documents.mx 132047518 taxation reviewer san beda.pdf

7/25/2019 'Documents.mx 132047518 Taxation Reviewer San Beda.pdf'

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San Beda College of Law1

MEMORYAIDINTAXATIONLAW

TAXATION LAW

I. GENERAL PRINCIPLES

POWER OF TAXATIONTAXATION power by which thesovereign through its law-making bodyraises revenue to defray the necessaryexpenses of government from amongthose who in some measure areprivileged to enjoy its benefits and mustbear its burdens.

Two Fold Nature of the Power of

Taxatio1. It i s an inherent attribute ofsovereignty

2. It is legislative in character

Extet of Taxi! PowerSubject to constitutional and

inherent restrictions the power oftaxation is regarded as comprehensiveunlimited plenary and supreme.

SCOPEOFLEGISLATI"ETAXINGPOWER1. !mount or rate of tax

2. !pportionment of the tax". #ind of tax$. %ethod of collection

5. &urpose's of its levy provided it isfor public purpose

6. Subject to be taxed provided it iswithin its jurisdiction

(. Situs of taxation

TAXES enforced proportionalcontributions from the persons andproperty levied by the law-making bodyof the State by virtue of its sovereigntyin support of government and for publicneeds.

C#ARACTERISTICSOFTAXES1. forced charge)2. pecuniary burden payable in money)". levied by the legislature)$. assessed with some reasonable rule

of apportionment) *see theoreticaljustice+

,. imposed by the State within itsjurisdiction)

. levied for a public purpose.

RE$%ISITESOFA "ALI&TAX1. should be for a public purpose2. the rule of taxation shall be uniform". that either the person or property

taxed be within the jurisdiction ofthe taxing authority

$. that the assessment and collectionof certain kinds of taxes guaranteesagainst injustice to individualsespecially by way of notice andopportunity for hearing be provided

,. the tax must not impinge on theinherent and onstitutionallimitations on the power of taxation

T#EORIESAN&'ASESOFTAXATION1. Life(lood Theor)

/axes are what we pay for civili0edsociety. ithout taxes the governmentwould be paraly0ed for lack of themotive power to activate and operate it.ence despite the natural reluctance tosurrender part of one3s hard-earnedincome to the taxing authorities every

person who is able to must contributehis share in the running of thegovernment. (CIR v. Algue, Inc.)

2. Ne*e++it) Theor)/he power to tax is an attribute of

sovereignty emanating from necessity. Itis a necessary burden to preserve theState3s sovereignty and a means to givethe citi0enry an army to resist anaggression a navy to defend its shoresfrom invasion a corps of civil servants toserve public improvements designed for

the enjoyment of the citi0enry and thosewhich come within the State3s territoryand facilities and protection which agovernment is supposed to provide.(Phil. Guaranty Co., Inc. v. CIR)

". 'eefit+,Prote*tio - Re*iro*it)Theor)/axation is described as a symbiotic

relationshipwhereby in exchange of thebenefits and protection that the citi0ensget from the 4overnment taxes arepaid. (CIR v. Algue, Inc.)

TAXATIONLAWCOMMITTEECHAIRPERSON: Charmaine Torre ASST. CHAIRPERSON: Rhohail Ca!ro EDP : Rachelle Saya SUBJECTHEADS: Jemina

Sy, Casiano Ilagan, J., Ryan Co, E!"in Toes :#E#BERS: #ai$a %o&!es A'&, E!i'e Eni(&e', Chis$ian Ca)ea,Jh&n!ee*&illemo


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Note hile taxes are intended forgeneral benefits special benefits totaxpayers are not re5uired. /he4overnment renders no special or

commensurate benefit to any particularperson or property.

IST#EPOWERTOTAXT#EPOWERTO&ESTRO/0

1. 1Power to tax i+ the ower tode+tro)2 *!arshall "ictum) # refersto the unlimitedness and the degreeor vigor with which the taxing powermay be employed to raise revenue.

- the financial needs of the State mayoutrun any human calculation so thepower to meet those needs by taxationmust not be limited even though taxes

become burdensome or confiscatory.

2. 1Power to tax i+ ot the ower tode+tro) while the Sure3e Court +it+2($olmes "ictum) 6 the power to taxknows no limit except those expresslystated in the onstitution.

!arshall and $olmes "ictum Reconciled!lthough the power to tax is almost

unlimited it must not be exercised in anarbitrary manner. If the abuse is sogreat so as to destroy the natural andfundamental rights of people it is theduty of the judiciary to hold such an actunconstitutional.

P%RPOSESAN&O'4ECTI"ESOFTAXATION1. Re5eue basically the purpose of

taxation is to provide funds orproperty with which the Statepromotes the general welfare andprotection of its citi0ens.

2. No,Re5eue 67e)8 PR9EP:

a. Promotion of general welfare

b. Regulationc. Reduction of social ine5uality

d. Encourage economic growth

e. Protectionism

POWEROF4%&ICIALRE"IEWINTAXATION!s long as the legislature in

imposing a tax does not violateapplicable constitutional limitations orrestrictions it is not within the provinceof the courts to in5uire into the wisdomor policy of the exaction the motives

behind it the amount to be raised or the

persons property or other privileges tobe taxed.

/he court7s power in taxation islimited only to the application and

interpretation of the law.

Note /he principle o% &udicial non'inter%erence extends to theadministrative realm.

ASPECTSOFTAXATION1. 8evy or imposition of the tax *tax

legislation+2. 9nforcement or tax administration

*tax administration+

'ASICPRINCIPLESOFASO%N&TAXS/STE; 67E/8

FAT:1. Fi+*al Ade


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4. Non-impairment of Contractsontractsmay not beimpaired

ontractsmay beimpaired

ontracts maybe impaired

5. ransfer of Propert! Ri"#ts/axes paidbecome partof publicfunds

No transferbut onlyrestraint inits exercise

/ransfer iseffected infavor of theState

$. %cope!ll personsproperty andexcises

!ll personspropertyrights andprivileges

nlyupon aparticularproperty

S/STE;SOFTAXATIONGlo(al S)+te3 S*hedular S)+te3

! systememployed wherethe tax systemviewsindifferently thetax base andgenerally treats incommon allcategories oftaxable income ofthe individual.

! system employedwhere the income taxtreatment varies andis made to depend onthe kind or category oftaxable income of thetaxpayer.

! system whichtaxes allcategories of

income exceptcertain passiveincomes andcapital gains. Itprescribes aunitary butprogressive ratefor the taxableaggregate incomesand flat rates forcertain passiveincomes derivedby individuals.

! system whichitemi0es the differentincomes and provides

for varied percentagesof taxes to be appliedthereto.

EXA;PLESOF TAXES LE"IE& WIT# A REG%LATOR/P%RPOSE= OR CO;'INE& EXERCISE OF POLICEPOWERAN&T#EPOWEROFTAXATION.

a.%otor vehicle registration feesare now considered revenue or taxmeasures.(Pal v. du, G.R No. *'+--,

August /,0)/his case reversed the doctrine

previously held in :epublic v. &hilippine:abbit ;us 8ines Inc. "2 S:! 211 tothe effect that motor vehicle

registration fees are regulatoryexactions and not revenue measures.

(./he tax imposed on videogram

establishments is not only regulatory buta revenue measure because the earningsof such establishments have not beensubject to tax depriving the governmentof an additional source of income. (1iov. 2ideogram Regulatory 3oard, /4CRA 56)

*./he ot political in character2. ivil in nature not subject to ex

post facto law prohibitions". >ot penal in character




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TAXESAREPERSONALTOT#ETAXPA/ER

1. ! corporation7s tax delin5uencycannot be enforced against itsstockholders. 6Cororate Etit)

&o*trie::ception Stockholders may beheld liable for unpaid taxes of adissolved corporation?a. if it appears that the corporate

assets have passed into theirhands or

b. when the stockholders haveunpaid subscriptions to thecapital of the corporation

2. 9state taxes are obligations thatmust be paid by the executor oradministrator out of the net assetsand cannotbe assessed against theheirs.:ception If prior to the paymentof the estate tax due the propertiesof the deceased are distributed tothe heirs then the latter issubsidiary liable for the payment ofsuch portion of the estate tax as hisdistributive share bears to the totalvalue of the net estate. (4ec. 0,Rev. Regs. No. 5'566-; see CIR vs.

Pineda G.R. No. *'558-+.4eptember /, 098))

CLASSIFICATIONOFTAXES1. !s to subject matter?

a. Per+oal Tax taxes are of fixedamount upon all persons of acertain class within thejurisdiction without regard toproperty occupation or businessin which they may be engaged.

b. Proert) Tax assessed onproperty of a certain class

c. Ex*i+e Tax imposed on theexercise of a privilege

d. Cu+to3+ &utie+ duties chargedupon the commodities on theirbeing imported into or exportedfrom a country.

2. !s to burden?

a. &ire*t Tax both the incidenceof or liability for the payment ofthe tax as well as the impact orburden of the tax falls on thesame person.

b. Idire*t Tax , /he incidence ofor liability for the payment ofthe tax falls on one person butthe burden thereof can be

shifted or passed on to another.". !s to purpose?

a. Geeral Tax levied for thegeneral or ordinary purposes ofthe 4overnment

b. Se*ial Tax levied for specialpurposes

$. !s to manner of computation?a. Se*ifi* Tax the computation

of the tax or the rates of the taxis already provided for by law.

b. Ad 'a&oremTax tax upon the

value of the article or thingsubject to taxation) theintervention of another party isneeded for the computation ofthe tax.

