration of supervisory and police powers conferred to it. Chapter 1: Bosic Principles | 19 a aa a Powers of the Commissioner 1. Interpret nterpret tax laws and decide tax cases; f persons, stimony of persons; 2. Obtain information, and to summon, examine, Sree ane ee and m — Make assessments and prescribe additional requir’ enforcement. i ffi th n officer with rank 4. Delegate powers vested in him by the Code to any subordinate equivalent to a division chief or higher. ayer. axes: 5. Suspend business operations of a taxp: 6. Compromise, abate and refund or credit t 0021, “The Exchange of Information In Mar. 5, 2010, the President signed Republic Act 1 BIR with on Tax Matters Act of 2009.” This law provides the Commissioner of the more powers to fight tax evasion by expanding its authority to look into Se counts and. sharing the obtained information with the requesting ign tax authority. ection 6(F) of R.A. 8424 or the Tax Reform Act of Section 3 of R.A, 10021, amending S« . tire into bank deposit 1997, provides the Commissioner with the authority to ing accounts and other related information held by financial institutions of: 1. Adecedent to determine his gross estate; Any Taxpayer who has filed an application for compromise of his tax liability under Sec. 204 2 (A)(2) of this Code by reason of financial incapacity to pay his tax liability. When a taxpayer files an application to compromise the payment of his tax liabilities based ‘on his claim that his financial position demonstrates a clear inability on his part to pay the tax assessed, his application shall only be considered upon waiving in writing his privilege under Republic Act 1405, Republic Act 6426, otherwise known as the Foreign Currency Deposit Act of the Philippines, or under other general or special laws. The waiver then constitutes as the authority of the Commissioner to inquire into the bank deposits of the taxpayer. 3. Aspecific taxpayer or taxpayers subject of a request for the supply of tax information froma foreign tax authority pursuant to an international convention or agreement on tax matte’ to which the Philippines is a signatory or a party of: Provided, That the information obtained from the banks and other financial institutions may be used by the Bureau of Intend Revenue for tax assessment, verification, audit and enforcement purposes. In case of a request from a foreign tax authority for tax information held by banks até financial institutions, the exchange of information shall be done in a secure mannet eu confidentially thereof under such rules and regulations as may be promulgat by the Secretary of Finance, upon recommendation of the Commissioner. The Commissioner shall. provi i i forei Provide the tax information obtained upon request of an tax authori A gn tax authority when such Tequesting foreign tax authority has provided the 20 | income Taxation 2023 Editio Prof. WIN Ballada and Susan Ballada Icon jt 4 Edition by Prof. WIN Ballad. Me : Powers of the Commissioner ke testimony of persons; inistration ar 2. Obtain information, and to summon, admi nd 3. Make assessments and prescribe addition? enforcement. Code to any subordinate o 4. Delegate powers vested in him by the Co! equivalent to a division chief or higher 5. Suspend business operations of @ ears es, 6. Compromise, abate and refund or credit taxes: fficer with rank «The Exchange of Information In Mar. 5, 2010, the President signed Republic Act 10022, "The joner of the BIR with more on Tax Matters Act of 2009.” This law provides the us into a taxpayer's bank Powers to fight tax evasion by expanding its authority ata requesting foreign tay accounts and sharing the obtained information with: the red authority. the Tax Reform Act of Section 3 of R.A. 10021, amending Section 6(F) of R.A. ace reese Taeaes 1997, provides the Commissioner with the authority place accounts and other related information held by financial insti 1. Adecedent to determine his gross estate; 2. Any Taxpayer who has filed an application for compromise of his tax liability under Sec. 204 (A)(2) of this Code by reason of financial incapacity to pay his tax liability. When a taxpayer files an application to compromise the payment of his tax liabilities based con his claim that his financial position demonstrates a clear inability on his part to pay the tax assessed, his application shall only be considered upon waiving in writing his privilege under Republic Act 1405, Republic Act 6426, otherwise known as the Foreign Currency Deposit Act of the Philippines, or under other general or special laws. The waiver then Constitutes as the authority of the Commissioner to inquire into the bank deposits of the taxpayer. ign tax authority for tax infor financial institutions, the exchange of information shall b ensure confidentially thereof under si by the Secretary of Finance, upon rec mation held by banks and e done in a secure manner? ations as may be promulgated e Commissioner uch rules and regul, ‘omMMendation of th Obtained upon request of th ‘8X authority has provided tM 20 | income r " Texation 2023 Edition by Prop WIN Batlada nd Susan Ball lada following inform: the request: n to demonstrate the foreseeable relevance of the information to a. The identity of the person under examination or investigation; A statement of the information being sought including its nature and the form in which the said foreign tax authority prefers to receive