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PART I. GENERAL PRINCIPLES OF TAXATION

A. CONCEPT, PURPOSE AND NATURE:
TAXATION - process or means of raising revenue to defray the necessary
expenses of the government
- one of the three inherent powers of the government
- attribute of sovereignty
- exercised by the lawmaking body
(Sec. of Finance vs. Ilarde, 458 SCRA 213)

B. TAXATION VS. POLICE POWER V. EMINENT DOMAIN

1. As to purpose: T – for revenue; PP – regulation;

ED- take private property for public use
2. As to benefits received: T- protection ; PP – general welfare’
ED- just compensation
3. As effect of non-payment: T- civil and criminal liability; PP –renders business
illegal

4. As to basis of amount- T- tax law; PP-expenses for regulation; ED-fair market

value

C. THEORY AND BASIS OF TAXATION

1. Lifeblood theory
2. Necessity theory
3. Benefits-received theory

D, LIMITATIONS ON TAXATION
a. Inherent limitations -PLITE
P - public purpose
L - legislative function
I - international comity
T - territoriality
E - exemption of the government

b. Constitutional limitations – constitutional provisions relating to or

affecting the exercise of the power to tax.

Important constitutional limitations on the exercise of the power to tax:

1. Due Process clause - The requirements of due process apply not only to the
national legislature but also to the legislative bodies of local government units or
the local Sanggunians. However, while the local legislative bodies are required
to conduct public hearings, prior to the enactment of tax ordinances and revenue
measures, the national legislature has the discretion as to whether or not to
conduct public hearings before the enactment of tax laws.

2. Art. VI, Sec. 28 (3), 1987 Constitution -Tax exemption of properties actually,
directly and exclusively used for charitable, religious or educational purposes –
applies only to real property tax

3. Equal protection clause – taxpayers of equal footing should be treated alike,

both as to privileges conferred and liabilities imposed.
Ormoc Sugar Central vs. CIR, 22 SCRA 603:
If the ordinance is intended to apply to a specific taxpayer and to no one
else regardless of whether or not other entities belonging to the same class are
established in the future, it is a violation of the equal protection clause; but if it is
to apply also to similar entities, which may be established in the future, then the
tax ordinance is valid even if in the meantime, it applies to only one entity or
taxpayer for the simple reason that there is so far only one member of the class
subject to the tax measure .

CREBA vs. The Hon. Executive Secretary Alberto Romulo,

G.R. NO. 160756, March 9, 2010:
The taxing power has authority to make reasonable classification for purposes of
taxation. Inequalities resulting from a singling out of one particular class for taxation or
exemption do not infringe any constitutional limitation. The real estate industry is, by itself,
a class and can be validly treated differently from other business enterprises.

4. Non-Delegation Of The Power To Tax:

Abacada Guro Party List vs. Ermita, 469 SCRA 1 –
While the power to tax cannot be delegated to executive agencies, details
as to the enforcement and administration of an exercise of such power may lft to
them, includingthe power to determine the existence of facts on which its operation
depends, the rationale being that the preliminary ascertainment of facts as basis
for the enactment of legialation is not of itself a legislative function but simply
ancillary to legislation.

5. The President has the power to fix tariff rates and wharfage dues;

May the delegated power of the President to fix tariff rates be exercised by his
department secretaries?

Southern Cross Cement Corp. Vs. Cement Manufacturers Association of the

Philippines, 465 SCRA 532-
The power delegated to the President under Sec.28 (2), Article VI may be
exercised in accordance with legislative sanction, by the alter egos of the
President, such as department secretaries – for purposes of the President’s
exercise of power to impose tariffs. Generally, the Sec. of Finance acts as his alter
ego. The President or the alter egos may be properly deemed as agents of
Congress to perform an act that inherently belongs as a matter of right to
Congress.

G. DOCTRINES IN TAXATION

1. PROSPECTIVITY OF LAX LAWS – tax laws must be applied prospectively.

Exception: when the law provides retroactive effect

2. IMPRESCRIPTIBILITY - unless otherwise provided by the law itself, taxes are

imprescriptible.

Question: If taxes are imprescriptible, what is the signification of the statute of

limitations on the assessment and collection of taxes?

Suggested Answer: To safeguard taxpayers from any unreasonable examination

or investigation or assessment, our tax law provides statute of limitations on the
collection and enforcement of taxes. If there is no fixed period within which the
government can assess and collect taxes, then taxpayers would not have peace
of mind since at any time tax officials can collect taxes.
3. DOUBLE TAXATION- not being forbidden by our Constitution, it is not a valid
defense against the validity of a tax measure.