,. !s to taxing authority?a. Natioal Tax levied by the

>ational 4overnmentb. Lo*al Tax levied by the local

government. !s to rate?

a. Pro!re++i5e Tax rate oramount of tax increases as the

amount of the income or earningto be taxed increases.b. Re!re++i5e Tax tax rate

decreases as the amount ofincome to be taxed increases.

c. Proortioate Tax based on afixed proportion of the value ofthe property assessed.

I;POSITIONSNOTSTRICTL/CONSI&ERE&ASTAXES

1. Toll amount charged for the costand maintenance of the propertyused.

2. Pealt) punishment for thecommission of a crime.

3. Co3ro3i+e Pealt) amountcollected in lieu of criminalprosecution in cases of taxviolations.

4. Se*ial A++e++3et levied only onland based wholly on benefitaccruing thereon as a result ofimprovements or public worksundertaken by government withinthe vicinity.




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5. Li*e+e or Fee regulatoryimposition in the exercise of thepolice power.

6. ;ar!i Fee exaction designed to

stabili0e the currency.7. &e(t a sum of money due upon

contract or one which is evidencedby judgment.

8. Su(+id) a legislative grant ofmoney in aid of a private enterprisedeemed to promote the publicwelfare.

9. Cu+to3+ dutie+ ad fee+ dutiescharged upon commodities on theirbeing transported into or exportedfrom a country.

10. Re5eue a broad term thatincludes taxes and income fromother sources as well.

11. I3o+t in its general sense itsignifies any tax tribute or duty. Inits limited sense it means a duty onimported goods and merchandise.

Tax Se*ialA++e++3et

Imposed on personsproperty and excises

8evied only on land

&ersonal liabilityattaches on theperson assessed incase of non-payment

annot be made apersonal liability ofthe person assessed

>ot based on anyspecial or directbenefit

;ased wholly onbenefit

8evied and paidannually

9xceptional both asto time and locality

9xemption grantedis applicable (Art.2I, 4ec. 5(-) 08Constitution)

9xemption does notapply.>.;. If property isexempt from :eal&roperty /ax it isalso exempt fromSpecial !ssessment.

Tax Li*e+e Fee

;ased on the powerof taxation

9manates frompolice power

/o generaterevenue

:egulatory

!mount is unlimited !mount is limitedto the cost of *1+issuing the licenseand *2+ inspectionand surveillance

>ormally paid afterthe start of abusiness

>ormally paidbeforecommencement ofbusiness

/axes being thelifeblood of theState cannot besurrendered exceptfor lawfulconsideration

8icense fee may bewith or withoutconsideration

>on-payment does

not make thebusiness illegal butmaybe a ground forcriminalprosecution

>on-payment makes

the business illegal

TESTIN&ETER;ININGIFT#EI;POSITIONISATAXORALICENSEFEE

If the purpose is primarily revenueor if revenue is at least one of the realand substantial purposes then theexaction is a tax. If the purpose isregulatory in nature it is a license.

(PA* v. du)

Tax &e(t

!n obligationimposed by law

reated by contract

@ue to thegovernment in itssovereign capacity

%ay be due to thegovernment but inits corporatecapacity

&ayable in money &ayable in moneyproperty or services

@oes not drawinterest except incase of delin5uency

@raws interest ifstipulated ordelayed

Notassignable !ssignable

Not subject tocompensation orset-off

Subject tocompensation orset-off

>on-payment ispunished byimprisonment

No imprisonment incase of non-payment(Art. III, 4ec. 56




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e:cept in poll tax 08 Constitution)

Imposed only bypublic authority

an be imposed byprivate individual

TESTIN&ETER;ININGIFT#EI;POSITIONISATAXORALICENSEFEE

If the purpose is primarily revenue orif revenue is at least one of the realand substantial purposes then theexaction is a tax. If the purpose isregulatory in nature it is a license.(PA* v. du)

Tax &e(t

!n obligationimposed by law

reated by contract

@ue to thegovernment in itssovereign capacity

%ay be due to thegovernment but inits corporatecapacity

&ayable in money &ayable in moneyproperty or services

@oes not drawinterest except incase of delin5uency

@raws interest ifstipulated ordelayed

Notassignable !ssignable

Not subject tocompensation orset-off

Subject tocompensation orset-off

>on-payment ispunished byimprisonmente:cept in poll tax

No imprisonment incase of non-payment (Art. III,4ec. 56 08Constitution)

Imposed only bypublic authority

an be imposed byprivate individual

CO;PENSATIONORSET,OFFGeneral Rule /axes cannot be thesubject of compensation or set-off.

Reasons1. lifeblood theory2. taxes are not contractual

obligation but arise out of dutyto the government

3. the government and thetaxpayer are not mutuallycreditors and debtors of eachother. (7rancia v. IAC)

:ception hen both obligations aredue and demandable as well as fullyli5uidated and all the re5uisites for avalid compensation are present

compensation takes place by operationof law. ("omingo v. Garlitos)

&OCTRINE OF E$%ITA'LE RECO%P;ENT NOTFOLLOWE&INT#EP#ILIPPINES

! tax presently being assessedagainst a taxpayer which has prescribedmay not be recouped or set-off againstan overpaid tax the refund of which isalso barred by prescription. It is againstpublic policy since both parties areguilty of negligence.

Tax Toll

9nforcedproportionalcontributions frompersons and property

! sum of money forthe use ofsomething aconsideration whichis paid for the use ofa property which isof a public nature)e.g. road bridge

! demand ofsovereignty

! demand ofproprietorship

>o limit as to the

amount of tax

!mount of toll

depends upon thecost of constructionor maintenance ofthe publicimprovement used

Imposed only by theState

%ay be imposed by?*1+ 4overnment*2+ &rivate

individuals orentities

Tax Pealt)

9nforcedproportionalcontributions frompersons andproperty

Sanction imposed asa punishment forviolation of a lawor acts deemedinjurious) violationof tax laws may giverise to imposition ofpenalty

Intended to raiserevenue

@esigned to regulateconduct

%ay be imposedonly by the

government

%ay be imposed by?*1+ 4overnment

*2+ &rivate




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individuals orentities

Tax Tariff

!ll embracing termto include variouskinds of enforcedcontributions uponpersons for theattainment ofpublic purposes

! kind of taximposed on articleswhich are tradedinternationally

TAXPA/ERS> S%IT! case where the act complained of

directly involves the illegal disbursementof public funds derive from taxation(


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to 4ec. 6+ o% theNIRC and theprinciple of mobiliaseBuuntur personam

;usiness tax &lace of business

9xcise or &rivilegetax

here the act isperformed or whereoccupation ispursued

Sales tax here the sale isconsummated

Income /ax onsider*1+ citi0enship*2+ residence and

*"+ source of income(4ec. +5, 008 NIRC)

/ransfer tax :esidence orciti0enship of thetaxpayer or locationof property

Aranchise /ax State which grantedthe franchise

SIT%S OF TAXATION OF INTANGI'LE PERSONALPROPERT/

enera& Ru&e @omicile of the ownerpursuant to the principle of the mobiliaseBuuntur personam or movables followthe person.Exceptions1. hen the property has ac5uired a

business situs in another jurisdiction)2. hen an express provision of the

statute provide for another rule.Illustration Aor purposes of estateand donor7s taxes the followingintangible properties are deemedwith a situs in the &hilippines?

*1+ franchise which must beexercised in the &hilippines)

*2+ shares obligations or bondsissued by any corporationorgani0ed or constituted in the&hilippines in accordance withits laws)

*"+ shares obligations or bonds byany foreign corporation eighty-five percent *B,C+ of thebusiness of which is located inthe &hilippines)

*$+ shares obligations or bondsissued by any foreign corporationif such shares obligations orbonds have ac5uired a business

situs in the &hilippines) and(5) shares or rights in any

partnership business or industryestablished in the &hilippines.(4ec. 6+, 008 NIRC).

6@: EXE;PTIONOFT#EGO"ERN;ENT!s a matter of public policy

property of the State and of itsmunicipal subdivisions devoted togovernment uses and purposes isdeemed to be exempt from taxationalthough no express provision in the law

is made therefor.

General Rule /he 4overnment is taxexe3t.- owever it can also tax itself.

