University of the PhilippinesCollege of Law

Taxation 1, Fridays 3 p.m. to 6 p.m. (Prof. Carina C. Laforteza)First Semester SY 2013-2014

FUNDAMENTALS OF TAXATION

A. Meaning and Nature of Tax(es)

1. “Taxation” and “tax” defined

Commissioner of Internal Revenue v. Algue, Inc. G.R. No. L-28896. February 17, 1988

2. Essential characteristics of taxes

3. Tax as distinguished from other forms of impositions

a. Tax v. license and regulatory fee

Osmeña v. Orbos G.R. No. 99886. March 31, 1993Philippine Airlines Inc. v. Edu G.R. No. L-41383. August 15, 1988Progressive Development Corporation v. Quezon City G.R. No. L-36081. April 24, 1989Compañia General de Tabacos de Filipinas v. City of Manila G.R. No. L-16619. June 29, 1963Angeles University Foundation v. City of Angeles, et al., G.R. No. 189999. June 27, 2012

b. Tax v. special assessment

Sec. 240 Local Government Code RA 7160Republic v. Bacolod Murcia G.R. No. 19824-26. July 9, 1999

c. Tax v. toll

Sec. 155 Local Government Code

d. Tax v. tariff and customs duties

Garcia v. Executive Secretary G.R. No. 101273. July 3, 1992

e. Obligation to pay tax v. obligation to pay debt

Article 1279, New Civil Code of the PhilippinesCaltex v. Commission on Audit G.R. No. 92585. May 8, 1992Francia v. Intermediate Appellate Court G.R. No. L-67649. June 28, 1988

Republic v. Mambulao Lumber Company G.R. No. 17725. February 28, 1962 Re: internal revenue taxes cannot be the subject of the set-off or compensationPhilex Mining v. Commissioner of Internal Revenue G.R. No. 125704. August 28, 1998Domingo v. Garlitos G.R. No. L-18994. June 29, 1963

B. Purposes/Objectives of taxation

1. Revenue-raising

PAL v. Edu, ibid . Osmeña v. Orbos, ibid .

2. Non-revenue/special or regulatory

Republic v. Bacolod-Murcia Milling Co. G.R. No. L-19824-26. July 9, 1999Tio v. Videogram Regulatory Board G.R. No. 75697. June 18, 1987Caltex v. Commission on Audit, ibid.Esso Standard Eastern v. Commissioner of Internal Revenue G.R. No.L-28508-9. July 7, 1989

C. Theory and Basis of Taxation

1. Necessity Theory

Phil. Guaranty Co., Inc. v. Commissioner of Internal Revenue G.R. No.L-22074. April 30, 1965Commissioner of Internal Revenue v. Algue ibid.Ferdinand R. Marcos II v. Court of Appeals G.R. No. 120880. June 5,1997NPC v. City of Cabanatuan G.R. No. 149110. April 9, 2003

2. Benefits-received TheoryGomez v. Palomar G.R. No. L-23645. October 29, 1968Lorenzo v. Posadas G.R. No. 43082. June 18, 1937

D. Aspects of taxation

1. Levy/Imposition by the legislative body

2. Collection / Administration / ways / methods of collection

“pay as you earn” “pay as you go” withholding system“pay as you are assessed”“pay as you file”

E. Nature and Scope of and Limitations on the Power of Taxation

2

1. Power to tax as differentiated from the powers of eminent domain and police power

2. Essential characteristics of taxation

a. Inherent in sovereignty

Roxas v. Court of Tax Appeals G.R. No. L-25043. April 26,1968

b. Exclusively legislative in nature

c. Subject to inherent and constitutional limitations

3. Inherent Limitations

a. Purpose must be public in nature

Pascual v. Secretary of Public Works G.R. No. L-10405December 29, 1960Caltex v. Commissioner of Internal Revenue, ibid.Gaston v. Republic Planter G.R. No. 77194, March 15, 1988Planters Product, Inc. v. Fertiphil Corp. G.R. No. 66006.March 14, 2008

b. Prohibition against delegation of taxing power

i. Extent of the legislative power to tax

Tan v. Del Rosario G.R. No. 109289 and G.R. No. 109446. October 3, 1994Sison v. Ancheta G.R. No. L-59431. July 25, 1984 Kapatiran v. Tan G.R. No. 81311, 81820, 81921, 82152. June 30, 1988

ii. Exceptions from the prohibition

(a) Delegation to local governments

Sec. 5 Art. X, ConstitutionLocal Government Code RA 7160 Book IIBasco v. PAGCOR G.R. No. 91649. May 14,1991

(b) Delegation to the President

Sec. 28(2) Art. VI, ConstitutionSec. 401 Tariff and Customs CodeGarcia v. Executive Secretary ibid.Abakada Guro Party List v. Ermita, G.R. No.

3

168056. September 1, 2005

Feliciano, Deconstruction of Constitutional Limitations and the Tariff Regime of the Philippines: The Strange Persistence of a Martial Law Syndrome, 84 Phil L.J. 311 (2009).

