LECTURE NOTES ON TAX BY DOMONDON.pdf

2010 Taxation Review by Domondon“BAR STAR NOTES” TAXATION VER. 2010.08.12 copyrighted 2010 Prepared by Prof. Abelardo T. Domondon (AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.). Lawyer-CPA-Customs Broker, Management Consultant, Professor of Law and Pre-Bar Reviewer) How to use the “BAR STAR NOTES.” The “BAR STAR NOTES” in the form of questions and answers as well as textual discussion were specially prepared by Prof. Domondon for the exclusive use of Bar Reviewees who attended the 2010 Wrap-Up Lectures on TAXATION conducted by Primus Information, Center, Inc., and the Bar Reviewees of various law schools and Review Centers where he was invited to lecture on Taxation. Included in the presentation are doctrines contained in Supreme Court decisions up to April 2010. The purpose of the ‘BAR STAR NOTES” is to provide the Bar Reviewee with a handy review material which serves as “memory-joggers” for the September 12, 2010 Bar Examinations in Taxation. The author tries to second guess what would be included in the Bar Exams using statistical analysis. The actual Bar questions may not be formulated in the same manner as the “BAR STAR NOTES”. However, the doctrines tested in the Bar would in all probability be included in these Notes. If pressed for time, the author suggests that the reader should focus his attention on the following: â ââ âââ Nice to know Should know Must know and master It is further suggested that the reader should merely browse those without stars. The BAR STAR NOTES in TAXATION is the 4th in the series of Bar Star Notes the author has prepared for all the eight Bar subjects. The other Bar Star Notes may be availed of by enrolling in the 2010 Wrap-Up lectures conducted by PRIMUS INFORMATION CENTER, INC. Please feel free to call Baby, Tel. No. 816-07-68 or 817-84-49; Leon, Mobile No. 0917-793-6169; Atty. Celia, Mobile No. 0917-790-8406, or Venny, Mobile No. 0917-337-6479. TAXATION GENERAL PRINCIPLES OF TAXATION TAXATION, IN GENERAL â 1. State briefly and concisely the nature of taxation. Alternatively, define taxation. SUGGESTED ANSWER: The inherent power of the sovereign exercised through the legislature to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. âââ 2. What is the nature of the State’s power to tax ? Explain briefly. SUGGESTED ANSWER: The nature of the state’s power to tax is two-fold. It is both an inherent power and a legislative power. It is inherent in nature being an attribute of sovereignty. This is so, because without the taxes, the state’s existence would be imperiled. There is thus, no need for a constitutional grant for the state to exercise this power. It is a legislative power because it involves the promulgation of rules. Taxation is a set of rules, how much is the tax to be paid, who pays the tax, to whom it should be paid, and when the tax should be paid. â 3. What is the underlying theory of taxation ? Explain briefly. SUGGESTED ANSWER: Taxes are the lifeblood of the nation. Without revenue raised from taxation, the government will not survive, resulting in detriment to society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. (Commissioner of Internal Revenue v. Algue, Inc. et al., 158 SCRA 8, 16-17) â 4. Marshall said that, “the power to tax involves the power to destroy.” On the other hand, Holmes stated that “the power to tax is not the power to destroy while the court sits.” Reconcile the statements. In the alternative, what are the implications that flow from the above statements? SUGGESTED ANSWERS: Marshall’s view refers to a valid tax while the Holmes’ view refers to an invalid tax. a) The imposition of a valid tax could not be judicially restrained merely because it would prejudice taxpayer’s property. b) An illegal tax could be judicially declared invalid and should not work to prejudice a taxpayer’s property. â 5. Discuss briefly the basis/bases, or rationale of taxation. SUGGESTED ANSWER: a) Reciprocal duties of protection and support between the state and its citizens and residents. called “symbiotic relation” between the state and its citizens. b) Jurisdiction by the state over persons and property within its territory. â 6. Discuss briefly but comprehensively the objectives or purposes of taxation. SUGGESTED ANSWER: The purposes or objectives of taxation are the following: a) The primary purpose: 1) Revenue purpose. b) The secondary purposes 1) Sumptuary or regulatory purpose. 2) Compensatory purpose. 3) To implement the power of eminent domain. â 7. Distinguish a tax from a license fee. SUGGESTED ANSWER: The following are the distinctions: a) Purpose: Tax imposed for revenue while license fee for regulation. Tax for general public purposes while license fee for regulatory purposes only. Also b) c) d) e) f) Basis: Tax imposed under power of taxation while license fee under police power. Amount: In taxation, no limit as to amount while license fee limited to cost of the license and the expenses of police surveillance and regulation. Time of payment: Taxes normally paid after commencement of business while license fee before. Effect of payment: Failure to pay a tax does not make the business illegal while failure to pay license fee makes business illegal. Surrender: Taxes, being the lifeblood of the state, cannot be surrendered except for lawful consideration while a license fee may be surrendered with or without consideration. (Cooley on Taxation, pp. 1137-1138; Pacific Commercial Company v. Romualdez, et al., 49 Phil. 924) â 8. How may the power to tax be utilized to carry out the social justice program of our government? SUGGESTED ANSWER: The compensatory purpose of taxation is to implement the social justice provisions of the constitution through the progressive system of taxation, which would result to equal distribution of wealth, etc. Progressive income taxes alleviate the margin between rich and poor. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) In recent years, the increasing social challenges of the times expanded the scope of the state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives. (Batangas Power Corporation v. Batangas City, et al., G. R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003) 9. Explain the sumptuary purpose of taxation. SUGGESTED ANSWER: The sumptuary purpose of taxation is to promote the general welfare and to protect the health, safety or morals of the inhabitants. It is in the joint exercise of the power of taxation and police power where regulatory taxes are collected. Taxation may be made the implement of the state’s police power. The motivation behind many taxation measures is the implementation of police power goals. [Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) The reader should note that the August 3, 2005 Southern Cross case is the decision on the motion for reconsideration of the July 8, 2004 Southern Cross decision. The so-called “sin taxes” on alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of these potentially harmful products. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) 10. Taxation distinguished from police power. Taxation is distinguishable from police power as to the means employed to implement these public goals. Those doctrines that are unique to taxation arose from peculiar considerations such as those especially punitive effects (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) as the power to tax involves the power to destroy and the belief that taxes are lifeblood of the state. (Ibid.) taxes being the lifeblood of the government, their prompt and certain availability is of the essence.” These considerations necessitated the evolution of taxation as a distinct legal concept from police power. (Ibid.) 11. How the power of taxation may be used to implement power of eminent domain. Tax measures are but ”enforced contributions exacted on pain of penal sanctions” and “clearly imposed for public purpose.” In most recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005) Establishments granting the 20% senior citizens discount may claim the discounts granted to senior citizens as tax deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted. Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended. [M.E. Holding Corporation v. Court of Appeals, et al., G.R. No. 160193, March 3, 2008 citing Expanded Senior Citizens Act of 2003, Sec. 4 (a)] â12. What are the three basic principles of a sound tax system? Explain each briefly. SUGGESTED ANSWER: The canons of a sound tax system, also known as the characteristics or, principles of a sound tax system, are used as criteria in order to determine whether a tax system is able to meet the purposes or objectives of taxation. They are: a) Fiscal adequacy. b) Administrative feasibility. c) Theoretical justice. â 13. What are the elements or characteristics of a tax? SUGGESTED ANSWER: a) Enforced contribution. b) Generally payable in money. c) Proportionate in character. d) Levied on persons, property or exercise of a right or privilege. e) Levied by the state having jurisdiction. f) Levied by the legislature. g) Levied for a public purpose. h) Paid at regular periods or intervals. 14. State the requisites of a valid tax. SUGGESTED ANSWER: a) A valid tax should be within the jurisdiction of the taxing authority. b) That the assessment and collection of certain kinds (The same as the inherent limitations of the power of taxation) should be for a public purpose. c) The rule of taxation should be uniform. d) That either the person or property of taxes guarantees against injustice to individuals, especially by way or notice and opportunity for hearing be provided. e) The tax must not impinge on the inherent and Constitutional limitations on the power of taxation. â15. What are the classes or kinds of taxes according to the subject matter or object? SUGGESTED ANSWER: a) Personal, poll or capitalization – imposed on all residents, whether citizen or not. Example – Community Tax. b) Property - Imposed on property. Example – Real property tax. c) Excise – imposed upon the performance of an act, the enjoyment of a privilege or the engaging in an occupation. Example – income tax, estate tax. ââ16. What are the kinds of taxes classified as to who bears the burden? Explain each briefly. SUGGESTED ANSWER: Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden of taxation, taxes may be classified into: a) Direct taxes. Those that are extracted from the very person who, it is intended or desired, should pay them (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G. R. No. 140230, December 15, 2005); they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in, (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, supra) which liability cannot be shifted or transferred to another. Example – income tax, estate tax, donor’s tax, etc. b) Indirect taxes are those that are demanded in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, supra) to someone else not as a tax but as part of the purchase price. (Commissioner, of Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005 citing various cases and authorities) Example – value added tax (VAT), documentary stamp tax, excise tax, percentage tax, etc. 317-318) The NIRC provides that the excise tax should be paid by the manufacturer or producer before removal of domestic products from place of production. Jr.which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect taxes.R. G. an international carrier. an indirect tax is the statutory taxpayer. May 31. May 31. unless the exempting statute.D. be exempt from the same customs duties. inspection fees and other duties or taxes imposed in the territories of the first Contracting Party . It invokes Maceda v. SUGGESTED ANSWER: Silkair is not entitled to tax refund or credit for the following reasons: a) The excise tax on aviation fuel is an indirect tax. the Court held that an exemption from “all taxes” granted to the National Power Corporation (NPC) under its charter includes both direct and indirect taxes. An exemption from “all taxes” excludes indirect taxes. without a clear showing of legislative intent. G. spare parts. It succinctly exempts NPC from “all forms of taxes. made even more specific the details of the exemption of NPC to cover. G. No.. The amendment under Republic Act No. P. G.ââ17. viz: It may be so that in Maceda vs. be construed as including indirect taxes. (Philippine Geothermal.. Macaraig. and if an exemption is found to exist. 197 SCRA 771. 2005.. it must not be . No. Commissioner of Internal Revenue. regular equipment and aircraft stores introduced into. a designated airline of the other Contracting Party and intended solely for use in the operation of the agreed services shall. Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. conventions. not Silkair. The proper party to question. 140230. [Philippine Acetylene Co.which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect taxes. v. 197 SCRA 771. Petron Corporation. In Commissioner of Internal Revenue v. both direct and indirect taxes on all petroleum products used in its operation. 88291. 127 Phil. 938 [NPC’s amended charter] amended the tax exemption by simplifying the same law in general terms. July 29. Presidential Decree No. 478 SCRA 61 the Supreme Court clarified the ruling in Maceda v. Philippine Long Distance Telephone Company. duties. 1991. 6395 enumerated the details covered by NPC’s exemption..R. with the exception of charges corresponding to the service performed. Macaraig. 470 (1967)] b) Silkair could not seek refuge under Maceda v. The materials referred to above may be required to be kept under customs supervision and control. Jr. 154028. 465 SCRA 308. or taken on board aircraft in the territory of one Contracting party by. Ltd. Inc. Macaraig. No. lubricants. among others. 2005. That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers. the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser. Inc. like NPC’s charter. the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. however. December 15. Commissioner of Internal Revenue.R. even when these supplies are to be used on the parts of the journey performed over the territory of the Contracting Party in which they are introduced into or taken on board. is so couched as to include indirect tax from the exemption.” Silkair likewise argues that it is exempt from indirect taxes because the Air Transport Agreement between RP and Singapore grants exemption “from the same customs duties. fees…” The use of the phrase “all forms” of taxes demonstrates the intention of the law to give NPC all the tax exemptions it has been enjoying before. No.. Silkair (Singapore) PTE. Even if Petron Corporation passed on to Silkair the burden of the tax. entities or agencies” Silkair further anchors its claim on Article 4(2) of the Air Transport Agreement between the Government of the Republic of the Philippines and the Government of the Republic of Singapore (Air Transport Agreement between RP and Singapore) which reads: “Fuel. which it uses for its operations. 88291. Subsequently. 135 of the NIRC of 1997 which provides that petroleum products are exempt from excise taxes when sold to “Exempt entities or agencies covered by tax treaties. Macaraig. 1991. Jr. 461.. and other international agreements for their use and consumption: Provided. 