International Juridical Double Taxation – imposition of comparable taxes in

two or more states on the same taxpayer in respect of the same subject matter
and for identical periods. (CIR vs. SC Johnson and Son, Inc.. G.R. No.
127105, 25 June 1999, 309 SCRA 87)

Remedies of double taxation:

1) Tax sparing provision - provision in some tax treaties which provides that
the state of residence allows as credit the amount that would have been paid, as
it no reduction has been made.
2) Tax credit - tax paid on income from foreign source by a resident citizen
is a tax credit on his total tax payable from all sources.
3) exemption method –
4) treaties – reciprocity provision

4 ESCAPES FROM TAXATION

a. Shifting of tax burden – This only applies to indirect taxes where the
burden to pay can be shifted by the taxpayer to another. Ex. Vat
and sales tax
b. Tax sparing provision in treaties
c. Tax avoidance and tax evasion

5. TAX LAWS AND TAX EXEMPTION

a. Tax Laws: Kinds;

1) laws imposing taxes
* construed in favor of taxpayer and against the government
* prospective effect

2) tax exemption laws

a) construed in favor of the government and against the taxpayer;
b) enjoyed only by the grantee; non-transferrable
c) burden of proof is on the one who claims exemption
d) cannot be the subject of a contractual stipulation

.RCPI vs. Provincial Assessor of South Cotabato, 456 SCRA 1; CIR VS.
Philippine American Accident Insurance Company, Inc., 453 SCRA 668
“x x x – It is the taxpayer’s duty to justify the exemption by words too plain
to be mistaken and too categorical to be misinterpreted.

Implied Tax Exemption: No tax by silence, but where the law levies a tax, so
also must the tax exemption be explicit in the law.

BDO vs. Republic G. R. No. 198756, Jan. 13, 2015, 745 SCRA 361-
Tax statutes must be reasonably construed as to give effect to the whole
act. Their constituent provisions must be read together, endeavoring to make every
part effective, harmonious and sensible; that construction which leave every word
operative will be favored over one that leaves some word, clause or sentence
meaningless and insignificant.

Contractual Tax Exemption is agreed in contracts lawfully entered into by the

government and the taxpayer under enabling laws; not to be construed with tax
exemption under the franchise.
Tax exemption under a franchise is not a contract; hence, not within the purview
of the infringement clause of the constitution.

CONTRACTUAL VS. EXEMPTION UNDER

TAX EXEMPTION A FRANCHISE

1. gov’t sheds cloak of authority - special privilege conferred by

and waives gov’t immunity gov’t authority

2. covers matters that are not - essentially gov’t in nature

essentially gov’t. in nature;

3. may not be revoked without

compromising the obligation - in case of revocation, no violation of
of contracts non-impairment clause of the Const.

NOTE: A legislative franchise partakes of the nature of a contract

MAY CONGRESS ENACT A LAW WITHDRAWING A TAX EXEMPTION?

Flowing from the basic precept of constitutional law that no law is

irreparable, Congress, in the legitimate exercise of its lawmaking powers, can
enact a law withdrawing a tax exemption. (Republic vs. Caguiao, 536 SCRA
193).

6. TAX RULES AND REGULATIONS; BIR RULINGS

1) Requisites for validity:- consistent and in harmony with the law

- reasonable
- useful and necessary
- published in Official Gazette

2) Revenue regulations have the force and effect of a law; issued by Sec. of
Finance upon the recommendation of the Commissioner.

3) General Rule: Revocation, modification, reversal of BIR rules and

regulations shall not be given retroactive effect - if the same is
prejudicial to the taxpayer.
Exceptions:
i) when the taxpayer deliberately misstates or omits material facts.
ii) when the facts subsequently gathered by the BIR are materially
different from the facts on which the ruling is based
iii) taxpayer acted in bad faith.

CASE: ING BANK N.V. (ING BANK N.V. MANILA BRANCH) V. CIR,
G.R. No. 167639, April 24,2016:

DOCTRINES:
1. Administrative issuances such as revenue memorandum circulars
cannot amend nor modify the law.