(c) Delegation to administrative agencies

Maceda v. Macaraig G.R. No. 88291. May 31, 1991; June 8, 1993Maceda v. ERB G.R. No. 96266. July 18, 1991Osmeña v. Orbos ibid.Commissioner of Internal Revenue v. Court of Appeals G.R. No. 119761. August 29, 1996

c. Exemption of government entities agencies and instrumentality

Sec. 24(c) NIRCExecutive Order 93 and Pres. Decree 1931Mactan Cebu International Airport Authority v. Marcos G.R. No.120082. September 11. 1996Manila International Airport Authority v. CA G.R. No. 155650July 20, 2006 Philippine Fisheries Development Authority v. CA G.R. No.169836. July 31, 2007GSIS v. City Treasurer of Manila,. G.R. No. 186242. December 23, 2009Philippine Fisheries Development Authority v. Central Board of Assessment Appeals et al. Lucena City, G.R. No. 178030, 15 December 2010. Republic of the Philippines represented by the Philippine Reclamation Authority v. City of Parañaque, G.R. No. 191109, July 18, 2012.

d. Limitation of international comity

Sec. 2, Art. II ConstitutionSec. 159 Local Government CodeTañada v. Angara G.R. No. 118295. May 2, 1997Commissioner of Internal Revenue v. Mitsubishi Corporation-Manila Branch C.T.A. E.B. No. 5. May 24, 2006

e. Limitation of territorial jurisdiction/personal jurisdiction

Commissioner of Internal Revenue v. British Overseas Airways Corporation G.R. Nos. 65773-74. April 30, 1987Iloilo Bottlers v. City of Iloilo G.R. No. L-52019. August 19, 1988Hopewell Power v. Commissioner of Internal Revenue C.T.A. Case No. 5310, November 18, 1998BPI v. CIR, G.R. No. 137002, July 27, 2006

4

Smith v. Commissioner of Internal Revenue C.T.A. Case No. 6268, September 12, 2002Commissioner of Internal Revenue v. Juliane Baier-Nickel G.R. No. 153793. August 29, 2006

4. Constitutional Limitations

a. Due process of law

Tan v. Del Rosario ibid.Sec. I, Art. III, ConstitutionSison v. Ancheta ibid.

b. Equal protection of the laws

Sec. I, Art. III, ConstitutionSison v. Ancheta, ibid.Villegas v. Hiu Chiong Tsai Pao G.R. No. L-29646. November 10,1978Tan v. Del Rosario, ibid.PHILRECA v. Secretary G.R. No. 143076. June 10, 2003

c. Uniformity and equity in taxationSec. 28(1) Art. VI, Constitution

(i) adoption of a progressive system of taxation

Tolentino v. Sec. of Finance, G.R. No. 115455.October 30, 1995

(ii) valid classification of taxpayers/subject or items to be taxed

Pepsi Cola v. City of Butuan G.R. No. L-22814. August 28, 1968Manila Race Horse Trainors Association v. DelaFuente G.R. No. L-2947. January 11, 1951Eastern Theatrical Co. v. Alfonso G.R. No. L-1104. May 31, 1949Shell v. Municipal Treasurer of Cordova G.R. No. L-6093. February 24, 1954Commissioner of Customs and the District Collector of the Port of Subic v. Hypermix Feeds Corporation, G.R. No. 179579, February 1, 2012

d. Prohibition against imprisonment for non payment of poll tax

Sec. 20 Art. III, ConstitutionCommunity tax v. poll taxSec. 156-164 Local Government Code RA 7160

e. Prohibition against impairment of obligation of contracts

5

Sec. 10, Art. III, ConstitutionSec. 11, Art. XII, ConstitutionCasanovas v Hord 8 Phil 125 (1907)Tolentino v. Sec. of Finance, ibid.

f. Prohibition against infringement of religious freedomSec. 5, Art. III, ConstitutionAmerican Bible Society v. City of Manila 101 Phil. 386Tolentino v. Sec. of Finance, ibid.

g. Prohibition re: appropriation of proceeds of taxation

The use of tax levied for special purpose

Sec. 29, Art. VI, ConstitutionOsmeña v. Orbos, ibid.Gaston v. Republic Planters Bank, ibid.

h. Prohibition against taxation of religious, charitable entities and educational entities

Sec. 28(3), Art. VI, ConstitutionAbra Valley College v. Aquino G.R. No. L-39086. June 15, 1988Lung Center of the Philippines v. Quezon City G.R. No. 144104. June 29, 2004

i. Prohibition against taxation of non-stock, non-profit institution

Sec. 4(3) Art. XIV ConstitutionSec. 4(4) Art. XIV, ConstitutionSec. 28 (3) Art. VI, ConstitutionSec. 24 (b) NIRCSecs. 27(B) and 30(H) of NIRC

Commissioner of Internal Revenue V. CA G.R. 124043. October 14,1998

j. Others

i. Grant of tax exemption

Sec. 28(4), Art. VI, Constitution

ii. Veto of appropriation, revenue, tariff bills by the president

Gonzales v. Macaraig G.R. No. 87636. November 19, 1990

iii. Non-impairment of the jurisdiction of the Supreme Court

Secs. 2 and 5(b), Art. VIII, ConstitutionSan Miguel Corp. v. Avelino G.R. No. L-39699. March 14,

6

1979

iv. Revenue bills shall originate from the House of Representatives

Sec. 24, Art. VI ConstitutionTolentino v. Secretary of Finance, ibid.

v. Infringement of press freedom

Sec. 4, Art. III ConstitutionTolentino v. Secretary of Finance, ibid.

vi. Grant of franchise

Sec. 11 Art. XII, ConstitutionTolentino v. Secretary of Finance, ibid.