380. Jr. inspection fees and other duties or taxes imposed in the territory of the first Contracting Party. purchased aviation gas from Petron Corporation. or seek a refund of.R. v. or on behalf of. Is Silkair entitled to the tax refund or credit it seeks? Reason out your answer. It now claims for refund or tax credit for the excise taxes it paid claiming that it is exempt from the payment of excise taxes under the provisions of Sec. Thus. The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore cannot. is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore. On the other hand taxation is an act of sovereign. b) Special or regulatory – imposed primarily for the regulation of useful or non-useful occupation or enterprises and secondarily only for the raising of public funds.. Only the legislature can exercise the power of taxes unless the same is delegated to some other governmental body by the constitution or through a law which does not violate any provision of the constitution. BASIS: The lifeblood theory. et al. d) A tax may be imposed. The revenues collected from taxation should be devoted to a public purpose. g) Private persons may be benefited but such benefit should be merely incidental as its main object is the benefit of the community in general. c) Territoriality. Purpose for the limitations on the power of taxation. REASON: It is inherent in the power to tax that the legislature is free to select the subjects of taxation. e) Public purpose continually expanding. c) An individual taxpayer need not derive direct benefits from the tax. v. REASON: The paramount consideration is the welfare of the greater portion of the population. An alternative meaning is that tax proceeds should be utilized only to attain the objectives of government. (Silkair (Singapore) PTE.. 1047) . not so much for revenue purposes.enlarged by construction. The limitations also serve as a standard to measure the validity of a tax law or the act of a taxing authority. b) No improper delegation of legislative authority to tax. f) Tax revenue must not be used for purely private purposes or for the exclusive benefit of private persons. G. ââ 2. What are the principles to consider in the determination of whether tax revenues are devoted for a public purpose? SUGGESTED ANSWER: a) The tax revenues are for a public purpose if utilized for the benefit of the community in general. No. Areas formerly left to private initiative now lose their boundaries and may be undertaken by the government if it is to meet the increasing social challenges of the times. LIMITATIONS OR RESTRICTIONS ON THE POWER 1. The inherent and constitutional limitations to the power of taxation are safeguards which would prevent abuse in the exercise of this otherwise unlimited and plenary power. v. INHERENT LIMITATIONS ââ 1. Municipality of Meycauayan. fiscal or revenue – imposed for the purpose of raising public funds for the service of the government. the power should be imposed upon equals out of respect. i) There is a presumption of public purpose even if the tax law does not specifically provide for its purpose. A violation of the limitations serves to invalidate a tax law or act in the exercise of the power to tax. This would still be for a public purpose.R. h) Determined at the time of enactment of tax law and not at the time of implementation.. 94 Phil. Thus. but under police power for the general welfare of the community. 2008) â 18. Commissioner of Internal Revenue. b) Inequalities resulting from the singling out of one particular class for taxation or exemption infringe no constitutional limitation. Some authorities include no double taxation. 173594. The taxing power should be exercised only within territorial boundaries of the taxing authority. What are the inherent limitations on the power of taxation? SUGGESTED ANSWERS: a) Public purpose. What are the different kinds of taxes classified as to purpose? SUGGESTED ANSWER: a) General. d) Recognition of government exemptions. February 6. and e) Observance of the principle of comity. (Santos & Co. Comity is the respect accorded by nations to each other because they are equals. Ltd. and if at all. Requisites for taxpayers. Romulo. (Commissioner of Internal Revenue v. 140835. (Automotive Industry Workers Alliance (AIWA). President Gloria MacapagalArroyo. April 16. It is. 252) ââ 4. et al.etc. et al. 2007. 741) . Enriquez. (Abaya v. 1993. R. 741) For voters. 337 SCRA 733.. 2005) or employees who are going to be demoted. (Automotive Industry Workers Alliance (AIWA). R. supra) 3. the sustained growth of which is one of the imperatives of economic growth. there must be a showing that the issues raised are of transcendental importance which must be settled early. 2006) b) For taxpayers. namely. (Philippine Coconut Producers Federation. 171396. January 18.et al. can claim any injury from the alleged executive encroachment of the legislative function to amend. 140835. therefore. President Gloria Macapagal-Arroyo. or that public money is being deflected to any improper purpose. et al.etc. No. Minute Resolution) A taxpayer’s suit is properly brought only when there is an exercise of the spending or taxing power of Congress. SUGGESTED ANSWER: a) In general. Ebdane.. For legislators. but also of export earnings. No. R. January 18. Decide with reason. . such as for example employees who would find themselves subject to disciplinary powers that may be imposed under the questioned Executive Order as they have a direct and specific interest in raising the substantive issue therein (Automotive Industry Workers Alliance (AIWA).. et al. Inc. et al. Some of the manufacturers of coconut oil challenge the validity of the law. there must be a showing of obvious interest in the validity of the election law in question. 157509. That public money is being deflected to any improper purpose (Pascual v. 110 Phil. G. August 14. (David. .. 2006) c) d) e) 5. the state’s concern to make it a strong and secure source not only of the livelihood of the significant segment of the population. and therefore. (Cocofed v.et al. only Congress.. etc... concerned citizens. SUGGESTED ANSWER: a) Only those who shall be directly affected by such executive encroachment. G. etc. G.etc. contending that the tax is to be used for a private purpose. the case should involve constitutional issues.. No. v. there must be a claim that the official action complained of infringes upon their prerogatives as legislators.j) Public use is no longer confined to the traditional notion of use by the public but held synonymous with public interest. 337 SCRA 733. G. No. May 3. G. G. G. For concerned citizens. v. the proceeds of which are to be used exclusively for the protection and promotion of the coconut industry. It cannot be denied that the coconut industry is one of the major industries supporting the national economy. 392 U. R. Garcia v. (David. Narvasa. etc. and public convenience. public welfare.” (Flast v. citing Gonzales v. Romulo. voters or legislators to have locus standi to sue. there must be a showing: 1.. No. etc.. 83) 2. Jr. Cohen.. b) Moreover. Presidential Commission on Good Government. Secretary of Public Works. R. the law violates the rule that public revenues shall not be appropriated for anything but a public purpose. to improve the working conditions in coconut mills and to conduct research on the use of coconut oil for motor fuel. SUGGESTED ANSWER: The levy is for a public purpose. G. R. modify and/or repeal laws. et al. v. et al. Narvasa. or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law. v. No. Only those directly affected have locus standi to impugn the alleged encroachment by the executive department into the legislative domain of Congress. 2000. public benefit.. 159647. 167919.R. Central Luzon Drug Corporation. 33) or a claim of illegal disbursement of public funds or that the tax measure is unconstitutional. G. R. 112655 December 9. (David. That tax money is “being extracted and spent in violation of specific constitutional protections against abuses of legislative power. May 3.. 178 SCRA 236. 157509. A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed. No. 2005) ââ 3.. 171396. 2005 citing Gonzales v. supra.R. February 14. August 14.S.2000. A law was enacted imposing a tax on manufacturers of coconut oil. No. No. transferred or otherwise affected by any personnel action subject o the rule on exhaustion of administrative remedies. G. There is no undue delegation of legislative power but only of the discretion as to the execution of the law.168056.6. etc. who must do it. No. 168056. 2005]. b) A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed. This is constitutionally permissible. R. 56) 10. In the above case the Secretary of Finance becomes merely the agent of the legislative department. No. The power to tax is no longer vested exclusively on Congress.” (People v. the basic . 