2. A documentary stamp tax is a tax on documents, instruments, loan

agreements, and papers evidencing the acceptance, assignment, sale, or transfer
of an obligation, right, or property.47 The tax is "levied on the exercise by persons
of certain privileges conferred by law for the creation, revision, or termination of
specific legal relationships through the execution of specific instruments." 48 The
law taxes the document because of the transaction.
Facts:
ING BANK is engaged in banking operations in the Philippines through its
Manila Branch. Assessments were issued against ING Bank for deficiency
documentary stamp tax for 1996 and 1997, deficiency tax on onshore interest
income for 1996 and Withholding tax for 1996 and 1997. It applied for availment
of Tax Amnesty Program under RA 9480. The Supreme Court in its Decision dated
July 22, 2015, set aside the assessments for deficiency documentary stamp taxes
on petitioner's special savings accounts for the taxable years 1996 and 1997 and
deficiency tax on onshore interest income for taxable year 1996 since it availed of
tax amnesty program under Republic Act No. 9480; except the assessment for
deficiency withholding tax on compensation for the taxable years 1996 and 1997.
The CIR filed a Motion for Partial Reconsideration on the ground that documentary
stamp tax is excluded from the amnesty program. It argued that RMC-19-2008
specifically excludes cases which were ruled by any court (even without finality) in
favor of BIR prior to availment of the tax amnesty under RA 9480.

Issue: Whether doc. Stamp taxes are excluded from the Tax Amnesty
Program under Rep. Act 9480.
Ruling:
Documentary stamp tax is one of the taxes covered by the Tax Amnesty
Program under RA 9480. It expressly covers "all national internal revenue taxes
for the taxable year 2005 and prior years . . . that have remained unpaid as of
December 31, 2005." Under Section 21 of NIRC documentary stamp tax is an
internal revenue tax.
RA 9480 provides a general grant of tax amnesty subject only to the
cases specifically excepted by it. Thus, excluded from the tax amnesty are only
those cases enumerated under Section 8 thereof, and doc. Stamp tax is not one
of them.
This Court has previously held that administrative issuances such as
revenue memorandum circulars cannot amend nor modify the law.
CIR’s argument that documentary stamp tax is covered by the excluded
items under the said RMC as "taxes passed-on and collected from customers for
remittance to the BIR”. The added exception "taxes passed-on and collected from
customers for remittance to the [Bureau of Internal Revenue]" provided in Revenue
Memorandum Circular Nos. 69-2007 and 19-2008 essentially refers to the
withholding tax liabilities of a withholding agent. Documentary stamp taxes on
special savings accounts are direct liabilities of petitioner and not simply "taxes
passed-on and collected from customers for remittance to the BIR as argued by
respondent.

7. EQUITABLE RECOUPMENT-

QUESTION: IS THIS APPLICABLE IN THE PHILIPPINES?

Suggested Answer: Considering that our tax laws provide for statute of
limitations within which a taxpayer can claim tax refund, equitable recoupment
does not apply in the Philippines. When the claim was filed beyond the
prescriptive period, the same shall not be granted.

8. SET-OFF OR COMPENSATION
General Rule: Tax is not subject to set-off or compensation
Exception: when the following requisites are present:
a) when both obligations are due and demandable; and
b) when the amounts are fully liquidated or determined
9. POWER TO TAX INVOLVES THE POWER TO DESTROY; THE POWER TO
TAX IS NOT THE POWER TO DESTROY WHILE THIS COURT SITS.

10. TAX PYRAMIDING – imposition of a tax on a tax ; has no legal basis in

fact or in law. It has been reject since 1922 by the Supreme Court, the
legislature and our tax authorities. (People vs.Sandiganbayan, 467 SCRA 137)

11. COMPROMISE -
a. Commissioner of Internal Revenue has the sole authority to
compromise
Internal revenue tax liabilities. (Sec 7 (c), 204(A) and 290 NIRC)

In case the taxpayer reneged in his commitments in the compromise

agreement, the CIR HAS THE OPTION to collect the balance under the
agreement, plus applicable interests; or to disregard the agreement and collect the
assessed tax (original amount) less payments made.

12. TAX AMNESTY AND TAX ABATEMENT

Tax Amnesty - a limited-time offer by the government to 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 (s), as well as
freedom from legal prosecution.

Tax abatement – power of the CIR to cancel the internal revenue liabilities of a
taxpayer on the following grounds:

a. Tax amnesty v. tax abatement

b. Grounds for tax abatement or cancellation of internal revenue liabilities
(i) the tax or any portion thereof appears to be unjustly or
excessively assessed;
(ii) the administration and collection costs involved do not justify the
collection of the amount due.

13. POWER OF TAXATION AS AN IMPLEMENT OF POLICE POWER AND

EMINENT DOMAIN-
Taxation is no longer envisioned as a measure merely to raise revenue to
support the existence of the government. Taxes may be levied with a regulatory
purpose to provide means for the rehabilitation and stabilization of a threatened
industry which is affected with public interest as to be within the police power of
the State.
(Planters Committee vs. Arroyo, G.R. No. 79310, 14 July 1989; Caltex Phil.
Inc. Vs. COA, G.R. No. 92385, 8 May 1992; CIR vs. Central Luzon Drug
Corporation, 456 SCRA 414)

14. TAXPAYER’S SUIT – the case directly involves the illegal disbursement of public
funds derived from taxation.
Asia Pacific Planters vs. City of Urdaneta, 566 SCRA 219 --- A city acquires
ownership of the money loaned to it, making the money public funds.