5. Who may question the validity of a tax measure of expenditure of taxes – taxpayer’s suit

Lozada v. COMELEC G.R. No. L-59068. January 27, 1983Maceda v. Macaraig, ibid.Gonzales v. Marcos G.R. No. L-31685. July 31, 1975Renato V. Diaz and Aurora Ma. Timbol v. The Secretary of Finance and The Commissioner of Internal Revenue, G.R. No. 193007. July 19, 2011

F. Tax Systems

1. Classification

Sec. 28 (1), Art. VI, CONSTITUTION – Progressive system of taxation

Progressive system v. progressive rate of tax

Tolentino v. Secretary of Finance, ibid.

2. Basic principles of a sound tax system

Chavez v. Ongpin G.R. No. 76778. June 6, 1990

G. Classification of taxes

1. As to scope of the tax: National / local taxes

Benguet Corporation v. CBAA G.R. No. 100959. June 29, 1992

2. As to who shoulders the burden of the tax: Direct / Indirect taxes

Sec. 1 RA 7716 (Expanded VAT)Tolentino v. Sec. of Finance, ibid.

7

Philippine Acetylene v. Commissioner of Internal Revenue G.R. No.L-19707. August 17, 1967Maceda v. Macaraig G.R. No. 88291. June 8, 1993Commissioner of Internal Revenue v. John Gotamco G.R. No. L-31092. February 27, 1987Commissioner of Internal Revenue v. PLDT G.R. No. 140230.December 15, 2005Exxonmobil Petroleum and Chemical Holdings, Inc. Philippine Branch v CIR, G.R. No. 180909, January 19, 2011Diageo Philippines, Inc. v. CIR, G.R. No. 183553, November 12, 2012

3. As to the object or subject matter of the tax: Property / personal / poll or capitation / excise

Villanueva v. City of Iloilo G.R. No. L-26521. December 28, 1968Commissioner of Internal Revenue v. Court of Appeals G.R. Nos. 104151and 105563. March 10, 1995)Association of Customs Brokers v. Municipal Board G.R. No. L-4376.May 22, 1953

4. As to the manner of computing the tax

a. Ad valoremb. Specific

We Wa Yu v. City of Lipa G.R. No. L-9167. September 27, 1956

5. As to graduation or rate

a. Proportional

Example: Real estate taxSec. 233 Local Government Code

b. Progressive

Example: Sec. 21(a) NIRCMeaning of “digressive tax rate”Tolentino v. Secretary of Finance, ibid.ABAKADA v. Ermita, ibid.Chavez v. Ongpin, ibid.

c. Regressive

H. Some Fundamental Doctrines in Taxation

1. Situs of Taxation

a. Meaning of situs of taxationb. Situs of subjects of taxation

8

Commissioner of Internal Revenue v. British Overseas AirwaysCorporation, ibid.Wells Fargo v. Collector of Internal Revenue G.R. No. 46720.June 28, 1940Tan v. Del Rosario, ibid.Sec. 42 NIRC

c. Multiciplicity of Situs

Collector of Internal Revenue v. de Lara G.R. Nos. L-9456 andL-9481. January 6, 1958Commissioner of Internal Revenue v. Juliane Baier-Nickel, ibid.

2. Double Taxation

a. Meaning of double taxation in the strict sense/in the broad sense

b. Instances of double taxation in its broad sense

Villanueva v. City of Iloilo, ibid.Commissioner of Internal Revenue v. Solidbank Corp. G.R. No.148191. Nov. 25, 2003Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc. G.R. Nos. 139786 and 140857. September 27, 2006

c. Constitutionality of double taxation

City of Baguio v. De Leon G.R. No. L-24756. October 31, 1968Pepsi Cola Bottling Co. v. City of Butuan, ibid.Commissioner of Internal Revenue v. Manila Jockey Club, 108 Phil 281

3. Escape from Taxation

a. Shifting of tax burden

i. Ways of shifting the tax burden

ii. Taxes that can be shifted

Sec. 105 NIRC

iii. Meaning of impact and incidence of taxationRelations among impact, shifting, and incidence of a tax

b. Tax evasion

Elements of tax evasionRepublic v. Gonzales G.R. No. L-17962. April 30, 1965Commissioner of Internal Revenue v. Estate of Benigno TodaG.R. No. 147188. September 14, 2004

9

c. Tax avoidance

Delpher Trades Corp. v. IAC G.R. No. 69259. January 26, 1988Yutivo Sons Hardware v. CTA G.R. No. L-13203. January 28,1961Commissioner of Internal Revenue v. Lincoln Philippine LifeInsurance Company, Inc. G.R. No. 119176. March 19, 2002

d. Exemption from taxation

i. Meaning of exemption from taxation

Greenfield v. Meer G.R. No. 156. September 27, 1946Commissioner of Internal Revenue v. Magsaysay Lines,Inc. G.R. No. 146984. July 28, 2006

ii. Compared with/differentiated from other terms

(a) Tax remission/tax condonation

Juan Luna Subdivision v. M Sarmiento G.R. No. L-3538. May 28, 1952Surigao Consolidated Mining v. Collector G.R. No. L-14878. December 26, 1963