R%LES81. !dministrative !gencies

4overnmental function - taxexe3t unless when the lawexpressly provides for tax. (4ec.-5 38)

&roprietary function 6 taxa(leunless exempted by law. (4ec.58C)

2. 4DsGeneral Rule Income is taxa(le atthe rate imposed upon corporationsor associations engaged in a similarbusiness industry or activity.:ception 4SIS SSS &I &SDand &!4D:. *Sec. 2(*+ >I:+

". 4overnment 9ducational InstitutionsA. &roperty or real estate tax 6

property actually directly andexclusively used for educationalpurposes 6 exe3t but incomeof whatever kind and characterfrom any of their propertiesreal or personal regardless ofthe disposition is taxa(le. (4ec.-6, last par., NIRC)

B. Income received by them assuch are exe3t from taxes.owever their income from anyof their activities conducted forprofit regardless of thedisposition is taxa(le. (4ec. -6,

last par., NIRC)




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4. Income derived from any publicutility or from the exercise of anyessential governmental functionaccruing to the 4overnment of the

&hilippines or to any politicalsubdivision thereof is notincluded ingross income and exe3t fromtaxation. (4ec. -5(3)(8)(b), NIRC)

5. @onations in favor of governmentalinstitutions are considered as incomeon the part of the donee. oweverit is not considered as taxableincome because it is an e:clusionfrom the computation of grossincome. (4ec.-5 (3)(-), NIRC)

6. /he amount of all be5uestslegacies devises or transfers to or

for the use of the 4overnment orany political subdivision forexclusively public purposes isdeductible from the gross estate.(4ec.9 (A)(-), NIRC)

7. 4ifts made to or for the use of the>ational 4overnment or any entitycreated by any of its agencies whichis not conducted for profit or to anypolitical subdivision of the said4overnment are exe3t fromdonor7s tax. (4ec. 6(A)(5), NIRC)

8. 8ocal government units are

exre++l) rohi(ited by the 84from levying tax upon >ational4overnment its agencies andinstrumentalities and localgovernment units. 4ec. -- (o),*GCD

9. Enless otherwise provided in the8ocal 4overnment ode *84+ taxexemptions granted to all personswhether natural or juridicalincluding 4D except local waterdistricts cooperatives dulyregistered under :! >o. F"B non-stock and non-profit institutions arewithdraw upon effectivity of the84. (4ec. 0-, *GC)

10. :eal property owed by the:epublic of the &hilippines or any ofits political subdivisions except whenthe beneficial use thereof has beengranted for consideration orotherwise to a taxable person shallbe exe3t from payment of realproperty tax. (4ec. 5-+, *GC)

6: INTERNATIONAL

CO;IT/

/hese principles limit the authorityof the government to effectively imposetaxes on a sovereign state and itsinstrumentalities as well as on its

property held and activities undertakenin that capacity. 9ven where one entersthe territory of another there is animplied understanding that the formerdoes not thereby submit itself to theauthority and jurisdiction of the other.

'. CONSTIT%TIONALLI;ITATIONSA. GENERAL OR IN&IRECTCONSTIT%TIONAL LI;ITATIONS

1. &ue Pro*e++ Clau+e /Art. ,,,0 %ec. 101 Constitution

Re


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4. No,Ifri!e3et Of Reli!iou+Freedo3 Ad Wor+hi 6Art. ,,,0 %ec.50 1 Constitution

! license tax or fee constitutes acurtailment of religious freedom ifimposed as a condition for itsexercise. (American 3ible 4ocietyvs. City o% !anila, GR No. *'09-8,

April -6, 0/8)

5. No,I3air3et Of Cotra*t+ 6Art.,,,0 %ec. 10 1 Constitution

>o law impairing the obligationof contract shall be passed. (4ec.6, Art. III, 08 Constitution)

/he rule however does not

apply to public utility franchises orright since they are subject toamendment alteration or repeal bythe ongress when the publicinterest so re5uires. (Cagayanlectric E *ight Co., Inc. v.Commissioner, GR No. 9659,4eptember 5/, 0/)

R%LES8A. hen the exemption is bilaterally

agreed upon between thegovernment and the taxpayer 6 it

cannot be withdrawn ithoutviolating the non-impairmentclause.

B. hen it is unilaterally granted bylaw and the same is ithdran byvirtue of another law 6 no violation.

C. hen the exemption is grantedunder a franchise 6 it may beithdranat any time thus not aviolation of the non-impairment ofcontracts

6. Pre+idetial ower to !ratrerie5e+= *o33utatio+ adardo+ ad re3it fie+ adforfeiture+ after *o5i*tio 6AR.',,0 %EC. 10 1 C)N%,*,)N&ue

Pro*e++Eoticemust

therefore be givenin case offailure topay taxes

conferred andliabilitiesimposed.

rate. /hereshouldthereforebe no directdouble

taxation

'. SPECIFIC OR &IRECTCONSTIT%TIONAL LI;ITATIONS

?. No,I3ri+o3et For &e(t Or No,Pa)3et Of Poll Tax 6Art. ,,,0 %ec.20 1 Constitution

9. Rule Re


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%+ed For Reli!iou+= Charita(le AdEdu*atioal Puro+e+. /Art. ',0%ec. 2/3 0 1 Constitution

/he constitutional provision

*above cited+ which grants taxexemption applies only to propertyor realty taxes assessed on suchproperties used actually directlyexclusively for religious charitableand educational purposes. (*ladocvs. Commissioner, GR No. *'056,


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/his constitutes a violation ofsubstantive due process.

Ele3et+8

a. the same property or subjectmatter is taxed twice when it shouldbe taxed only once.

b. both taxes are levied for thesame purpose

c. imposed by the same taxingauthority

d. within the same jurisdictione. during the same taxing periodf. covering the same kind or

character of tax.(2illanueva vs. City o% Iloilo)

(2) Idire*t &uli*ate Taxatio notlegally objectionable. /he absenceof one or more of the above-mentioned elements makes thedouble taxation indirect.

(3) &o3e+ti*, this arises when the taxesare imposed by the local or nationalgovernment *within the same state+

(4) Iteratioal,refers to theimposition of comparable taxes intwo or more states on the same

taxpayer in respect of the samesubject matter and for identicalperiods.

RE;E&IESOF&O%'LETAXATION. Tax Sari! Rule 6 same dividend

earned by a >:A within the &hil. isreduced by imposing a lower rate of1,C *in lieu of the ",C+ on thecondition that the country to whichthe >:A is domiliced shall allow acredit against the tax due from the>:A taxes deemed to have been

paid in the &hil. *Sec.2B ; ,b+ *I:vs &rocter J 4amble+ (GR No.99-, "ec. 5, 00+

2. Tax dedu*tio+:ample? vanishing deduction underSection B*!+*2+ >I:

". Tax *redit+Instances under the NIRC

Aor 2A1 purposes the tax oninputs or items that go into themanufacture of finished products*which are eventually sold+ may becredited against or deducted from

the output tax or tax on the finishedproduct.

7oreign income ta:es may becredited against the &hil. Income

tax subject to certain limitationsby citi0ens including members ofgeneral professional partnerships orbeneficiaries of estates or trusts*pro rata+ as well as domesticcorporations.

! tax credit is granted for estateta:es paid to a foreign country onthe estate of citi0ens and residentaliens subject to certain limitations.

/he donorFs ta:imposed upon aciti0en or a resident shall be

credited with the amount of anydonor7s tax imposed by the authorityof a foreign country subject to

certain limitations.$. Tax Exe3tio+,. Pri*ile of Re*iro*it). Treatie+ with other +tate+

;ET#O&SRESORTE&TO'/A TAXTREAT/INOR&ERTOELI;INATE&O%'LETAXATION

FIRST ;ET#O&8/he tax treaty sets outthe respective rights to tax by the state

of source or situs and by the state ofresidence with regard to certain classesof income or capital. In some cases anexclusive right to tax is conferred in oneof the contracting states) however forother items of income or capital bothstates are given the right to tax althoughthe amount of tax that may be imposedby the state of source is limited.SECON& ;ET#O&8/he state of source isgiven a full or limited right to taxtogether with the state of residence. Inthis case the treaty makes it incumbentupon the state of residence to allowrelief in order to avoid double taxation.

TWO;ET#O&SOFRELIEFARE%SE&%N&ERT#ESECON&;ET#O&8

. The exe3tio 3ethod- the incomeor capital which is taxable in thestate of source or situs is exemptedin the state of residence although insome instances it may be taken intoaccount in determining the rate of

tax applicable to the tax payer7s




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remaining income or capital.*/hismay be done using the tax deductionmethod which allows foreign incometaxes to be deducted from gross

income in effect exempting thepayment from being further taxed.+

!. The *redit 3ethod, although theincome or capital which is taxed inthe state of source is still taxable inthe state of residence. /he tax paidin the former is credited against thetax levied in the latter.(Commissioner o% Internal Revenuev. 4.C


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income in order to avoid or reducetax liability.

9xample?


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A. 9xemptions from taxation arehi!hl) di+fa5ored in law and arenot re+u3ed.

B. e who claims as exemption must

be able to justify his claim by the*leare+t !rat of organic or statutelaw by word+ too lai to bemistaken. If ambiguous there is noexemption.

C. e who claims exemption shouldprove by *o5i*i! roof that heis exempted.

D. /axation is the rule) tax exemptionis the e:ception.

E. /ax exemption must be +tri*tl)*o+trued against the taxpayer andliberally in favor of the taxing

authority.f. /ax exemptions are not presumed.G. onstitutional grants of tax

exemption are +elf,exe*uti!.H. /ax exemptions are er+oal.

T#E FOLLOWING PARTA7E T#E NAT%RE OF TAXEXE;PTION1. @eductions for income tax purposes2. laims for refund". /ax amnesty$. ondonation of unpaid tax liabilitiesN1 must be +tri*tl) *o+trued

against the taxpayer

W#EN EXE;PTIONS ARE CONSTR%E& LI'ERALL/ INFA"OROFGRANTEE1. hen the law so provides for such

liberal construction.2. 9xemptions from certain taxes

granted under special circumstancesto special classes of persons.