2007) â 7. Ermita. The following are examples of instances where suits have been brought by parties who have not have been personally injured by the operation of a law or any other government act but by concerned citizens. R. No. raise the rate of value-added tax to twelve percent (12%) after any of the following conditions have been satisfied. Locus standi being merely a matter of procedure. (Abaya v. et al. The taxing power of local governments is limited in the sense that Congress can enact legislation granting tax exemptions. fees and other charges pursuant to Article X.) v. e) Delegation to administrative bodies [Abakada Guro Party List (Formerly AASJS). Batangas City. local legislative bodies are now given direct authority to levy taxes. to the interposition of the superior in cases of necessity. R. G. to determine and declare the even upon which its expressed will takes place. 9. Congress does not abdicate its functions or unduly delegate power when it describes what job must be done. (Batangas Power Corporation v. February 14. no longer merely by virtue of a valid delegation as before. Section 28 (2).” Was there an invalid delegation of legislative power? SUGGESTED ANSWER: No. April 28. 2005 and companion cases citing various cases]] 8. d) Delegation to the people at large. Vera. “is not regarded as a transfer of general legislative power. “(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or (ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%). according to immemorial practice. G. effective January 1. “Paradigm shift” from exclusive Congressional power to direct grant of taxing power to local legislative bodies.. No. but pursuant to direct authority conferred by Section 5. R. September 1. subject. The VAT law provides that. there is a requirement that the law is complete in all aspects so what is delegated is merely the implementation of the law or there exists sufficiently determinate standards to guide the delegate and prevent a total transference of the taxing power. 2003) Local government legislation.. or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law. 2004 citing National Power Corporation v. April 9.. Article X of the Constitution. or that public money is being deflected to any improper purpose. The President cannot set aside the findings of the Secretary of Finance. which is referred to as subordinate legislation. shall. but rather as the grant of authority to prescribe local regulations. Instances of proper delegation: When taxing power could be delegated: Exceptions to the rule on non-delegation: SUGGESTED ANSWER: a) Delegation of tariff powers by Congress to the President under the flexible tariff clause. and to ratify treaties which may contain tax exemption provisions subject to the concurrence by the Senate in the ratification made by the President. upon the recommendation of the Secretary of Finance. Ermita. In this instance. who is not under the conditions acting as the execute alter ego or subordinate. September 1. etc. While the system of local government taxation has changed with the onset of the 1987 Constitution. et al. and what is the scope of his authority. 149110. c) The delegation to the President of the Philippines to enter into executive agreements. [Abakada Guro Party List (etc.. 167919. G. Taxing power of the local government is limited. the President. . v. G. No. and companion case. 65 Phil. have been waived in certain instances where a party who is not personally injured may be allowed to bring suit. b) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution. R. City of Cabanatuan. Article VI of the Constitution. section 5 of the 1987 Constitution. 152675. taxpayers or voters who actually sue in the public interest: SUGGESTED ANSWER: a) Taxpayer’s suits to question contracts entered into by the national government or government-owned or controlled corporations allegedly in contravention of the law. Ebdane. the power of local government units to tax is still limited. et al. While the power to tax by local governments may be exercised by local legislative bodies. of course. 2006. 166408. G.R. these limitations must be “consistent with the basic policy of local autonomy. ABS-CBN Broadcasting Corporation. v. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. Inc. G. et al. is taxable only on income derived from sources within the Philippines. October 6. Marcos. G. d) An alien individual. the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons. March 6. Henceforth.. No.” (Quezon City. referring to Philippine Long Distance Telephone Company. What it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue.R. The Supreme Court in a series of cases has sustained the power of Congress to grant tax exemptions over and above the power of the local government’s delegated power to tax. City of Davao] âââ 13. No. v.. whether a resident or not of the Philippines. R. Reconciliation of the local government’s authority to tax and the Congressional general taxing power. Congress has the inherent power to tax.doctrine on local taxation remains essentially the same. “the power to tax is [still] primarily vested in the Congress.. v. Juliane a non-resident alien appointed as a commission agent by a domestic corporation with a sales commission of 10% all sales actually concluded and collected through her efforts. 162015. whether engaged or not in trade or business in the Philippines. Inc. doubts will be resolved in favor of municipal corporations. uniform within a locality. v. 680) 11. ABS-CBN Broadcasting Corporation. They no longer have to wait for a statutory grant of these powers. The local company withheld the amount of P107. She filed a claim for refund alleging that her sales commission is not taxable because the same was a compensation for her services rendered in Germany and therefore considered as income from sources outside the Philippines. It must be noted that Section 137 of the LGC does not prohibit grant of future exemptions. 2006. 484 SCRA 169 in turn referring to Mactan Cebu International Airport Authority. e) A domestic corporation is taxable on all income derived from sources within and without the Philippines. October 6. NIRC of 1997. “What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation. 120082. et al. 2008 citing City Government of Quezon City.” The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers. that taxes imposed by local government must be for a public purpose. 484 SCRA 169) 12. 2008 citing City Government of Quezon City. doubts must be resolved in favor of municipal corporations. however. It is understood. Bayan Telecommunications.R. No. No. in interpreting statutory provisions on municipal fiscal powers. must not be confiscatory. 162015. and f) A foreign corporation. No. et al. 23.. Is her contention correct? .” [Ibid. R. That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker. Bayan Telecommunications. 484 SCRA 16) “Indeed. March 6. March 6. October 6. G. to tax is prescribed by Section 151 in relation to Section 137 of the LGC which expressly provides that notwithstanding any exemption granted by any law or other special law. 2006.. 2006.R. v. v.000 from her sales commission and remitted the same to the BIR. 166408. Inc. G. R. No. ABS-CBN Broadcasting Corporation. (Quezon City. such as provinces and cities for example Quezon City. et al. SUGGESTED ANSWER: a) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines. 261 SCRA 667. et al. G.. Bayan Telecommunications. v. which includes the power to grant tax exemptions. September 11. Inc. c) An individual citizen of the Philippines who is working and deriving income abroad as an overseas contract worker is taxable only on income from sources within the Philippines: Provided. (Sec. is taxable only on income derived from sources within the Philippines. the power of local governments. b) A nonresident citizen is taxable only on income derived from sources within the Philippines. emphasis supplied) ââ14. the City or a province may impose a franchise tax. and must be within the jurisdiction of the local unit to pass. (PLDT) vs. et al. General principles of income taxation in the Philippines or the source rule of income taxation as provided in the NIRC of 1997..” (Quezon City. 2008 citing City Government of Quezon City. No. 1996. Moreover. On the other hand. pursuant to a declared national policy. Further amplification by Bernas of the local government’s power to tax. 166408. 