(b) Tax amnesty

Republic Act No. 9399 (March 20, 2007)Republic Act No. 9480 (May 24, 2007)Commissioner of Internal Revenue v. Court of Tax Appeals G.R. No. 108358. January 20, 1995Republic v. Intermediate Appellate Court G.R. No.69344. April 26, 1991People v. Castañeda, Jr. G.R. No. L-46881. September 15, 1988Pascual v. Commissioner of Internal Revenue G.R.No. 78133. October 18, 1988Commissioner of Internal Revenue v. Marubeni G.R. No. 13737. December 18, 2001 Asia International Auctioneers, Inc. v. CIR, G.R. No. 179115, September 26, 2012

(c) Zero-rating (VAT)

Sec. 106 NIRC

(d) Exclusion/deduction

iii. Kinds of tax exemption

10

Atlas Fertilizer v. Commissioner of Internal Revenue G.R.Nos. L-26686 and L-26698. October 30, 1980

11

Commissioner of Internal Revenue v. Phil. Ace Lines G.R.Nos. L-20960-61. October 31, 1968Caltex v. Commission on Audit, ibid.

iv. Nature of the power to grant tax exemption

Basco v. Pagcor, ibid.Maceda v. Macaraig, ibid.

v. Rationale/grounds for tax exemption

Tolentino v. Sec. of Finance, ibid.Maceda v. Macaraig, ibid. (1993)Davao Light v. Commissioner of Customs G.R. Nos.L-28739 and L-28902. March 29, 1972.Tan Kim Kee v. CTA G.R. No. L-18080. April 22, 1963NPC v. Presiding Judge G.R. No. 72477. October 16, 1990Davao Gulf v. Commissioner of Internal Revenue G.R. No.117359. July 23, 1998

vi. Nature of tax exemption

Philippine Acetylene v. Commissioner of Customs, ibid.Wonder Mechanical Engineering Corp. v. CTA G.R. No.L-22805. June 30, 1975PLDT v. City of Davao G.R. No. 143867. March 25, 2003and August 22, 2001Commissioner v. PAL, Inc. G.R. No. 180043. July 14, 2009Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corporation, G.R. No. 188497. April 23, 2012

vii. Laws granting tax exemption/tax incentives

(a) Constitution

Art. 28(3) Art. VI, ConstitutionSec. 4(3,4) Art. XIV, Constitution

(b) National Internal Revenue Code

(c) Special laws

(d) Treaty/international agreement

I. Philippine Tax Laws and Regulations

1. Nature of Tax Laws

Hilado v. Collector of Internal Revenue G.R. No. L-9408. October 31,

12

1956Republic v. Vda. de Fernandez G.R. No. L-9141. September 25, 1956

2. Sources of Tax Laws

a. Constitutionb. National Internal Revenue Codec. Tariff and Customs Coded. Local Government Code Book II (RA 7160)e. Local tax ordinance/city or municipal tax codesf. Tax treaties/international agreementsg. Special lawsh. Decisions of the SC/CTAi. Revenue rules and regulations/Administrative rulings and opinions

Sec. 245 NIRCSecs. 511 and 519 Tariff and Customs CodeMisamis Oriental Association of Coco Traders, Inc. v. Department of Finance G.R. No. 108524. November 10, 1994

i. Validity of revenue rules and regulations

Tan v. del Rosario, ibid.Commissioner of Internal Revenue v. CA G.R. No. 104151and 105563. March 10, 1995, ibid.Phil. Petroleum Corp. v. Mun. of Pililia G.R. No. 90776.June 3, 1991Umali v. Estanislao G.R. Nos. 104037 and 104069. May29, 1992La Suerte Cigar & Cigarette Factory v. CTA G.R. Nos.L-36130 and L-36131. January 17, 1985Commissioner of Internal Revenue v. Seagate TechnologyG.R. No. 153866. February 11, 2005

ii. BIR Rulings

3. Interpretation/Construction of Tax Laws

Hilado v. Collector of Internal Revenue, ibid.

a. Rule when legislative intent is clear

Umali v. Estanislao, ibid.Lorenzo v. Posadas ibid.Commissioner of Internal Revenue v. Solidbank Corp.,ibid.

b. Rule when there is doubt

Collector of Internal Revenue v. La Tondeña G.R. No.L-10431. July 31, 1962

13

c. Provisions/laws granting tax exemptions

i. General rule

Commissioner of Internal Revenue v. CA G.R. No. 124043, ibid.Misamis Oriental Asso. v. Department of Finance, ibid.Commissioner of Internal Revenue of Customs v. Phil. Acetylene Company, ibid.Manila Electric Company v. Vera G.R. No. L-29987 andL-23847. October 22, 1975Benguet Corporation v. CBAA, ibid.Coconut Oil Refiners Association Inc. v. Torres G.R. No. 132527. July 29, 2005

ii. Exceptions

Maceda v. Macaraig, ibid.