Jumamil vs. Café, 470 SCRA 475 – A taxpayer need not be a party to the
contract to challenge its validity. Parties suing as taxpayer must prove
sufficient interest in preventing illegal expenditure of money raised by
taxation.
14. ESTOPPEL
GENERAL RULE: The government is not estopped by the mistakes or errors
of its agents, erroneous application and enforcement of law by public
officers do not bar the subsequent correct application of statutes.
(E. Rodriguez, Inc. vs. Collector, L-23041, July 31, 1969; CIR vs. Manila
Bankers Life Ins. Co., G.R. No. 169103. March 16, 2011)

EXCEPTION: In the interest of justice and fair play, as where injustice

will result to the taxpayer.
15. Injunction:

General Rule: The NIRC provides that Injunction does not lie against the
government in the enforcement and collection of internal revenue taxes.
Regular courts cannot issue injunction, because of the Lifeblood doctrine.

Exception: The Court of Tax Appeals may issue Injunction in the exercise of its
appellate jurisdiction, provided the taxpayer will suffer irreparable injury; and he
must comply with Rule 58 of the Rules of Court (posting of a bond)

On local and real property taxes - The LGC does not contain the same provision.
Therefore, regular courts may issue injunction in the collection of local and real
property taxes provided, taxpayer will suffer irreparable injury and comply with
Rule 58.

16. Situs of Taxation - No state may tax anything not within its jurisdiction
without violating the due process clause of the constitution. The taxing power of a
state does not extend beyond its territorial limits,.

PART II. NATIONAL TAXATION

A. POWER AND AUTHORITY OF COMMISSIONER

1. to interpret the provisions of the Tax Code and other tax laws;
2. to decide disputed assessments, refunds of internal revenue taxes, fees and
penalties and charges and other matters arising under the Tax Code

*3. to obtain information, summon and examine witnesses (Sec. 4)

*4. to make assessments and examination of taxpayer (Sec. 6 (A)
*5. to prescribe real property values

TRAIN law (RA 10963 – Jan. 1 2018) provided for additional requirements in the
exercise by the Commission of this power: (MAPBA)

a) Mandatory consultation with private and public appraisers

b) Prior notice to affected taxpayers
c) publication in newspaper of general circulation in the province,
city or municipality concerned, or posting of adjustments
d) basis of valuation and records of consultation done are public records
open to public
e) automatic adjustment once every 3 years
6. to terminate taxable period
7. to inquire into bank deposit accounts
8. to accredit and register tax agents
9. to prescribe additional procedural or documentary requirements
Question: May the Commissioner delegate his powers under the Tax Code?

Suggested Answer: Yes, except the following:

a) to recommend rules and regulations to the Sec. of Finance

b) to issue rulings of first impression or revoke or revise any existing ruling
c) to compromise or abate tax liabilities: however, assessments made by
regional offices where the basic deficiency tax due is P500,000 or less and
minor criminal offenses – may be delegated to the Regional Evaluation Board
d) to assign or reassign internal revenue officers to establishments where
articles subject to excise tax are produced or kept.

Question: How will you describe the income tax situs of the Philippines?

Suggested Answer: The income tax situs of the Philippines was described as
comprehensive since we have practically employed/adopted all the possible
criteria in imposing tax on income. These are: a) nationality of taxpayer
b) residence of taxpayer
c) source of income

C. RULE ON RECOGNITION OF INCOME:

Constructive receipt of income is recognized (Sec. 51, RR-2)

-provided: i) income is credited or set aside for the taxpayer; or
ii) certain income can be withdrawn by the taxpayer during the
taxable year.

Requisites for income to be taxable:

(1) there is income, gain or profit;
(2) the income, gain or profit is received or realized during the taxable year;
and,
(3) The income, gain or profit is not exempt from income tax.

Tests to determine whether income is earned for tax purposes:

1. REALIZATION/SEVERANCE TEST – There is no taxable income until there is

a separation from capital of something of exchangeable value, thereby supplying
the realization or transmutation which would result in the receipt of income.

Revenue is generally recognized when the following conditions are met:

(1) the earning process is complete or virtually complete; and,
(2) an exchange has taken place.

This principle requires that revenue must be earned before it is recorded. The fact
of recognition is not the actual receipt of certain income; but the right to receive
which must be unconditional

2. ECONOMIC BENEFIT TEST – Any economic benefit to the employee that

increases his net worth, whatever may have been the mode by which it is
effected, is taxable.