162015. G. Obama Airlines. shall be transferred to General Co. G... Philippine Stamping Plant. Inc. cost of living and educational allowances of Larry’s dependents will be shouldered by Kuala Lumpur Manufacturing... a Philippine corporation. In 2009.. Thus. Before remitting the dividends to Ensite Ltd.. Baier-Nickel. Ltd. has an executive Larry who is a Filipino citizen. an Indonesian company which has a duly licensed Philippine branch. Inc.. while the other 50% plus housing. The ”sale of tickets” in the Philippines is the activity that determines whether such income is taxable in the Philippines. is a Canadian corporation not doing business in the Philippines. Since Philippine Stamping Plant. The salary of Larry will be shouldered 50% by Philippine Stamping Plant. seeks your advice as to whether it will subject the remittance to withholding tax. then the income did not originate from sources from within the Philippines.. and that title to the Philippine Stamping Plant. [Commissioner of Internal Revenue v. and Susanto Co. ââ 16. (Commissioner of Internal Revenue v. in Toronto Canada where stock certificates will be delivered. Larry will bring his family to reside in Malaysia and will lease out his residence in the Philippines. Philippine Stamping Plant. which has a duly licensed Philippine branch engage in trading activities in the Philippines. Inc. the flow of wealth should share the burden of supporting the government. Inc.. 2006) ââ 15. General Co. Inc. being a foreign corporation is to be taxed on its income derived from sources within the Philippines.. being a foreign corporation. seeks your advice as to whether or not it will subject the payments of the purchase price to withholding tax. Ensite. hence the dividends are considered as income from within. No. SUGGESTED ANSWER: Philippine Stamping Plant. or the place where the contract for service is entered into. Inc. It holds 40% of the shares of Philippine Stamping Plant. Ensite. 153793. Ltd.. should be subject to tax on its income from within. Since the activity of securing the sales were in Germany. or the place of payment. He will also be receiving rental income for the lease of his Philippine residence. has a subsidiary in Malaysia (Kuala Lumpur Manufacturing. subject to Philippine income taxation.. a Filipino-owned Philippine corporation.. Inc.) and will assign Larry for an indefinite period to work full time for Kuala Lumpur Manufacturing. Inc. will credit the 50% of Larry’s salary to his Philippine bank account. Considering that all the activities (sales) occurred within the Philippines. a foreign airline company which does not maintain any flight to and from the Philippines sold air tickets in the Philippines. being derived from labor or personal services rendered outside of the Philippines is considered as income from without. The important factor which determines the source of income of personal services is not the residence of the payor. through a general sales agent.. Are these salaries. ââ18. the flow of wealth proceeded from and occurred. Ensite Ltd.. group. Larry will sign the contract of employment in the Philippines. both outside the Philippines.. There is no need to discuss WT rates. subject to income taxes on the sale of the tickets ? SUGGESTED ANSWER: Yes. then he is to be taxed only on his income derived from within the Philippines such as the rentals on his Philippine residence. R. within the Philippine territory. Inc... 149 SCRA 395] Off-line air carriers having general sales agents in the Philippines are engaged in or doing business in the Philippines and their income from sales of passage documents here is income from within the Philippines. Ensite. August 29. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. Philippine Stamping Plant.. Inc.SUGGESTED ANSWER: Yes. but the place where the services were actually performed.. Focus your discussion on what is the issue. SUGGESTED ANSWER: The payments of the purchase price will be subject to withholding tax. Philippine Stamping Plant.. Ltd. Ensite. should subject the remittance to withholding tax. Due to worldwide restructuring of the Ensite Ltd. a) Is Obama. allowances and rentals subject to Philippine income tax? Explain briefly.. In consideration of such protection. Inc. relating to the carriage of passengers and cargo between two points. also owns 100% of the shares of Susanto Co. Explain your advice. ââ 17. Co... a Philippine corporation.S.. The source of income which is taxable is that “activity” which produced the income. The negotiations for the buy-out and the signing of the Agreement of Sale were all done in the Philippines. and are not reflected as assets of the Philippine branch. its shares of stock have obtained a business situs in the Philippines. enjoying the protection accorded by the Philippine Government. is a Philippine corporation. also invested directly in 40% of the shares of stock of Philippine Stamping Plant. Since Larry is an OCW. a Philippine company while the 60% is owned by Fred Corporation. is a Canadian corporation. and not on his income from without. if applicable.. The situs of the source of payments is the Philippines. the off-line air carrier . and Susanto Co. SUGGESTED ANSWER: The salaries and allowances of Larry. Philippine Stamping Plant. Ensite Co.. British Overseas Airways Corporation (BOAC). Inc. Inc. Ltd. Ltd. These shares are booked in the Head Office of Ensite.. Inc. decided to sell all its shares in Philippine Stamping Plant. The Agreement provides that the purchase price will be paid to Ensite Ltd’s bank account in the U. Ltd. the income is considered as income from within.. Inc. declared dividends to its stockholders. Ensite. Inc. a) No imprisonment for non-payment of a poll tax. h) Presidential power to grant reprieves. SUGGESTED ANSWER: No more. 3. 2010) 19. d) Religious freedom. G.. No improper delegation of legislative authority to tax. February 16. Pampanga. It is not subject to any income tax because the activity which generated the income (the sale of the tickets) was performed outside of the Philippines. 2. Commissioner of Internal Revenue. Airport at Clark. G. Nos. 149 SCRA 395] b) Supposing that Obama. cargo and mail originating from the Philippines in a continuous and uninterrupted flight. bound for Nairobi. c) Congress shall evolve a progressive system of taxation. but the Senate may propose and concur with amendments. cargo and mail originating from the Philippines in a continuous and uninterrupted flight. b) Taxation shall be uniform and equitable. irrespective of the place of sale or issue and the place of payment of the ticket or passage document. Inc. irrespective of the place of sale or issue and the place of payment of the ticket or passage document.liable for the 32% (now 30%) tax on its taxable income. This time Obama. commutations and pardons and remittal of fines and forfeiture after conviction by final judgment.” [NIRC of 1997. South Africa to the Philippines but returns to South Africa without any cargo or passengers.. Kenya ? Reason out your answer. and where the people have laid the power. c) Freedom of the press. Inc.. (GPB). . Bill should embrace only one subject expressed in the title thereof. b) Equal protection clause. sells tickets outside of the Philippines for passengers it carry from Gold City. Sec. 180356. planes from the Diosdado Macapagal Intl. British Overseas Airways Corporation (British Overseas Airways). (Commissioner of Internal Revenue v.R. 180356. 1987. excess baggage. Inc. L-65773-74. Three (3) readings on three separate days. income is included in GPB. April 30. based on the principle that taxes are a grant of the people who are taxed. Sec. there it must remain and be exercised. 167274-75. Fortune Tobacco Corporation. 