4. Application of Tax Laws/Revenue Regulations and Rulings

a. General

Art. 2, Civil CodeUmali v. Estanislao, ibid.Lorenzo v. Posadas, ibid.Hijo Plantation v. Central Bank G.R. No. L-34526. August 9, 1988 Commissioner of Internal Revenue V. Filipinas Compania deSeguros G.R. No. L-14880. April 29, 1960Cebu Portland v. Collector of Internal Revenue G.R. No.L-20563. October 29, 1968Commissioner of Internal Revenue v. Rio Tuba Nickel MiningG.R. Nos. 83583-84. March 25, 1992

b. Application of revenue rules and regulations/rulings

Revenue Memo Circular 20-86Sec. 246 NIRCTuzon v. CA G.R. No. 90107. August 21, 1992Commissioner of Internal Revenue v. Mega General G.R. No.69136. September 30, 1988ABS-CBN v. Court of Tax Appeals G.R. No. L-52306. October 12, 1981Commissioner of Internal Revenue v. Court of Appeals G.R. No. 119761. August 29, 1966Commissioner of Internal Revenue v. Telefunken Semiconductor G.R. No. 103915. October 23, 1995Commissioner of Internal Revenue v. Benguet Corporation G.R. Nos. 134587 and 134588. July 8, 2005Commissioner of Internal Revenue v. Michel Lhuillier Pawnshop G.R. No. 150947. July 15, 2003

14

c. Effectivity and validity of tax ordinances

Hagonoy Market Vendors Asso. V. Municipality of Hagonoy G.R. No. 137621. February 6, 2002Jardine Davies Insurance Brokers, Inc. v. Aliposa G.R. No. 118900. February 27, 2003

4. Mandatory and directory provisions of tax laws

Roxas v. Rafferty G.R. No. L-12182. March 27, 1918Aragon v. Jorge G.R. No. L-2678. December 29, 1949Pecson v. Court of Appeals G.R. No. 105360. May 25, 1993

15

INCOME TAXATION

A. INTRODUCTION

Fisher v. Trinidad G.R. No. 17518. October 30, 1922

1. History of the Philippine Income Tax Law

Madrigal v Rafferty, G.R. No. 12287. August 7, 1918.

2. Meaning of Income

Eisner v Macomber, 1920, 252 US 189, 40 SCt 189, 64 Led, 521, 9ALR 1570

3. Classification of income taxpayers

4. General Principles of Income Taxation

Sec. 23, NIRC

B. TAX ON INDIVIDUALS

1. Kinds of individual taxpayers

Sec. 24, Sec. 25

2. Definition of each kind of taxpayer

Sec. 22

a. Resident citizens and resident aliens (Sec. 5, Sec. 6, RR-2, RR 2-98, April 17, 1998)

b. Non-resident citizens (RR 1-79 and RR 9-99, April 19, 1999, definition and requirements for information return)

c. Non-resident aliens engaged in business in the Philippines

d. Senior Citizen Law, RA 7432, as amended by RA 9257 and RA 9994 Carlos Superdrug Corp. vs. DSWD, ibid.

Mercury Drug Corporation v. Commissioner of Internal Revenue. G.R. No. 164050. July 20, 2011

3. Kinds of income and income tax of individuals

a. Income subject to ordinary income tax

16

b. Income subject to final income tax – interests, dividends, royalties, awards, capital gains, on sale of shares, realty (RR 10-98, August 25, 1998, RR 8-98, August 25, 1998)

c. Compensation Income

5. Personal exemptions

Sec. 35

6. Premium payments on health and/or hospitalization insurance

(Sec. 34 (m))

6. Estates and Trusts

Sections 60-66 NIRC (Sec. 207-213, RR 2)

1. General rule on taxability: fiduciary or beneficiary

2. Personal exemption allowed

3. Decedent’s estate administrationRevocable trusts

4. Income for benefit of grantor

C. TAX ON CORPORATIONS

1. Definition of corporations

Sec. 22

Collector of Internal Revenue v. Batangas Transportation Co. G.R. No. L-9692. January 6, 1958Oña v. Commissioner of Internal Revenue G.R. No. L-19342. May 25, 1972BIR Ruling 317-92, October 28, 1992Obillos v. Commissioner of Internal Revenue G.R. No. L-68118. October 29, 1985

2. Classification of corporations and the tax rates

a. In general

Sec. 27-28

1. Domestic

2. Resident

3. Non-resident

17

b. Special corporations

1. Private educational institutions and non-profit hospitals

Sec. 4 [3] Article XIV, Constitution

2. Non-resident cinematographic film owner, lessor or distributor

3. International carriers

Commissioner v BOAC, ibid.United Airlines, Inc., v CIR, G.R. No. 178788, 29 September 2010

4. Non-resident owner of vessels

5. Non-resident lessor of aircraft, machineries and other equipment

6. Foreign currency deposit system/Offshore banking units

7. Petroleum service contractor and sub-contractor

PD 1354, PD 87

8. Enterprise Registered under Bases Conversion and Development Act of 1992 and Philippine Economic Zone Act of 1995. Clarification of coverage of 5% preferential rate by RR 20-2002, October 14, 2002, as amended by RR 2-2005 (February 8, 2005) amending RR 1-95 and RR 16-99.

John Hay Peoples Alternative Coalition v. Victor Lim, BCDA G.R. 119775. October 14, 2003, March 29, 2005

Coconut Oil Refiner’s Association, et al. v. Ruben Torres, ibid.