the information from the Commissioner; ¢_ The tax purpose for which the information is being sought; 4, Grounds for believing that the information requested is held in the Philippines or is in the possession oF control of a person within the jurisdiction of the Philippines; To the extent known, the name and address of any person believed to be in possession of the requested information; f. Astatement that the request is in conformity with the law and administrative practices of the said foreign tax authority, such that if the requested information was within the jurisdiction of the said foreign tax authority then it would be able to obtain the information under its laws or in the normal course of administrative practice and that it is in conformity with a convention or international agreement; g. Astatement that the requesting foreign tax authority is also allowed under its domestic laws to exchange or furnish the information subject of the request (RR 10-2010, Oct. 6, 2010); and h, Astatement that the requesting foreign tax authority has exhausted all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties. Revenue Regulations 3-2014, issued Feb. 11, 2014, amended Sec. 10 of RR 10-2010, to read as follows: “A taxpayer shall be duly notified in writing by the Commissioner that a foreign tax authority is requesting for exchange of information held by financial institutions pursuant to an international convention or agreement on tax matters within 60 days from receipt of the said request. However, if notification within this period will undermine the chances of success of the investigation conducted by the requesting foreign tax authority, the taxpayer shall be notified within 6 calendar months from receipt of the request.” Pursuant to Section 20 (B) of the Tax Code, as amended by R.A. 11534 or CREATE Act, the Secretary of Finance may order the Commissioner to furnish the Department of Finance (DOF) such specifically identified information related to entities receiving incentives under Title XIII of the Tax Code of 1997, as amended, with justification clearly stated therefor. ‘ Tax Incentives An example of a law that grants tax incentives is the Adopt-a-School Act of 1998 (R.A. 8525). Revenue Regulations 10-2003 implements the tax incentive provisions of said law. A pre-qualified adopting private entity which enters into an agreement with a Public school shall be entitled to the following tax incentives: * Deduction from gross income of the amount of contribution/donation that were actually, directly and exclusively incurred for the Program, subject to limitations, plus an additional amount equivalent to 50% of such contribution/donation; Chapter 1: Basic Principles | 21 SO a or from paym fer and Busi ment of donor's taX. Donation apy * Exemption of the Assistance made by the don ness Taxation by the Same boo, donor's tax are covered in another text, Trans team. tion Act of 2009, states Section 19 of R.A, 10028, the Expanded Breastfeeding pret facility, establishment g, that "The expenses incurced by a private health and 7 cable expenses fo institution, in complying with the provisions ofthis ACH ANT Tor svided That the deduction shall apply for the taxable period ben ae plshments and institutions shay further, That all health and non-health facilites me a prov rove (6) months p hall secure a "Working comply with the provisions of this Act within sik" B finally, That such facilities, establishments or In' ot Health to be filed with the Mother-Baby-Friendly Certificate” from the Deserta ve a Bureau of Internal Revenue, before they can avail o ce Act of 2010, a lawyer or professional as defined by the Supreme Court, shall ross income, the amount that could Per Republic Act 9999 or the Free Legal Assistan partnerships rendering actual free legal services, be entitled to an allowable deduction from the gr 4 have been collected for the actual free legal services rendered or up to 10% of the gross income derived from the actual performance of the legal profession, pies lover Provided, That the actual free legal services herein contemplated a Ibe a lusive o the minimum 60 hours mandatory legal aid services rendered to indigent litigants as required under the Rule on Mandatory Legal Aid Services for Practicing Lawyers, under BAR Matter 2012, issued by the Supreme Court, INCOME AND INCOME TAXES Income Defined and Distinguished from Capital Income, in its broad sense, means all wealth, which flows into the taxpayer other than a mere return of capital. It is the return in money from one’s business, labor, or capital invested, e.g., gains, profits, salary and wages. The words ‘income from any source whatever’ disclose a legislative policy to include all income not expressly exempted from the class of taxable income under our laws (Commissioner vs. BOAC, L-65773, Apr. 30. 1987, citing Madrigal vs. Rafferty, 38 Phil. 14). Income is also defined as the amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise Specified, it means cash or its equivalent. Income may also be thought of as a flow of the fruits of one’s labor. Capital isa fund or property existin W at one distinct point of time. In her e. Income, on the othe fans, denotes flow of wealth during a definite period of time wire ni Income is the service of wealth. In the Madrigal case. the essential distinction between capital and income: .

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