3. CLAIM OF RIGHT DOCTRINE – a taxable gain is conditioned upon the

presence of a claim of right to the alleged gain and the absence of a definite
unconditional obligation to return or repay that which would otherwise constitute a
gain.
D. ELEVEN (11) CATEGORIES OF INCOME –SEC. 32 (A)

a. COMPENSATION INCOME – remuneration for services rendered on account

of employer-employee relationship; whatever form- cash or in kind. (RR-2-
98;)

Taxable income for compensation income earners = gross compensation

income less non-taxable income/benefits: (RR-8-2018 dtd Jan. 25, 2018)
1) 13th month pay and other not exceeding Php90,000.00;,
2) de minimis benefits; and
3) employee’s share in the SSS, GSIS, PHIC,PAG-IBIG contributions
and union dues

Kinds of compensation income earners:

1. Minimum wage earners (MWE) – worker in the private sector who are
paid the statutory minimum wage or to an employee in the public sector with
compensation income of not more than the statutory minimum wage in the
non-agricultural sector where he is assigned.
2. Low income earners
3. Taxable Income earners

tax- exempt income:

a) compensation income (SMW);
b) holiday pay; overtime pay, hazard; night differential pay
c) de minimis benefit not exceeding the amount fixed by law
d) 13th month pay and other benefits not exceeding P90,000.00

taxable: other income received as commissions or honoraria

fringe benefits, other taxable income in excess of P90,000.00
Income from trade, business or practice of profession

De minimis benefit - exempt from the fringe benefit tax shall, in general, be
limited to facilities or privileges, furnished or offered by an employer to his
employees, provided such facilities or privileges are of relatively small value and
are offered or furnished by the employer merely as a means of promoting the
health, goodwill, contentment, or efficiency of his employees.
- not subject to income tax and withholding tax on compensation income
of both managerial, and rank and file employees:

Fringe Benefits – (Sec. 33) -granted to employee; managerial or supervisory

Tax base – grossed up monetary value of benefit
Tax Rate - 35% - final tax; ( effective Jan 2018-TRAIN LAW)
withheld at source by the employer
Tax exempt FB -
a) benefit is required by the nature of, or necessary to the trade,business or
profession of the employer; or
b) benefit is for the convenience of the employer
c) authorized and exempted by special laws;
d) contributions of the employer in the retirement, insurance
and hospitalization benefit of employees
e) benefit given to rank and file whether under CBA or not;
f) de minimis benefits as defined under RR-10-2004
b. INCOME FROM TRADE, BUSINESS OR PRACTICE OF PROFESSION

1. Self-Employed Individual – kinds of income:

a) professional income - income from practice of profession
b) business income – from trade or business
c) investment income – income from investment

a. Self-employed earning purely income from business or

profession:
i) gross sales/receipts does not exceed VAT Threshold of P3M – may avail
a) graduated rate; or
b) 8% on gross sales/receipts in excess of Php250,000;
provided he signified his intention to avail of this rate and gross
receipts does not exceed Vat threshold of P3M.

NOTE: Election is irrevocable for the taxable year.

Option Of 8% Income Tax Rate Not Available To:

a. Vat registered taxpayer, regardless of the amount of gross sales/receipts;

b. Taxpayer subject to other percentage tax under Title V of the Tax Code;
c. Partners in General Professional Partnership with respect to their distributive
share;
d. Income exceeds the Vat Threshold of Php3M.

If self-employed availed and qualified to 8% income tax rate –

- final income tax of 8%
- tax base- actual annual gross receipts/sales and other non- operating income
– in lieu of the graduated rates of income

b. Individuals Earning Mixed Income – compensation and from self-

employment:

Computation of income tax:

a. compute compensation income – graduated rate
b. self-employment income –
(i) not exceed VAT Threshold of Php3M - option to avail of:8% income tax
rate or graduated rate (plus percentage tax under Sec. 116)
(ii) exceeds Php3M Vat Threshold –graduated rate

c. INCOME FROM DEALINGS IN PROPERTY

I. Capital Asset v. Ordinary Asset:

Sec. 39 (A) (1) – defined Capital asset by way of exclusion- any property held by
thetaxpayer whether for business or not but does not fall in any of the following:

Ordinary Asset-defined by way of enumeration:

1. inventoriable assets - remain in the inventory at the end of the taxable year’
2. property primarily held for sale to customer in the ordinary course or
trade/business
3. depreciable – used in business subject to depreciation;
4. real property used in trade or business

=============nothing follows======= Prepared by: Atty. CCDabu