2008) CONSTITUTIONAL LIMITATIONS 1. It is not subject to the carrier’s tax based on gross Philippine billings because there were no lifts that originated from the Philippines. No. 2. “Gross Philippine Billings” refers to the amount of gross revenue derived from carriage of persons.” [NIRC of 1997. Printed copies in final form distributed three (3) days before passage. (South African Airways v. revenue or tariff bills shall originate exclusively in the House of Representatives. July 21. The specific or direct constitutional limitation. “Gross Philippine Billings” refers to the amount of gross revenue derived from carriage of persons. Angeles. 28(A)(3)(a)] c) Would your answer be the same if Obama. would be subject to the carrier’s tax based on Gross Philippine Billings. G.R. as long as the uplifts of passengers and cargo occur from the Philippines. e) No taking of private property without just compensation. No. [South African Airways v. such power being inherently legislative. 3. d) All appropriation. Would it then be subject to any Philippine tax on such sales? SUGGESTED ANSWER: It would not be subject to any tax. excess baggage. Inc. f) Non-impairment clause. and the grant must be made by the immediate representatives of the people. The general or indirect constitutional limitations as well as the specific or direct constitutional limitations. g) Law-making process: 1. The general or indirect constitutional limitations on the power of taxation are: a) Due process clause. 2010 citing Commissioner of Internal Revenue v. Commissioner of Internal Revenue. 28(A)(3)(a)] The place of sale is irrelevant. sold tickets outside of the Philippines for travelers who are going to picked up by Obama. Constitutional limitations on the power of taxation . February 16. The power to tax is inherent in the State. No. R. that they committed identical acts for which they were charged with the violation of the same provisions of the NIRC. to levy taxes. (Tiu. assessment or toll or the legality of any penalty imposed in relation to the above. through a law 3. or tariff bill. etc. Equal protection does not demand absolute equality. and that they presented similar arguments and evidence in their defense . impose. 2008) It is imperative to duly establish that the one invoking equal protection and the person to which she is being compared were indeed similarly situated. buildings and improvements of all kinds actually. and all lands. that it must be germane to the purpose of the law. 173176. (Santos. . within the framework of national development program. g) Tax exemption of charitable institutions. et al. n) Tax exemption of all revenues and assets of non-stock. No. 127410. h) No tax exemption without the concurrence of majority vote of all members of Congress. etc. government orphanage or leprosarium.. Requisites for valid classification. 2008] 7. R. mosques.The President shall have the power to veto any particular item or items in an appropriation. The recognized tests are: a) b) c) The traditional (or rational basis) test. fees and other charges subject to guidelines and limitations imposed by Congress consistent with the basic policy of local autonomy. et al.. If the groupings are characterized by substantial distinctions that make real differences. directly and exclusively for educational purposes. (Santos v. R. [ABAKADA Guro Party List. penal institutions. balance if any. 5. j) Money collected on tax levied for a special purpose to be used only for such purpose.. directly and exclusively used for religious. 166715. No. f) Delegated power of the President to impose tariff rates. Tests to determine validity of classification. et al. to general funds. Purisima.e. All that is required of a valid classification is that it be reasonable. Court of Appeals.yet. tonnage and wharfage dues: 1. People. G. churches. supra) 8. which means that: a) b) c) d) the classification should be based on substantial distinctions which make for real differences. No. revenue. o) Tax exemption of all revenues and assets of proprietary or cooperative educational institutions subject to limitations provided by law including restrictions on dividends and provisions for reinvestment of profits. charitable or educational purposes. subject to Congressional limits and restrictions 4. they were treated differently. G.. v. but the veto shall not affect the item or items to which he does not object.. and that it must apply equally to each member of the class. Equal protection of the law clause is subject to reasonable classification. under like circumstances and conditions. import and export quotas. G. Delegation by Congress 2. non-profit educational institutions used actually. e) The standard is satisfied if the classification or distinction is based on a reasonable foundation or rational basis and is not palpably arbitrary.R. i) No use of public money or property for religious purposes except if priest is assigned to the armed forces. k) The Supreme Court's power to review judgments or orders of lower courts in all cases involving the legality of any tax. et al. p) Tax exemption of grants. January 20. The United States Supreme Court has established different tests to determine the validity of a classification and compliance with the equal protection clause. 1999) ââ 6. i. It merely requires that all persons shall be treated alike. v. m) Automatic release of local government's just share in national taxes. The intermediate level of scrutiny (or quasi-suspect class) test. that it must not be limited to existing conditions only. August 26. The strict scrutiny (or compelling interest) test. both as to the privileges conferred and liabilities enforced. donations or contributions used actually. The classification must also be germane to the purpose of the law and must apply to all those belonging to the same class. August 14. l) Authority of local government units to create their own sources of revenue.. parsonages and convents appurtenant thereto. endowments. directly and exclusively for educational purposes subject to conditions prescribed by law. one class may be treated and regulated differently from another. . The municipal attorney rendered an opinion that Benjie cannot be reimbursed because the ordinance did not provide for such reimbursement. "inequalities which result from a singling out of one particular class of taxation. but not widowers. 190) Thus. Shevin. There is a valid classification between those who already paid their taxes and those who have not. etc. the taxing authority has the prerogative to select the subjects and objects of taxation. Thus. 2008) 11... There is no class legislation because there is no violation of the equal protection suit. 202) 11. 10.S.” but neither are they judged by the traditional or rational basis test. 449 U. Benjie files suit to declare the ordinance void on the ground that it is a class legislation. et al. R. 429 U. by itself. a state law granting a property tax exemption to widows. 61. 166) 10. customs duties. Moreover. infringe no constitutional limitation. Will his suit prosper ? Explain your answer briefly. Purisima. Equality and uniformity of taxation may mean the same as equal protection. Since the subject of the law is the revenue. Natural Carboinic Gas Co. Hence. (Kahn v. 457 U. is not. The complainant must prove that the classification is “invidous. Santos.S. and the condonation of all penalties on fines resulting from late payment. SUGGESTED ANSWER: No. Intentional discriminations against members of a quasi-suspect class violate equal protection unless they are substantially related to important government objectives. McGowan v. (ABAKADA Guro Party List. A classification is necessary when it is narrowly drawn so that no alternative. however.S. a denial of the equal protection of the laws. The equal protection clause recognizes a valid classification.” or ”capricious. (Lindsley v. (Craig v. Where the official action purports to be in conformity to the statutory classification." (Commissioner of Internal Revenue. United States Railroad Retirement Board v. 13. Classification based on gender or legitimacy are not “suspect. (Plyler v. has been held valid for it furthers the state policy of cushioning the financial impact of spousal loss upon the sex for whom that loss usually imposes a heavier burden.” otherwise the classification is presumed to be valid. 