". 9xemptions in favor of thegovernment its political subdivisionsor instrumentalities.

$. 9xemptions to traditionalexemptees such as those in favor ofreligious and charitable institutions.

,. If exemptions refer to the publicproperty

$8 %ay a tax exemption be revokedGA8 Hes. It is an act of liberality whichcould be taken back by the governmentunless there are restrictions. Sincetaxation is the rule and exemptiontherefrom is the exception theexemption may be withdrawn by the

taxing authority. (!actan Cebu

International Airport Authority vs.!arcos, 59 4CRA 998)

RESTRICTIONSONRE"OCATIONOFTAXEXE;PTIONS

A. No i3air3et *lau+e. here theexemption was granted to privateparties based on materialconsideration of a mutual naturewhich then becomes contractual andis covered by the non-impairmentclause of the onstitution.

B. Adhere*e to for3, if the taxexemption is granted by theonstitution its revocation may beeffected through onstitutionalamendment only

". here the tax exemption grant is in

the form of a special law and not bya general law even if the terms ofthe general act are broad enough toinclude the codes in the general lawunless there is manifest intent torepeal or alter the special law(Province o% !isamis riental vsCagayan lectric Poer and *ightCo. Inc)

NAT%REOFTAXA;NEST/1. 4eneral or intentional overlooking by

the state of its authority to impose

penalties on persons otherwise guiltyof evasion or violation of a revenueor tax law.

2. &artakes of an absolute forgiveness ofwaiver of the government of its rightto collect.

". /o give tax evaders who wish torelent and are willing to reform achance to do so.

R%LES ON TAX A;NEST/

1. /ax amnestya+ like tax exemption it is never

favored nor presumedb+ construed strictly against the

taxpayer *must show completecompliance with the law+

2.4overnment not estopped from5uestioning the tax liability even ifamnesty tax payments were alreadyreceived.

Reason? 9rroneous application andenforcement of the law by publicofficers do not block subse5uentcorrect application of the statute. /he




16/128



government is never estopped bymistakes or errors of its agents.3asis? 8ifeblood /heory

".@efense of tax amnesty like insanityis a personal defense.Reason? :elates to the circumstances

of a particular accused and not thecharacter of the acts charged in theinformation.

Tax a3e+t) Tax exe3tio

Immunity from allcriminal civil andadministrativeliabilities arisingfrom non paymentof taxes

Immunity from civilliability only

!pplies only to pasttax periods henceretroactiveapplication

&rospectiveapplication

&OCTRINEOFI;PRESCRIPTI'ILT/!s a rule taxes are imprescriptible

as they are the lifeblood of thegovernment. owever tax statutes mayprovide for statute of limitations.

/he rules that have been adoptedare as follows?a. Nationa& ,nterna& Revenue Code /he statute of limitation forassessment of tax if a return is filed iswithin three 6B: )ear+from the last dayprescribed by law for the filling of thereturn or if filed after the last daywithin three years from date of actualfilling. If no return is filed or the returnfiled is false or fraudulent the period toassess is within te )ear+from discoveryof the omission fraud or falsity.

/he period to collect tax is withinthree )ear+from date of assessment. Inthe case however of omission to file orif the return filed is false or fraudulentthe period to collect is within te )ear+from discovery without need of anassessment.

7. ariff and customs codeIt does not express any general

statute of limitation) it providedhowever that L7 hen articles have

entered and passed %ree o% duty or %inal

ad&ustment o% duties made, ithsubseBuent delivery, such entry and

passage %ree o% duty or settlement o%duties ill, a%ter the e:piration o% one

/1 !ear, %rom the date o% the %inalpayment o% duties, in the absence o%%raud or protest, be %inal and conclusiveupon all parties, unless the liBuidationo% import entry as merely tentative.(4ec 96-,1CC)

c.+ (oca& overnment Code*ocal 1a:es, %ees, or charges shall

be assessed ithin five /5 !ears %romthe date they became due. In case o%

%raud or intent to evade the payment o%ta:es, %ees or charges the same may be

assessed ithin ten /1 !ears %romdiscovery o% the %raud or intent toevade payment. 1hey shall also becollected either by administrative or

&udicial action ithin five /5 !ears%rom date o% assessment (4ec. 0+. *GC)

TAX ENFORCE;ENT AN&A&;INISTRATION

SO%RCESOFTAXLAWS67e)8 SPEC9TRA 'LT:1. Statutes2. Presidential @ecrees3. Executive Drders4. Constitution5. Court @ecisions6. Tax odes7. Revenue :egulations8. Administrative Issuances9. 'I: :ulings10. Local /ax Drdinance11. Tax /reaties and onventions

RE$%ISITESOFTAXREG%LATIONS

1. :easonable2. ithin the authority conferred3. Not contrary to law$. %ust be published

N1 !dministrative regulations mustalways be in harmony with theprovisions of the law. In case ofdiscrepancy between the basic law andthe implementing rule or regulation theformer prevails.

NON,RETROACTI"IT/OF'IR R%LINGS




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General Rule? :ulings are notretroactive if they are prejudicial to thetaxpayer. (4ec. 5+9, NIRC):ceptions

1. here the taxpayer deliberatelymisstates or omits material factsfrom his return or any documentre5uired of him by the ;I:.

2. here the facts subse5uentlygathered by the ;I: is materiallydifferent from the facts on whichthe ruling is based.

". here the taxpayer acted in badfaith.

PRINCIPLE OF LEGISLATI"E APPRO"AL OF ANA&;INISTRATI"E INTERPRETATION T#RO%G#

REENACT;ENThere a statute is susceptible of the

meaning placed upon it by a ruling ofthe government agency charged with itsenforcement and the legislaturethereafter reenacts the provisionwithout substantial change such actionis to some extent confirmatory that theruling carries out the legislativepurpose.

R%LEOFNOESTOPPELAGAINSTT#EGO"ERN;ENTGeneral Rule /he 4overnment is not

estopped by the mistakes or errors of itsagents) erroneous application andenforcement of law by public officers donot bar the subse5uent correctapplication of statutes. (. Rodrigue,Inc. vs. Collector, *'5-6+,


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b. In the application of statute oflimitations

c. In the establishment of tax liensand

d. In estimating the revenues that maybe collected by government in thecoming year. (!amalateo,2ictorino. Revieer on 1a:ation,566+)

7IN&S

1. SELF, ASSESS;ENT, one in which the taxis assessed by the taxpayer himself

2. &EFICIENC/ ASSESS;ENT,made by the taxassessor himself whereby the correct

amount of the tax is determinedafter an examination or investigationis conducted. /he liability isdetermined and assessed for thefollowing reason?a. amount ascertained exceeds that

which is shown as the tax by thetaxpayer in his return

b. no amount of tax is shown in thereturn

c. taxpayer did not file any returnat all

3. ILLEGAL AN& "OI& ASSESS;ENT,

assessment wherein tax assessor hasno power to assess at all

4. ERRONEO%S ASSESS;ENT, assessor haspower to assess but errs in theexercise thereof

'%R&ENOFPROOFINPRE,ASSESS;ENTPROCEE&INGS/here is a presumption of

correctness and good faith on the part ofthe I:) thus the burden lies on thetaxpayer. Dtherwise the finding of theI: will be conclusive and he will assessthe taxpayer. /he same is true even if

the I: is wrong if the taxpayer doesnot controvert. (Cagayan Robina 4ugar!illing Co. vs. Court o% Appeals, GR.No. 55+/, ctober 5, 5666)Reasons8 a. lifeblood theory b. presumption of regularity in

performance of publicfunctions

N1 !ssessments by the ;I: must haveon its face the law and facts upon whichthe presumption is made.

PRINCIPLESGO"ERNINGTAXASSESS;ENTS

1. !ssessments are prima faciepresumed correct and made in goodfaith.

2. It should be based on actual facts.

". It is discretionary on the part of theommissioner.

$. /he authority of the ommissionerto assess taxes may be delegatedexcept the power to make finalassessments.

,. It must be directed to the rightparty.

Authorit) of a Re5eue Offi*er -pursuant to a 8etter of !uthority issuedby the :egional @irector

a. /o examine taxpayers withinthe jurisdiction of the district inorder to collect the correctamount of tax)

b. /o recommend the assessment ofany deficiency tax due in thesame manner that the said actscould have been performed by the:evenue :egional @irector.

General Rule income tax returns are

confidential.:ception in5uiry into income taxreturns may be authori0ed-

1. inspection is authori0ed uponwritten order of the &resident of the&hilippines)

2. inspection is authori0ed underAinance :egulations >o. "" of theSecretary of Ainance)

". production of the tax return ismaterial evidence in a criminal casewherein the government isinterested in the result) or

$. production or inspection thereof isauthori0ed by the taxpayer himself.

Networth ;ethod, inventory method ofincome tax verification.

!pplies the accounting principle?assets 6 liabilities M networth

ondition for its use?1. taxpayer7s books do not clearly

reflect his income or the taxpayer




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has no books or if he has books herefuses to produce them)

2. there is evidence of possible sourceor sources of income to account for

increases in networth)". there is a fixed starting point or

opening networth) and$. there must be proper adjustments to

conform with the income tax laws.