9. R.A. No. 9400 gives tax privileges to Clark & John Hay, R.A. No. 9399 Grants tax amnesty to locators of Clark & John Hay

3. Kinds of Taxes

a. Income subject to corporate income tax

Commissioner of Internal Revenue v. Procter & Gamble G.R. No. 66838. April 15, 1988 and December 2, 1991

Commissioner of Internal Revenue v. Wander Phils. G.R. No.68375. April 15, 1988

b. Income subject to final income tax

18

4. Branch Profit Remittance Tax

Rev. Memo Cir. 55-80, Sec. 28 [A][5], NIRC

5. Minimum Corporate Income Tax

Sec. 27[e] and Sec. 28[A][2], NIRC (RR 9-98, August 25, 1998)

6. Improperly Accumulated Earnings Tax

Sec. 29 NIRC (Rev. Regs. 2-2001, February 12, 2001)Cyanamid Philippines, Inc. v. CA G.R. No. 108067. January 20, 2000

Fringe Benefits Tax

Sec. 33

D. EXEMPT ENTITIES

1. Partnership/joint ventures formed for the purpose of undertaking constructionprojects or engaging in energy operations

Sec. 26, NIRC

Professional partnership of real estate brokers exempt from income tax (BIR ruling 294-88, July 5, 1988)

2. Co-ownership

Obillos, Jr. v. Commissioner of Internal Revenue, ibid.

3. Section 30, NIRC

Sec. 23-35, NIRCSinco v. Collector of Internal Revenue, No. 2229, May 20, 1955, 100 Phil. 127

3. Under special laws

Omnibus Investment Code – income tax holiday incentive, as amended by EO 226

Special Economic Zone Act of 1995 (RA 7916)

Bases Conversion and Development Act (RA 7227, as amended)

F. INCLUSIONS AND EXCLUSIONS FROM GROSS INCOME

Sec. 32, NIRC (Sec. 39-60, RR 2)

19

1. Definition of Gross Income

2. Exclusions from Gross Income

Sec. 61-64, NIRC RR 2, RA 4917, RA 7641 – An Act granting retirement benefits to private sector employees in absence of qualified plan

3. Exclusion of 13th Month Pay

RA 7833, January 1994, Rev. Reg. 2-95, Rev. Memo, Cir. 36-94, December 14, 1994 – Inventors and Inventions Incentives Act of the Philippines

G. ITEMS OF GROSS INCOME (Sec. 32)

1. Compensation for personal services

a. In money

b. In kind

i. “Convenience-of-the-employer rule”

Henderson v. Collector of Internal Revenue, G.R. No. L-12954. February 28, 1961

ii. RR 2-98, as amended and RR 3-98

H. INTEREST INCOME

1. Taxable

2. Not taxable

4. Imputed interest on inter-company loans/Advances

Sec. 50, NIRC (RMO 63-99, July 1999)

Commissioner of Internal Revenue v. Filinvest Development CorpG.R. No. 163653; 167689. July 19, 2011

I. INCOME UNDER LEASE AGREEMENTS

(Sec. 49, RR 2)

1. Rent

2. Obligations of lessor to third parties assumed and paid by lessee

3. Advance rental

20

4. Leasehold improvements. Options to report income for right of reversion of improvements to lessor:

a. Option 1 – Report fair market value upon completion

b. Option 2 – Report over remaining life of lease depreciated value after expiration of lease period

J. DIVIDEND INCOME Sec. 73, NIRC (Sec. 250-256, RR 2)

1. Kinds of dividends recognized in law

a. Cash

b. Property

BIR Ruling 108-93, May 7, 1993

c. Stock

Commissioner of Internal Revenue v. Manning G.R. No. L-28398, August 6, 1975, 66 SCRA 14

Fisher v. Trinidad, ibid.

2. Measure of income in cash and property dividend

3. Stock dividend

a. When taxable

1. Measure of income

b. When not taxable

1. Adjusted cost per share

4. Liquidating “dividend”

Wise & Co., Inc. v. Meer G.R. No. L-48231. June 30, 1947Commissioner of Internal Revenue v. CA G.R. No. 108576.January 20, 1999

K. INCOME FROM ANY SOURCE WHATSOEVER

1. Bad debt recovery

Sec. 50, RR 2

2. Forgiveness of indebtedness

21

Sec. 50, RR 2

3. Tax refunds

RMC 13-80, April 10, 1980

4. Damage recovery

5. Prizes and winnings

6. Income from any source whatsoever

Gutierrez v. Court of Tax Appeals. G.R. Nos. L-9738 and L-9771. May 31, 1957

L. CLASSES OF DEDUCTIONS

Sec. 34, NIRC

1. Optional standard deduction

2. Itemized deductions

M. EXPENSES IN GENERAL

Sec. 65-76, RR 2

1. Requisites for deductibility (ordinary, necessary)

Visayan Cebu Terminal Co. v. Collector of Internal Revenue G.R. No. L-12798. May 30, 1960

2. Compensation for personal services

Kuenzle & Streif, Inc. v. Commissioner of Internal Revenue IR G.R. No. L-12010 and L-12113. October 20, 1959

3. Traveling/Transportation expenses

RR 3-98

4. Cost of materials

Sec. 67, RR 2

5. Repairs

Sec. 68, RR 2

6. Expenses under lease agreements

22

Sec. 74, RR 2

7. Expenses for professionals

Sec. 69, RR 2

8. Expenses for farmers

Sec. 75, RR 2

9. Entertainment expenses

RR 3-98

10. Expenses of private educational institutions

Alhambra Cigar & Cigarette Manufacturing Co. v. Collector of Internal Revenue G.R. No. L-12026.May 29, 1959Calanoc v. Collector of Internal Revenue G.R. No. L-15922. November 19, 1961