351) 12. or exemption. Benjie demands that he be refunded an amount equivalent to one-half of the real property taxes he paid. et al. v.S. The rewards law to tax collectors does not violate equal protection. 416 U. such substantial distinction is germane and intimately related to the purpose of the law. It is inherent in the power to tax that the State be free to select the subjects of taxation.. including granting a 50% discount in the payment of unpaid real estate taxes. it was held that denial of free public education to the children of illegal aliens imposes an enormous and lasting burden based on a status over which the children have no control is violative of equal protection because there is no showing that such denial furthers a “substantial” state goal.9. 166715. Benjie is a law-abiding citizen who pays his real estate taxes promptly. less burdensome means is available to accomplish the state interest. Maryland. et al.S. The strict scrutiny (or compelling interest) test used in order to determine the validity of the classification. fees and charges. that is. 220 U. 277 SCRA 617) ââ 9. Doe. The prosecution of one guilty person while others equally guilty are not prosecuted.” “wholly arbitrary. In such a case. Due to a series of typhoons and adverse economic conditions. it’s expressed public policy is the optimization of the revenue-generation capability and collection of the BIR and the BOC. 420.S. the terms would mean that all subjects and objects of taxation which are similarly situated shall be subject to the same burdens and granted the same privileges without any discrimination whatsoever.. No. Fritz. 366 U. G. August 14. Government regulation that intentionally discriminates against a “suspect class” such as racial or ethnic minorities. etc. Arguing that the ordinance rewards delinquent tax payers and discriminates against prompt ones.generation capability and collection of the BIR and the BOC. Boren. an . the classification and treatment accorded to the BIR and the BOC under RA 9335 fully satisfy the demands of equal protection. Indubitably.. the incentives and/or sanctions provided in the law should logically pertain to the said agencies. and it has been repeatedly held that. a classification that has a reasonable foundation or rational basis and not arbitrary. the law concerns only the BIR and the BOC because they have the common distinct primary function of generating revenues for the national government through the collection of taxes. The intermediate level of scrutiny (or quasi-suspect class) test used in order to determine the validity of he classification. The traditional (or rational basis) test used in order to determine the validity of classification. Furthermore. With respect to RA 9335. is subject to strict scrutiny and considered to violate the equal protection clause unless found necessary to promote a compelling state interest. an ordinance is passed by Soliman City granting a 50% discount for payment of unpaid real estate taxes for the preceding year and the condonation of all penalties on fines resulting from the late payment. The classification is valid if it is rationally related to a constitutionally permissible state interest. v. It would be unconscionable. (Smart Communications. or an increased tax on an old one. since these are being imposed: (1) on the same subject matter – the privilege of doing business in the City of Manila. Sec. 11) It is enough to say that the parties to a contract cannot. No. (The City of Manila. When withdrawal of a tax exemption impairs the obligation of contracts. is not without more a denial of the equal protection of the laws. Secretary of Finance. 181845. R. etc. v. (Santos v. July 14. G.. Secretary of Finance. (Smart Communications. 143867. to excuse a defendant guilty of murder because others have murdered with impunity. 2008) NOTES AND COMMENTS: Philippine Long Distance Telephone Company. 143867. et al. within the meaning of the constitution. (2) for the same purpose – to make persons conducting business within the City of Manila contribute to city revenues. Inc. et al. etc. G. if the failure of prosecutors to enforce the criminal laws as to some persons should be converted into a defense for others charged with crime. 2008) citing Tolentino v. Illustration of double taxation in local taxation. Likewise. The Contract Clause has never been thought as a limitation on the exercise of the State’s power of taxation save only where a tax exemption has been granted for a valid consideration. A lawful tax on a new subject. Art. This may appear on the face of the action taken with respect to a particular class or person. there is indeed double taxation if Coca-Cola is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 2008 is explicit in its holding that Smart is not entitled to a tax exemption. v. Inc.. R.. No. The City of Davao. G. No. R. For not only are existing laws read into contracts in order to fix obligations as between parties.. et al. et al. G. 155491. (1987 Constitution. The City of Davao.. and (6) of the same kind or character – a local business tax imposed on gross sales or receipts of the business.. 109791. fetter the exercise of the taxing power of the State. for instance.. August 26. etc. (4) within the same taxing jurisdiction – within the territorial jurisdiction of the City of Manila. (5) for the same taxing periods – per calendar year. The withdrawal of a tax exemption should not be construed as prohibiting future grants of exemption from all taxes. et al. v. August 25. G. August 22. (Philippine Long Distance Telephone Company. No. City of Davao. The primary reason for the withdrawal of tax exemption privileges granted to government owned and controlled corporations and all other units of government was that such privilege resulted to serious tax base erosion and distortions in the tax treatment of similarly situated enterprises. Coca-Cola Bottlers Philippines. through the exercise of prophetic discernment. resulting in its unequal application to those who are entitled to be treated alike. People. 2001 made the observation that since Smart’s franchise was granted after the effectivity of the Local Government Code that its tax exemption privilege was reinstated. No. People. et al. City of Davao. G. September 16. No. August 22. XII. v. 7794. (3) by the same taxing authority – City of Manila. 173176. The unlawful administration by officers of a statute fair on its face. Inc. 173176. fiscal or otherwise.... 685) The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others) 18. does not interfere with a contract or impairs its obligation. No. Equal protection should not be used to protect commission of crime. is not a denial of equal protection unless there is shown to be present in it an element of intentional or purposeful discrimination... hence resulting in the need for these entities to share in the requirements of development. September 16. (Tolentino v. However. â 17. et al. 2003) . G. R. No. R. or it may only be shown by extrinsic evidence showing a discriminatory design over another not to be inferred from the action itself. R. (Philippine Ports Authority v. 2008) 12. G. R. Inc. 115455. 235 SCRA 630. A legislative franchise is granted with the express condition that it is subject to amendment. 2009) 14. Inc. and companion cases. 155491. G. alteration. et al.. City of Iloilo. G. 1994. August 4. Smart Communications. The policy of protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace and good order of society. 