POWERSAN&&%TIESOFT#ECO;;ISSIONERI. SECTION @ *power to interpret tax lawand decide tax cases+

?. Iterret ro5i+io+ of thi+ Code adother tax law+ +u(e*t to re5iew of the

Se*retar) of Fia*e6$ua+i,le!i+lati5e:

2. &e*ide8 6$ua+i,udi*ial:a+ disputed assessmentb+ refunds of internal

revenue taxes fees and chargesc+ penalties imposed in

relation thereto

d) other matters arisingfrom this ode or other laws orportions thereof administered bythe ;I: subject to the exclusiveappellate jurisdiction of the /!(4ec. +)

II. SECTION *power to obtaininformation summon examine and taketestimony of persons+

B. For the Co33i++ioer toa+*ertai8

*a+ correctness of any return or inmaking a return where none hasbeen made

*b+ liability of any person for anyinternal revenue tax or incorrecting such liability

*c+ tax compliance/he ommissioner is authori0ed?1. to 9xamine any relevant ;ook paper

record or other data2. to Dbtain any information *costs

volume of production receipts salesgross income etc+ on a regular basisfrom?i. any person other than the person

under investigation or

ii. any office or officer of thenational'local government gov7tagencies and instrumentalities*;angko Sentral gov7t owned and

controlled corporations+ *e.g. 8/D:egister of @eeds+

". to Summoni. the person liable for tax or

re5uired to file a return orii. any officer or employee of such

person oriii. any person having in his

possession'custody'care-- the books of accounts-- accounting records of entriesrelating to the business of theperson liable for tax or any other

person-- to produce such bookspapers records and other dataand to give testimony

$. to take the /estimony of the personconcerned under oath as may berelevant to the in5uiry

,. to cause revenue officers andemployees to make a anvass of anyrevenue district or region

>othing in Section , shall beconstrued as granting the ommissioner

the authority to in5uire into bankdeposits other than as provided forunder sec. *A+ of the ode.

III. SECTION *power to makeassessments prescribe additionalre5uirements for tax administrationand enforcement+

@. Exa3iatio of retur+ addeter3iatio of tax due!. !fter a return has been filed the

ommissioner or his

representative may authori0ei.the 9xamination of any taxpayer

andii.the !ssessment of the correct

amount of tax);. A

ailure to file a return shall notprevent the commissioner fromauthori0ing the examination ofany taxpayer)




20/128



N !ny tax or deficiency tax soassessed shall be paid uponnotice and demand from theommissioner or his

representativeN !ny return statement or

declaration %iled in anyauthori0ed office shall not bewithdrawn) but within threeyearsfrom date of filing thesame may be modifiedchanged or amended)provided that no notice foraudit or investigation of suchreturn has in the meantimebeen actually served upon thetaxpayer.

.Failure to +u(3it re


21/128



. Authorit) to ID/ be delegated+) power to :ecommend the

promulgation of rules andregulations by the Sec. ofAinance

) power to Issue rulings of firstimpression or to :everse revokemodify any existing rule of the;I:

) power to ompromise or !bateany tax liability

provided hoever that theregional evaluation board maycompromise?1. assessments issued by

regional offices involvingdeficiency taxes of &,KKKKKor less and

2. minor criminal violations asmay be determined by therules and regulations

". discovered by regional anddistrict officials

Regional valuation 3oard iscomposed o%?i. :egional @irector as hairmanii. !sst. :egional @irectoriii. eads of the 8egal !ssessment

and ollection @iv.iv. :evenue @istrict Dfficer having

jurisdiction over the taxpayer

) power to !ssign or reassigninternal revenue officers toestablishments wherearticles subject to excise taxare kept.

". SECTIONS = ?@= ?= ?= ?H *Dther&owers+

13. @uty to ensure the provision anddistribution of forms receiptscertificates and appliances and




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the acknowledgment of payment oftaxes (4ec. )

14. !uthority to administer oathsand to

take testimony (4ec. +)

15. !uthority to make arrests andsei0ures(4ec. /)

16. !uthority to employ assign orreassign internal revenue officersinvolved in excise tax functions toestablishments where articlessubject to excise tax are producedor kept (4ec. 9)

17. !uthority to assign or reassigninternal revenue officers andemployees of the ;I: to other orspecial duties connected with theenforcement or administration ofthe revenue laws (4ec. 8)

ARE LEGAL OFFICERS OF T#E'IR A%T#ORIE& TOINSTIT%TE APPEAL PROCEE&INGS WIT#O%T T#EPARTICIPATIONOFT#ESOLICITORGENERAL0

>D. /he institution orcommencementbefore a proper court ofcivil and criminal actions and

proceedings arising under the /ax:eform !ct which shall be conducted bylegal officers of the ;I: is not in dispute.!n appealfrom such court however isnot a matter of right. It is still theSolicitor 4eneral who has the primaryresponsibility to appear for thegovernment in appellate proceedings.(Commissioner vs. *a 4uerte Cigar andCigarette 7actory, GR No. ++0+5,


23/128



the taxpayer is economicallybenefited.

CRITERIAINI;POSINGINCO;ETAX

1. CitiKe+hi Pri*ile 6 ! citi0en ofthe &hilippines is subject to &hilippineincome tax *a.+ on his worldwideincome if he resides in the &hilippinesor *b.+ only on his income from sourceswithin the &hilippines if he 5ualifies asnonresident citi0en.2. Re+ide*e Pri*ile6 resident alienis liable to pay income tax on his incomefrom sources within the &hilippines butexempt from tax on his income fromsources outside the &hilippines.". Sour*e Pri*ile6 !n alien is subject

to &hilippine income tax because hederives income from sources within the&hilippines. /hus a nonresident alien isliable to pay &hilippine income tax onhis income from sources within the&hilippines such as dividend interestrent or royalty despite the fact that hehas not set foot in the &hilippines.

CLASSIFICATION OF TAXPA/ERS

Idi5idual+a. citi0ens

(1)resident citi0ens

6RC:(2) non-resident citi0ens 6NRC:b. aliens

(1) resident aliens 6RA:

(2) non-resident aliens 6NRA:

(a) engaged in trade orbusiness within the&hils. 6NRAET':

(b) not engaged in trade orbusiness within the&hilippines 6NRANET':

Cororatio+a. @omestic 6&C:b. Aoreign

(1) resident foreign corporation6RFC:

(2) non-resident foreigncorporation 6NRFC:

E+tate+Tru+t+Parter+hi+

A. IN&I"I&%ALS

W#OARETAXA'LE01. Re+idet CitiKe2. No,re+idet CitiKe

! non-resident citi8enmeans a

Ailipino citi0en?a. who establishes to the

satisfaction of the ommissionerthe fact of his physical presenceabroad with a definite intentionto reside therein)

b. who leaves the &hilippinesduring the taxable year to resideabroad either as an immigrantor for employment on apermanent basis)

c. who works and derives incomefrom abroad and whose

employment thereat re5uireshim to be physically presentabroad most of the time duringthe taxable year)

d. who is previously considered as anon-resident and who arrives inthe &hilippines at anytime duringthe taxable year to residethereat permanently shall beconsidered non-resident for thetaxable year in which he arrivesin the &hilippines with respect tohis income derived from sources

abroad until the date of hisarrival 4ec.55 (), NIRCD

N1!n o5er+ea+ *otra*t worDer6OCW: is taxable only on incomederived from sources within the&hilippines. QSec. 2" *;+*+R

! +ea3a is considered as anD provided the followingre5uirements are met?

1. receives compensation for servicesrendered abroad as a member ofthe complement of a vessel) and

2. such vessel is engaged exclusivelyin international trade.

;ased on the above provisionsthere are three *"+ types ofnonresident citi0ens namely? *1+immigrants) *2+ employees of a foreignentity on a permanent basis) and*"+ overseas contract workers.Immigrants and employees of a foreignentity on a permanent basis aretreated as nonresident citi0ens from

the time they depart from the




24/128



&hilippines. owever overseascontract workers must be physicallypresent abroad most of the timeduring the calendar year to 5ualify as

nonresident citi0ens.3. Re+idet alie' means an individual

whose residence is within the&hilippines and who is not a citi0enthereof. 4ec.55 (7, NIRC)D

4. No,re+idet alie e!a!ed itrade or (u+ie++ withi thePhiliie+. 6NRAET':

! non-resident a&ien means anindividual whose residence is notwithin the &hilippines and who is nota citi0en thereof. 4ec.55 (G)D

/he term trade or 7usiness

includes the performance of thefunctions of a public office. 4ec. 55(4)D

/he term trade0 7usiness orprofession shall not includeperformance of services by thetaxpayer as an employee. 4ec. 55(CC)D

! non-resident alien individualwho shall come to the &hilippinesand stay therein for an aggregateperiod of more than 1BK days duringany calendar year shall be deemed a

non'resident alien doing business inthe Philippines 4ection 55(G)notithstanding 4ec. 5/(A)()D

5. No,re+idet alie ot e!a!ed itrade or (u+ie++ withi thePhiliie+. 6NRANET':

ONL/ RESI&ENT CITIENS are taxablefor income derived from sourcesithinand ithout the Philippines. !ll otherindividual income taxpayers are taxableonly for income derived from sourcesithin the Philippines.

Tax Rate+8&lease refer to Aex A.