Expense for police protection is illegal

11. Constructive dividends (Sec. 70, RR 2)

RR 10-2002, Ceilings for entertainment, amusement and recreational expenses (July 10, 2002)

N. INTEREST

1. Interest deductible from gross income

2. Interest not deductible from gross income

3. Prepaid interest of individual on cash method of accounting

Commissioner of Internal Revenue v. Vda. de Prieto G.R. No. L-13912. September 30, 1960

4. Reduction of interest expense on interest income subjected to final tax

RR 13-2000, November 20, 2000 requirement for deductibility of interest expense

O. TAXES

Sec. 80-82, RR 2

1. Deductible from gross income

2. Not deductible from gross income

Sec. 82-83, RR 2

23

3. Meaning of the term “taxes”

4. Tax Credits v. Tax Deduction

Commissioner of Internal Revenue v. Lednicky, et al. G.R. No. L-18169. July 31, 1964Commissioner Internal Revenue v. Bicolandia Drug Corp., G.R. No. 148083. July 21, 2006Mercury Drug Corporation v. Commissioner of Internal Revenue, ibid.

5. Fines and penalties

Gutierrez v. Collector of Internal Revenue. G.R. No. L-19537. May 20, 1965

P. LOSSES (Sec. 93-101, RR 2)

1. Kinds of taxpayers and their losses

2. Completed transactions

Fernandez Hermanos v. Commissioner of Internal Revenue G.R. No. L-21557. September 30, 1969

3. Special rules on losses

a. Voluntary removal of buildings

b. Lose of useful value of assets

c. Shrinkage in value of stocks

4. Wagering losses

5. Rev. Regs. 12-77, substantiation of losses

6. Foreign exchange losses

BIR Ruling 144-85, August 26, 1985Rev. Memo Circular 26-85, July 15, 1985, inter-bank guiding rate

7. Abandonment losses

8. Net operating loss carry-over (as implemented by RR 14-2001, August 27, 2001)

a. Three-year period

b. No substantial change in ownership (75% rule)

Q. BAD DEBTS

24

Sec. 102-104, RR 2

1. Requirements for deductibility

Collector of Internal Revenue v. Goodrich G.R. No. L-22265. December 22, 1967

2. Tax benefit rule

RR 5-99, March 10, 1999

3. Bad debts between related parties

Sec. 36 [B], NIRC

4. RR 5-99, March 10, 1999, requirements for deductibility of bad debts including banks

Philex Mining v. Commissioner of Internal Revenue G.R. No. 148187. April 16,2008

R. DEPRECIATION (Sec. 105-115, RR 2)

1. Depreciation base

Zamora v. Collector of Internal Revenue G.R. Nos. 15290, 15280, 15289, 15281.May 31, 1963

2. Methods of depreciation (straight line, declining balance, sum of the digits)

3. Depreciation rates

i. Bulletin “F”

ii. Rev. Regs. 19-86, Annex “A”

S. DEPLETION (Rev. Regs. 5-76, April 2, 1976)

T. PENSION TRUST (Sec. 118, RR 2)

U. CHARITABLE AND OTHER CONTRIBUTIONS (BIR-NEDA Regs. 1-81, BIR-NEDA Regs. 1-82)

1. Fully deductible

2. Deductible, subject to limitations

a. Corporation

b. Individuals

3. RR – 13-98 (December 8, 1998), implementing Section 34(H), RA 8424 “deductibility by actually paid or made to accredited donee institution”

25

V. RESEARCH AND DEVELOOPMENT EXPENSES

Sec. 34, NIRC

a. When paid or incurred; or

b. Amortized for 60 months

W. IMPOSITION OF CEILINGS ON DEDUCTIONS BY THE SECRETARY OF FINANCE

Sec. 34, last par., NIRC

X. ADDITIONAL REQUIREMENT FOR DEDUCTIBILITY

Sec. 34 [k] NIRC (RMO 38-83, November 14, 1983 on deficiency withholding)

Y. ITEMS NOT DEDUCTIBLE

Sec. 36 NIRC (Sec. 119-122, RR 2)

Atlas Consolidated v. Commissioner of Internal Revenue G.R. No. L-26911. January 27,1981

Z. SALE OR EXCHANGE OF PROPERTY

A. Capital assets

Sec. 38 (Sec. 132-135, RR 2)

1. Definition of capital asset (RR 7-2003, February 11, 2003)

Guidelines in determining whether a real property is capital or ordinary asset

Definition of ordinary income

Sec. 22 (Z)

Calasanz v. Commissioner of Internal Revenue G.R. No. L-26284. October 8, 1986

3. Net capital gain, net capital loss

4. Ordinary loss

5. Percentage taken into account (long term – short term) by taxpayers other than a corporation

6. Limitation on capital loss

7. Meaning of sale or exchange – requirement for capital gain

26

B. Determination of gain or loss from sale or transfer of property

Sec. 40 NIRC (Sec. 136-143, RR 2)

1. Computation of gain or loss

CIR v. Aquafresh Seafood, Inc., G.R. No. 170389, 20 October 2010

2. Cost or basis for income tax purposes

3. Exchange of property – tax-free exchange

Sec. 40(c)(2), NIRC

i. Merger or consolidation –

BIR Ruling 383-87, November 25, 1987

Commissioner of Internal Revenue v Vicente Rufino G.R. No. L-33665-68. February 27, 1987

ii. Transfer of “substantially all” the assets

iii. Transfer of property for shares of stocks

iv. Administrative requirements in case of tax-free exchanges

v. De facto merger

4. Cost basis in tax-free exchanges

5. Assumption of liability in tax-free exchanges

6. Business purpose

Gregory v. Helvering, 293 U.S. 465, 55 SCT 266

C. Losses from wash sales of stocks or securities

Sec. 32 NIRC (Sec. 131, RR 2)