'. CORPORATIONS

W#OARETAXA'LE01. &o3e+ti* Cororatio 6 created or

organi0ed in the &hils. or under itslaw 4ec. 55(C), NIRCD

2. Re+idet Forei! Cororatio 6engaged in trade or business withinthe &hilippines 4ec. 55($), NIRCD

3. No,re+idet Forei! Cororatio 6not engaged in trade or businesswithin the &hilippines 4ec. 55(I),NIRCD

A Cororatio I*lude+81. &artnerships no matter how

created or organi0ed)2. oint-stock companies)". oint accounts *cuentas en

participacion+$. !ssociations) or5. Insurance companies 4ec. 55(3),

NIRCD.

Ex*lude+81. 4eneral professional

partnerships)

2. oint venture or consortiumformed for the purpose ofundertaking construction projects orengaging in petroleum coalgeothermal and other energyoperations pursuant to an operatingor consortium agreement under aservice contract with the4overnment.

CORPORATIONS EXE;PT FRO; INCO;E TAXATION6FORINCO;EREALIE&ASS%C#: %N&ERNIRC. Tho+e eu3erated uder %ec. 3.

9xempt corporations are subjectto income tax on their income fromany of their properties real orpersonal or from any other activitiesconducted for profit regardless o%the disposition made o% such income.

!. With re+e*t to GOCC+= the generalrule is that these corporations aretaxable as any other corporationexcept?

a. 4SISb. SSSc. &Id. &SDe. &!4D: 4ec. 58 (C)D

3. Re!ioal or Area #ead


25/128



other corporate income taxpayers aretaxable only for income derived fromsources ithinthe &hilippines.

T! R"#$# $lease refer to A%%#! B.

C. ESTATES AN& TR%STS

ESTATE6 refers to the mass of propertiesleft by a deceased person.

R%LESONTAXA'ILIT/OFESTATEhen a person who owns property

dies the following taxes are payableunder the provisions of the income ta:la?1. Income tax for individual under Sec.

2$ and 2, *to cover the periodbeginning anuary to the time ofdeath+)

2. 9state income tax under Sec. K ifthe estate is under administration orjudicial settlement.

ESTATES%N&ER4%&ICIALSETTLE;ENTA. &uri! the Pede*) of the

Settle3etGeeral Rule8 !n estate underjudicial settlement is subject toincome tax in the same manner asindividuals. Its status is the same asthe status of the decedent prior tohis death.Ex*etio+8. /he entitlement to personal

exemption is limited only to&2KKKK.

2. >o additional exemption isallowed.

". /he distribution to the heirs

during the taxable year of estateincome is deductible from thetaxable income of the estate.Such distributed income shallform part of the respectiveheirs7 taxable income.

here no suchdistribution to the heirs is madeduring the taxable year that theincome is earned and suchincome is subjected to incometax payment by the estate thesubse5uent distribution thereof

is no longer taxable on the partof the recipient.

'. TER;INATION OF T#E 4%&ICIAL SETTLE;ENT

6W#ERET#E#EIRSSTILL&ONOT&I"I&ET#EPROPERT/:. If the heirs contribute to the

estate money property orindustry with intention to dividethe profits between'amongthemselves an unregisteredpartnership is created and theestate becomes liable for thepayment of corporate incometax. (vangelista vs. Collector,GR No. *'0009, ctober /,0/8; Ja vs. Commissioner, GR

No. *'0-+5, !ay 5/, 085)!. If the heirs without contributing

money property or industry toimprove the estate simplydivide the fruits thereofbetween'among themselves aco-ownership is created andindividual income tax is imposedon the income received by eachof the heirs payable in theirseparate and individualcapacity. (Pascual vs.Commissioner, GR No. *'8--,

ctober , 0; billos vs.Commissioner, GR No. *'9,ctober 50, 0/)

ESTATESN)%N&ER4%&ICIALSETTLE;ENT&ending the extrajudicial

settlement either of the followingsituations may arise?1. If the heirs contribute money

property or industry to the estatewith the intention of dividing theprofits between'among themselvesan unregistered partnership iscreated and the estate becomesliable for the payment of corporateincome tax) or

2. If the heirs without contributingmoney property or industry to theestate simply divide the fruitsthereof between'among themselvesa co-ownership is created andincome tax is imposed on the incomereceived by each of the heirspayable in their separate andindividual capacity.




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TR%ST6 ! right to the property whetherreal or personal held by one person forthe benefit of another.

W#ENTR%STSARETAXA'LEENTITIES1. ! trust the income of which is to be

accumulated2. ! trust in which thefiduciary may at

his discretion either distribute oraccumulate the income.

R%LESONTAXA'ILIT/OFT#EINCO;EOFA TR%ST

1. /he income of the trust for thetaxable year which is to bedistributed to the beneficiaries #

%iling and payment o% ta: lie on the

bene%iciaries.2. /he income of the trust which is tobe accumulated or held for futuredistribution whether consisting ofordinary income or gain from thesale of assets included in thePcorpusP of the estate 6 %iling o%return and payment o% ta: becomethe burden o% the trustee or

%iduciary.:ceptions?a. In the case of a revocable trust

the income of the trust will be

returned by the grantor.b. In a trust where the income is

held for the benefit of thegrantor the income of the trustbecomes income to the grantor.

c. In the case of trustadministered in a foreigncountry the income of the trust)undiminished by any amountdistributed to the beneficiariesshall be taxed to the trustee.

IRRE"OCA'LE TR%STS*irrevocable both as tocorpus and as to income+ 6

/rust itself through the trustee orfiduciary is liable for the payment ofincome tax. /axed exactly in the sameway as estates under judicial settlementand its status as an individual is that ofthe trustor. It is entitled to theminimum personal exemption *&2KKKK+and distribution of trust income duringthe taxable year to the beneficiaries isdeductible from the trust7s taxableincome.

RE"OCA'LE TR%STS 6 the trustor not thetrust itself is subject to the payment ofincome tax on the trust income.

EXE;PTIONOFE;PLO/EES> TR%ST&rovided?1. the employee7s trust must be part of

a pension stock bonus or profitsharing plan of the employer for thebenefit of some or all of hisemployees)

2. contributions are made to the trustby such employer or suchemployees or both)

". such contributions are made for thepurpose of distributing to such

employees both the earnings andprincipal of the fund accumulated bythe trust and

4. that the trust instrument makes itimpossible for any part of the trustcorpus or income to be used for ordiverted to purposes other than theexclusive benefit of such employees.(4ec. 963, NIRC)

/ax exemption is likewise to beenjoyed by the i*o3e of the e+iotru+t) otherwise taxation of those

earnings would result in a diminution ofaccumulated income and reducewhatever the trust beneficiaries wouldreceive out of the trust fund.(Commissioner vs. Court o% Appeals,Court o% 1a: Appeals and GC*Retirement Plans, GR No. 0/655, !arch5-, 005)

&. PARTNERS#IPS

7IN&SOFPARTNERS#IPFORTAXP%RPOSES%N&ER

T#E

NIRC1. Geeral Profe++ioal Parter+hi+6GPP:- formed by persons for?a. the sole purpose of exercising a

common profession and

b. no part of the income of which isderived from engaging in anytrade or business. 4ec. 55(3),NIRCD.

2. Taxa(le or 'u+ie++ Parter+hi6!ll other partnerships except

general professional partnerships nomatter how created or organi0ed.




27/128



It includes unregistered jointventures and business partnerships.

owever joint ventures are nottaxables as corporations when it is)

*a+ undertaking construction projects*b+ engaged in petroleum coal andother energy operation under aservice contract with thegovernment

enera& co-partners#ips /CPare partnerships which are by lawassimilated to be within the contextof and so legally contemplated ascorporations. /he partnership itselfis subject to corporate taxation. /heindividual partners are consideredstockholders and therefore profits

distributed to them by thepartnership are taxable as dividends.

/he taxable income for a taxableyear after deducting the corporateincome tax imposed therein shall bedeemed to have been actually orconstructively received by thepartners in the same taxable yearand shall be taxed to them in theirindividual capacity hether actuallydistributed or not. 4ec. 8-("),NIRCD

LIA'ILIT/OFA PARTNERS#IP

1. Geeral Profe++ioal Parter+hi .-/hey are not sub&ect to income ta:but are re5uired to file returns oftheir income for the purpose offurnishing information as to theshare of each partner in the net gainor profit which each partner shallinclude in his individual return. /hepartnership shall act as thewithholding agent.

/he net income *income for

distribution+ shall be computed inthe same manner as a corporation.@ate of filing of the return is !pril1, of each year.

2. Taxa(le or 'u+ie++ Parter+hi -/he income tax of this type of&artnership is computed and ta:edli?e that o% a corporation. /his kindof partnership like a regularcorporation is also re5uired to file a5uarterly corporate income taxreturn. Ailing and payment of5uarterly return is within K days

after the end of each 5uarterwhile

the annual return is on or before!pril 1, of the following year.

LIA'ILIT/OFA PARTNER

Rule+8?. Share of a arter i !eeral

rofe++ioal Parter+hi

a. 9ach partner shall report asgross income *business income+his distributed share actually orconstructively received in thenet income of the partnership.(4ec. 59, NIRC)Q/he same shareshall be subject to creditablewithholding tax of 1KC.R /heyare liable in their separate andindividual capacity.

b. Share of a partner in the lossof a general professionalpartnership may be taken by theindividual partner in his returnof income.

c. 9ach partner in a generalprofessional partnership shallreport as gross income hisdistributed share in the net

income of the 4&& based on hisagreed ratio whether he availsof itemi0ed or optional standarddeduction.

d. &ayments made to a partner ofa 4&& for services rendered shallbe considered as ordinarybusiness income subject to Sec.2$! *9ffective anuary 1 1FB2+

9. Share of a arter i Taxa(le or'u+ie++ arter+hi

a. Share of a partner in the netincome of a taxable or businesspartnership *dividend+ shall besubject to a final tax as follows.

:esident iti0en >on-resident iti0en and:esident !lien *2KKK andonward+ 6 1KC (4ec. 5+35)

>on-resident !lien engagedin trade or business 6 2KC(4ec. 5/ A5)




28/128



>on-resident alien notengaged in trade or business6 2,C (4ec. 5/3)

b. Share of a partner in the loss

of a taxable or businesspartnership maybe taken by theindividual partner in his returnof income.

c. &ayments made to a partner ofa business or taxable partnershipfor services rendered shall beconsidered as compensationincome subject to sec. 2$!.

7IN&S OF INCO;E TAXES%N&ER T#E NIRC

1. >et Income /ax2. Dptional orporate Income tax". %inimum orporate Income /ax$. Improperly !ccumulated 9arnings

/ax,. &referential :ates or Special :ates

of Income /ax. 4ross Income /ax(. Ainal Income /axB. Aringe ;enefits /axF. apital 4ains /ax

6?: NET INCO;E TAX

&EFINITION8 %eans gross income lessdeductions and'or personal andadditional exemptions (4ec. -, NIRC)

NETINCO;ETAXFOR;%LA9ntire Income*ess 9xclusions and Income subject

to Ainal /ax *e.g. &assiveIncome+

4ross Income*ess @eductions *and'or additional

exemptions if applicable+>et /axable Income

!ultiply by/ax :ate *C+

>et Income /ax @ue*ess/ax redit if any

Tax Still due= if a)

GROSS INCO;E

&EFINITION8%eans all income derived fromwhatever source including but notlimited to the following/%ec. 32a. ompensation)

b. 4ross income from profession tradeor business)

c. 4ains form dealings in property)d. Interests)

e. :ents)f. :oyalties)g. @ividends)h. !nnuities)i. &ri0es and winnings)j. &ensions)k. &artner7s share in the net income of

the general professional partnership

See Aex & for detailed discussionof items.

7IN&SOF&I"I&EN&S

?. Ca+h ad Proert) &i5ided+Individual /axpayera. Arom @omestic orporations

: >: :! 6 ?J (4ec.5+A)

>:!9/; 6 9J(4ec. 5/A5)

>:!>9/; 6 9 on grossincome (4ec. 5/3)

b. Arom Aoreign orporations

: >: :! >:!9/; 6 ,B9(4ec. 5+, 5/A)

>:!>9/; 6 9 on gross

income (4ec. 5/3)

orporate /axpayera. Aoreign to @omestic orp. 6 B9

(4ec. -5A)b. @omestic to @omestic orp. 6

Exe3t) intercorporatedividends (4ec. 58")

c. @omestic to Aoreign orp. -

:esident Aoreign orp. 6Exe3t(4ec. 5 AD 8d)

>onresident Aoreign orp. 6?subject to the condition

stated in 4ec. 5 3D /.Dtherwise it shall be taxedat B9. (4ee Commissionervs. Procter and Gamble, GRNo. 99-, "ecember 5,00)

9. Sto*D &i5ided+4eneral rule? Not subject to taxbecause it does not constituteincome) it represents transfer ofsurplus to capital account. (4ec.8-3, 008 NIRC)




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9xceptions?a. Sec. ("; 1FF( >I:

*1+ there is redemption orcancellation

*2+ the transaction involvesstock dividends and

%3& the


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compensation for such loss wasvoluntary does not change itsexempt status. It was in factcompensation for a loss which

impaired petitioner7s capital.

5. I*o3e exe3t uder Treat)M

6. Retire3et (eefit+= e+io=!ratuitie+= et*.a. those derived under :.!. ($1

*pertains to private firmswithout retirement trust fund+)

b. those received by officials andemployees of private employersin accordance with a reasonableprivate benefit plan)

ReBuisites?*1+ in the service of the same

employer for at least 1Kyears)

*2+ at least ,K years old)*"+ must be availed of only once%4& plan approved by the ;I:

*R.R.5'0+)c. separation pay because of

death sickness or otherphysical disability or for anycause beyond the control of theofficial or employee *e.g.retrenchment redundancy orcessation of business+)

K%or any cause beyond thecontrol o% said o%%icial oremployee 6 connotesinvoluntariness on the part ofthe official or employee)separation must not be asked orinitiated by the official oremployee.

d. social security benefitsretirement gratuities pensions

and other similar benefitsreceived by citi0ens and alienswho come to reside permanentlyhere from foreign sourcesprivate or public)

e. benefits due to residents underthe laws of the E.S.administered by the E.S.eterans !dministration

f. SSS benefits) andg. 4SIS benefits.

7. ;i+*ellaeou+ ite3+

a. &assive income derived in the&hilippines by?*1+ Aoreign governments)*2+ Ainancing institutions

owned controlled orenjoying refinancing fromforeign governments

*"+ International or regionalfinancial institutionsestablished by foreigngovernments

b. Income derived from anypublic utility or from theexercise of any governmentalfunction)

c. &ri0es and awards madeprimarily in recognition of

religious charitable scientificeducational artistic literary orcivic achievementReBuisites?

*1+ recipient was selectedwithout any action on hispart) and

*2+ recipient is not re5uired torender substantial futureservices.

d. &ri0es and awards granted toathletes in sports competitionsand sanctioned by their national

sports association )e. 1"th month pay and other

benefits up to &"KKKK.KK)f. 4SISSSS %edicare and union

dues of individuals)g. 4ains derived from debt

securities with a maturity ofmore than , years)

h. 4ains from redemption of sharesin %utual Aund.

EXCLUS&ONS'S. DEDUCT&ONS

Ex*lu+io+Se*. B96':

&edu*tio+Se*. B@

:efer to flow ofwealth which are nottreated as part ofgross incomebecause?*1+ exempted by thefundamental law) *2+exempted by statute)*"+ do not comewithin the definition

of income

:efer to the amountswhich the law allowsto be subtractedfrom gross income inorder to arrive at netincome




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Ex*lu+io+Se*. B96':

&edu*tio+Se*. B@

&ertain to the

computation of grossincome

&ertain to the

computation of thenet income

Something earned orreceived by thetaxpayer which donot form part of grossincome

Something spent orpaid in earning ofgross income

&E&%CTIONS

&EFINITION? Items or amounts which thelaw allows to be deducted from grossincome in order to arrive at the taxableincome.

'ASICPRINCIPLESGO"ERNING&E&%CTIONSa. /he taxpayer seeking a deduction

must point to some specificprovisions of the statute authori0ingthe deduction) and

b. e must be able to prove that he isentitled to the deduction authori0edor allowed. (Atlas Consolidated!ining E "ev. Corp. vs.

Commissioner, GR No. *'590,on-resident foreign corporation

CLASSESOF&E&%CTIONS?. Idi5idual+

a. with gross compensation incomefrom employer-employeerelationship only*1+ premium payments on health

and'or hospitali0ationinsurance

*2+ personal additionalexemptions

b. gross income from business orpractice of profession

*1+ Dptional Standard @eduction*DS@+

*2+ Itemi0ed deductions*"+ premium payments on health

and'or hospitali0ationinsurance

*$+ personal additionalexemptions

9. Cororatio+

Itemi0ed @eductions

7IN&SOF&E&%CTIONS. Otioal +tadard dedu*tio+ 6OS&:

1KC of the gross income./he DS@ may be availed of

only by individuals *exceptnonresident alien+ who are notpurely compensation incomeearners.

(. Per+oal ad additioal exe3tio+!vailable only to individuals

*business income and compensationincome earners+.

>:!9/; may be entitled topersonal exemptions *only+ subjectto reciprocity i.e.a. the country of which he is a

subject or citi0en has an incometax law) and

b. the income tax law of hiscountry allows personalexemption to citi0ens of the&hilippines not residing thereinbut deriving income therefromand not to exceed the amountallowed in >I:.




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/he personal exemption shall bee5ual to that allowed by the incometax law of his country to a citi0en ofthe &hilippines not residing therein

or the amount provided in the >I:whichever is lower.

Idi5idual+ not etitled to the+eexe3tio+8a. >on-resident !lien not engaged

in trade or businessb. !lien individual employed by

:egional or !rea ead5uartersof %ultinational ompanies

c. !lien individual employed byDffshore ;anking Enits

d. !lien individual employed by

&etroleum Service ontractorand Subcontractor

*. Ite3iKed dedu*tio+a. ordinary and necessary

expensesb. interestsc. taxesd. lossese. bad debtsf. depreciation of property)g. depletion of oil and gas wells

and mines)

h. charitable and othercontributions)

i. research and development)j. pension trust contributions of

employees) andk. premium payments on health

and'or hospitali0ation insurance.*/his is the only deduction whicha compensation income earnermay claim as a deduction.+

d. Se*ial dedu*tio+a. private proprietary educational

institutions and hospitals thatare non-profit (4ec. -+ A, 5)

b. insurance companies (4ec. -8)c. estates and trusts (4ec. 9)

PERSONALEXE;PTIONS

A. A3out+ of Per+oal Exe3tio+9%ec. 350 N,RC:

1. P 9J=JJJ 6 Single individual ormarried individual judiciallydecreed legally separated

without 5ualified dependentchildren.