D. Exemption from capital gains tax of certain individuals from the sale or exchange of principal residence

Sec. 24, (D)(2)

E. R.A. 9480 (Tax Amnesty) effective June 16, 2007

27

F. RR 6-2008, Taxation of Shares of Stocks (April 22, 2008)

AA. SITUS OF TAXATION – SOURCES FROM WITHIN AND WITHOUT THE PHILIPPINES

Sec. 42 NIRC (Sec. 152-165, RR 2)

1. Gross income from sources within Philippines

2. Taxable income from sources within the Philippines

Commissioner of Internal Revenue v. CTA and Smith Kline & French Overseas G.R. No. L-54108. January 17, 1984

Rev. Audit Memo Order 1-86 (income from constructive trading of multinationals)

Rev. Regs. 16-86

RAMO 4-86 (allocation of head office overhead expenses)

RAMO 1-95 (audit guidelines on determination of income tax of branches of multinationals)

3. Gross income from sources without the Philippines

4. Income from sources partly within or without the Philippines

5. Situs of sale of stocks in a domestic corporation

6. Definition of royalties

Philamlife v. CTA CA-G.R. SP No. 31283. April 25, 1995

Commissioner of Internal Revenue v. Marubeni Corp. G.R. No. 137377. December 18, 2001

Rev. Memo Circular No. 44-2005 (September 1, 2005)Guideline for computer software payment, royalty, services or business income

BB. ACCOUNTING PERIODS AND METHODS

Sec. 43-50 NIRC (Sec. 166-179, RR 2, Sec. 51-53, RR 2)

i. General rule

ii. Accounting period

iii. Accounting method (cash (actual or constructive) or accrual)

Hybrid method (Consolidated Mines, Inc. v. CTA G.R. Nos. L-18843 and 18844, L-18853 and 18854. August 29, 1974)

28

Percentage of completion method (Sec. 44, RR 2, Sec. 48 (Tax Code as amended by Tax Reform Act)

iv. Change of accounting period

v. Installment basis

vi. Allocation of income and deductions

Yutivo Sons Hardware Co. v. Commissioner of Internal Revenue ibid.

vii. Networth method

Perez v. Court of Tax Appeals G.R. No. L-10507. May 30, 1958Collector of Internal Revenue v. Reyes G.R. Nos. L-11534 and 11558.November 25, 1958

viii. Tax Evasion v. Tax Avoidance

Commissioner of Internal Revenue v. Benigno Toda, ibid.

CC. RETURNS AND PAYMENT OF TAX

1. Individual return (Sec. 51, Sec. 56), NIRC

a. Who are required to fileb. Those not required to file

c. Where to file

d. When to file

e. Where to pay

f. Capital gains on shares of stocks and real estate

g. Quarterly declaration of income tax (Sec. 74)

h. RR 3-2002, March 22, 2002 (substituted filing of ITR of salaried individuals), as amended by RR 19-2002 (November 25, 2002)

i. RR 16-2002, October 11, 2002 (modes of payment of taxes through banks)

2. Corporate regular returns (Sec. 52, Sec. 50, Sec. 56, NIRC)

a. Quarterly income tax (Sec. 75, NIRC)

b. Final adjustment return (Sec. 76, NIRC)

Commissioner v BPI. G.R. No. 178490. July 7, 2009

29

Commissioner of Internal Revenue v. PL Management International Philippines, Inc. G.R. No. 160949, April 4, 2011

c. When to file

d. Where to file (Sec. 77, NIRC)

e. When to pay

f. Capital gains on shares of stock

g. Return of corporations contemplating dissolution/reorganization

(Sec. 244, RR 2)

BPI v. Commissioner of Internal RevenueCA-G.R. SP No. 38304, April 14, 2000

DD. WITHHOLDING TAX

A. 1. Final withholding tax at source (Sec. 57, NIRC)

Withholding of creditable tax

RR 2-98 as amended

Filsyn v. CA G.R. 118408 and 124377. October 12, 1999

RR 3-2004, March 12, 2004

3. Return and payment of tax (Sec. 58, NIRC)

4. Tax deemed paid on dividends

Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation G.R. No. 66838. December 2, 1991

5. Withholding agent can file claim for refund

6. Withholding tax on dividends

Marubeni Corp. v. Commissioner of Internal Revenue G.R. No. L-76573. September 14, 1989

7. Withholding tax on royalties

Commissioner of Internal Revenue v. Court of Appeals & SC Johnson & Sons, Inc. G.R. No. 127105, June 25, 1999, August 30, 1999

30

8. Rev. Memo. Cir. 46-2002, tax on royalty payments to US entity adopts most favored nation clause under RP-China Tax Treaty effective January 1, 2002

Golden Arches Dev’t. Corp. v. Commissioner of Internal RevenueCTA Case No. 6862, July 13, 2007.

9. Withholding on wages (Sec. 78-81, RR 2-98, as amended)

C. Withholding tax by government agencies (RR 2-98, as amended)

31