2. P 9=JJJ6 ead of the family ormarried individual judicially

decreed legally separatedwith 5ualified dependentchildren.

3. P B9=JJJ 6 Aor eac# legallymarried individual.

#ead of the Fa3il)1. Enmarried or legally separated

person with one or both parentsor one or more brothers orsisters or one or morelegitimate recogni0ed natural orlegally adopted children livingwith and dependent upon thetaxpayer for their chief support)andKChie% support means morethan one-half of there5uirements for support.

2. here such brother ' sister orchildren are not more than 21years of age unmarried and notgainfully employed or wheresuch dependents regardless ofage are incapable of self 6

support because of mental orphysical defect.

&arents brothers sisters and seniorciti0en with the tax payer whetherrelative or not may 5ualify thetaxpayer to the personal exemption of&2,KKK as head of the family but not tothe additional e:emption o% P,666.

'. Additioal Exe3tio for&eedet+ 9%ec. 350 N,RC:& BKKK 6 Aor each of the 5ualified

dependent children notexceeding four *$+ innumber.

/he additional exemption refersonly to 5ualified dependent childrensuch as legitimate recogni0ed naturalillegitimate and legally adopted.

/he proper claimant of theadditional exemption is the husbandbeing the head of the family exceptunder the following cases?

1. usband is unemployed2. usband is working abroad like

an DA or a seaman




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3. usband explicitly waived hisright of the exemption in favorof his wife in the withholdingexemption certificate.

! Seior CitiKeis?

1. anyresident citi0en of the&hilippines

2. at leastsixty K years old includingthose who have retired fromboth government offices andprivate enterprises and

". has anincome of not more than Sixtythousand pesos *KKKK+ perannum subject to the review ofthe >ational 9conomic@evelopment !uthority *>9@!+every three years.

&arents and dependents 5ualifythe taxpayer to the personalexemption of &2,KKK as head of thefamily but not to the additionale:emption o% P,666.

N1>:!9/; may deduct personal

exemption *not additionalexemption+ but only to the extentallowed by his country to Ailipinosnot residing therein and shall notexceed the aforementionedamounts. >:!>9/; cannot claimany personal or additionalexemptions.

C. Cha!e of Statu+ 9%ec. 350 N,RC:1. If the taxpayer should marry or

should have additionaldependents during the taxable

year he may claim thecorresponding exemptions in fullfor such year.

2. If the taxpayer should die duringthe taxable year his estate mayclaim the correspondingexemptions as if he died at theclose of such year.

". If the spouse or any dependentshould die or any dependentshould marry or become twenty-one years old during the year orshould become gainfully

employed the taxpayer may

claim the exemptions as if thespouse or dependent died or asif such dependent marriedbecame twenty one years old or

became gainfully employed atthe close of such year.

4. Aor any other event and forwhich there are no specific rulesapplicable from the above-mentioned the status of thetaxpayer at the end of the yearshall determine his exemptions.(strictly construed against theta:payer)9xamples?

became legally separated 6can only claim & 2KKKK

2, years old child becameincapacitated 6 cannot claimadditional exemption

ITE;IE& &E&%CTIONS

A. OR&INAR/ AN& NECESSAR/EXPENSES

NECESSAR/EXPENSE6 appropriate and helpfulin the development of taxpayer3sbusiness and are intended to minimi0e

losses or to increase profits. /hese arethe day-to-day expenses.OR&INAR/ EXPENSE 6 normal or usual inrelation to the taxpayer7s business andthe surrounding circumstance.

RE$%ISITES OF '%SINESS EXPENSE TO 'E&E&%CTI'LE1. ordinary and necessary)2. paid or incurred w'in the taxable

year)". paid or incurred in carrying on a

trade or business)

$. substantiated with official receiptsor other ade5uate records.

,. if subject to withholding taxes proofof payment to the ;ureau of Internal:evenue must be shown.

. must be reasonable *when theexpense is not lavish extravagant orexcessive under the circumstances+

(. must not be contrary to law publicpolicy or morals.

N1 hile illegal income will formpart of income of the taxpayer




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expenses which constitute bribekickback and other similar paymentbeing against law and public policy arenot deductible from gross income.

(4ubsec. A, , c)

CAPITAL EXPEN&IT%RE 6 !n expenditure thatbenefits not only the current period butalso future periods. It is not deductiblebut depreciable e:cept if the taxpayeris a non-profit proprietary educationalinstitution which may elect either todeduct the capital expense ordepreciate it.

See Aex E6 ;usiness 9xpenses

See Aex F6 eiling on


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2. @eposit account in @9A ;ank andderived interest income thereofamounting to &2KKKKK on which thefinal tax of &$KKKK has been

withheld.!ssume that ompany O7s net

income before the deduction ofinterest expense is &,KKKKK.

/he deductible expense shall becomputed as follows?

/ear 9JJJ

>et Income beforeinterest expense &,KKKKK*ess Interest 9xpense &12KKKK

*ess "BC of interestincome from deposit*"BC x &2KKKKK+ (KKK

&edu*ti(le Itere+tExe+e @@=JJJ/axable Income &$,KKK

D#*"+,-# &%"##$" E!/#%$#

1. Interest on taxes such as those paidfor deficiency or delin5uency sincetaxes are considered indebtedness*provided that the tax is adeductible tax except in the case ofincome tax+. owever finespenalties and surcharges on accountof taxes are not deductible. 1heinterest on unpaid business ta: shallnot be sub&ected to the limitationon deduction.

2. Interest paid by a corporation onscrip dividends

3. Interest-on deposits paid byauthori0ed banks of the 3ang?o4entral ng Pilipinas to depositors

if it is shown that the tax on suchinterest was withheld.

4. Interest paid by a corporate taxpayerwho is liable on a mortgage upon realproperty of which the saidcorporation is the legal or e5uitableowner even though it is not directlyliable for the indebtedness.

N)N,&E&%CTI'LEINTERESTEXPENSE

1. !n individual taxpayer reportingincome on the cash basis incurs anindebtedness on which an interest is

paid in advance through discount orotherwise?

allowed as a deduction in theyear the indebtedness is paid

if the indebtedness is payableperiodic amortiation on theamount of interest whichcorresponds to the amount ofthe principal amorti0ed or paidduring the year shall be allowedas deduction in such taxableyear.

2. Interest paid on indebtednessbetween related taxpayer

". If the indebtedness is incurred tofinance petroleum exploration

$. Interest on preferred stock whichin reality is dividend

,. Interest on unpaid salaries andbonuses

6. Interest calculated for cost keepingon account of capital or surplusinvested in business which does notrepresent charges arising underinterest-bearing obligation.

(. Interest paid when there is nostipulation for the payment thereof.

OPTIONALTREAT;ENTOFINTERESTEXPENSE

!t the option of the taxpayerinterest incurred to acBuire propertyused in trade or business may beallowed as a deduction or treated ascapital e:penditure. 4ec -+ (3)(-),NIRCD

C. TAXES

/axes mean TAXES PROPER= andtherefore no deductions are allowed for?1. interest2. surcharges

3. penalties or fines incident todelin5uency (4ec. 6, Rev. Reg. 5)

RE$%ISITESFOR&E&%CTI'ILIT/1. must be in connection with

taxpayer7s business)2. tax must be imposed by law on and

payable by taxpayer *direct tax+)and

". paid or incurred during the taxableyear.

TAXESN)&E&%CTI'LE




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1. income tax)2. estate and donor7s tax)". special assessments)$. excess electric consumption tax)

,. foreign income tax war profits andexcess profits tax if the taxpayermakes use of tax credit) and

. final taxes being in the nature ofincome tax.

N1 /axes allowed as deductionswhen refunded or credited shall beincluded as part of gross income in theyear of receipt to the extent of theincome tax benefit of said deduction.*1a: 3ene%it Rule+

Aor >:!9/; and :A taxes paid orincurred are allowed as deductions onlyif and to the extent that they areconnected from income within the&hilippines.

EXCEPTIONS to re5uirement that onlysuch persons on whom the tax isimposed by law can claim deductionthereof?1. /axes of shareholder upon his

interest as such and paid by thecorporation without reimbursement

from him can be claimed by thecorporation as deduction.

2. ! corporation paying the tax for theholder its bondsor other obligationcontaining a tax-free covenantclause cannot claim deduction forsuch taxes paid by it pursuant tosuch covenant.

TAX CRE&IT

&EFINITION8 right of an income taxpayer to

deduct from income tax payable theforeign income tax he has paid to hisforeign country subject to limitation.

W#OCANCLAI;TAXCRE&IT1. resident citi0ens of the &hilippines2. resident aliens under the principle of

reciprocity". domestic corporations which include

partnerships except generalprofessional partn