2001) 16.. by paying the taxes and other charges due them. Tax exemptions in franchises are always subject to withdrawal. R. the result would be that the trial of the district attorney for nonfeasance would become an issue in the trial of many persons charged with heinous crimes and the enforcement of law would suffer a complete breakdown. v. August 26. No.erroneous or mistaken performance of the statutory duty. or repeal.. although a violation of the statute. While all persons accused of crime are to be treated on a basis of equality before the law. Inc. R. etc. but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. R. The City of Davao. No. et al. etc. 155491. it does not follow that they are to be protected in the commission of crime. September 16. (Santos v. v. 2008) â 13. 235 SCRA 630) 15. Congress did not expressly exempt Smart from local taxes. the uncertainty in the “in lieu of all taxes” provision should be construed against ABS-CBN." Also.. Inc. The clause “in lieu of all taxes” does not pertain to VAT or any other tax. It does not expressly provide what kind of taxes ABS-CBN is exempted from. “In lieu of all taxes” refers to national internal revenue taxes and not to local taxes. whether municipal. Carpio in a similar case involving a demand for exemption from local franchise taxes: [T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes. G. The City of Davao.19. October 6. et al. The “in lieu of all taxes” clause applies only to national internal revenue taxes and not to local taxes. As appropriately pointed out in the separate opinion of Justice Antonio T. from which the grantee is hereby expressly exempted. et al. municipal. National Power Corporation (NPC) is of the insistence that it is not subject to the payment of franchises taxes imposed by the Province of Isabela because all of its shares are owned by the Republic of the Philippines. to impose and collect a local franchise tax because the Local Government Code has withdrawn all tax exemptions previously enjoyed by all persons and authorized local government units to impose a tax on business enjoying a franchise tax notwithstanding the grant of tax exemption to them. established or collected by any authority whatsoever. It cannot apply when what is paid is a tax other than a franchise tax. No. Since the franchise tax on the broadcasting companies with yearly gross receipts exceeding ten million pesos has been abolished. nature or description levied. “In lieu of all taxes” in the franchise of ABS-CBN does not exempt it from local franchise taxes. 22.. 143867. 2001. 571. the same paragraph declares that the tax returns "shall be subject to audit by the Bureau of Internal Revenue. September 16. et al. etc. Inc. G. v. rendered inoperative." Moreover. The "in lieu of all taxes" clause does not apply to local taxes.. v. 155491. The City of Davao. October 6. Inc. is that the "in lieu of all taxes" clause in Smart's franchise refers only to national and not to local taxes. G. other than income tax.. et al. However. 594 (2003)] NOTES AND COMMENTS: The author opines that the above finds application to all telecommunications companies. (Quezon City. provincial or national. et al." Nothing is mentioned in Section 9 about local taxes. etc.. R. 2008) NOTES AND COMMENTS: This is practically the same holding in an earlier case involving another telecommunications company Smart Communications. The proviso in the first paragraph of Section 9 of Smart's franchise states that the grantee shall "continue to be liable for income taxes payable under Title II of the National Internal Revenue Code. 2008) . upheld the authority of the City of Davao. 447 Phil. The right to exemption from local franchise tax must be clearly established and cannot be made out of inference or implications but must be laid beyond reasonable doubt. imposed under the National Internal Revenue Code. G. ABS-CBN Broadcasting Corporation..) â 21.. It is thus. an instrumentality of the National Government which is exempt from local taxation. 2008. It is not clear whether the exemption would include both local. v. No. (Emphasis supplied). the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code. (Quezon City. No. the "in lieu of all taxes" clause does not apply to income tax. as follows: x x x in lieu of any and all taxes of any kind. ABS-CBN Broadcasting Corporation. No. City of Davao. If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to local taxes. Verily. v. 166408. The “in lieu of all taxes” clause in the franchise of ABS-CBN has become functus officio with the abolition of the franchise tax on broadcasting companies with yearly gross receipts exceeding Ten Million Pesos. 2008 citing Philippine Long Distance Telephone Company. Congress used the "in lieu of all taxes" clause only in reference to national internal revenue taxes. v. R. and national tax. The clear intent is for the "in lieu of all taxes" clause to apply only to taxes under the National Internal Revenue Code and not to local taxes. ABS-CBN has the burden to prove that it is in fact covered by the exemption so claimed but has failed to do so. under the rule on strict construction of tax exemptions. Even with respect to national internal revenue taxes. Congress would have expressly mentioned the exemption from municipal and provincial taxes. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others. x x x. [Smart Communications. 155491. 166408. Inc. The only interpretation. R. 20. G. City of Davao. a local government unit. Philippine Long Distance Telephone Company. R. No. As such it is not a private corporation engaged in “business enjoying franchise” Is such contention meritorious? SUGGESTED ANSWER: No... August 22. city or provincial. etc. v. R. September 16. Whether the “in lieu of all taxes provision” would include exemption from local tax is not unequivocal. the “in lieu of all taxes” clause has now become functus officio. Congress could have used the language in Section 9(b) of Clavecilla's old franchise. If any of the elements are absent then there is indirect duplicate taxation which is not prohibited by the constitution. September 16. Tax credit generally refers to an amount that is subtracted directly from one’s total tax liability. (Commissioner of Internal Revenue v. a) b) c) Tax treaties which exempts foreign nationals from local taxation and local nationals from foreign taxation under the principle of reciprocity. results to discrimination among subjects and objects that are similarly situated. Central Luzon Drug Corporation. June 25. Johnson and Son. Central Luzon Drug Corporation. or a deduction from what is owned. which is prohibited under the constitution because it violates the concept of equal protection. Inc. etc. April 15. Subject or object is taxed twice 2. S. it may mean direct duplicate taxation. (Commissioner of Internal Revenue v. during the same taxable period b) Taxing all of the subjects or objects for the first time without taxing all of them for the second time. 2005) â 30. 159647. NOTES AND COMMENTS: a) Presence of the 2nd element violates the equal protection clause. deleting entirely the no pass-on provisions found in both the House and Senate Bills. When an item of income is taxed in the Philippines and the same income is taxed in another country. Elements of direct duplicate taxation: a) Same 1.. v.C. this means taxing the same subject or object twice during the same taxable period. 28.. R. hence violative of the equal protection clause. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others. et al. G. A tax deduction reduces the income that is subject to tax in order to arrive at taxable income. an allowance against the tax itself.NOTES AND COMMENTS: This is practically the same holding in an earlier case involving another telecommunications company. Double taxation in its generic sense. 26. G. by the same taxing authority. or an amount that is allowed by law to reduce income prior to the application of the tax rate to compute the amount of tax which is due. 155491. In its particular sense. 25. etc. because it would violate the equal protection clause of the constitution. If only the 1st element is present. April 15. uniformity and equitableness of taxation. Methods for avoiding double taxation (indirect duplicate taxation). (Commissioner of Internal Revenue v. Smart Communications. without taxing all for the second time. Indirect duplicate taxation is not anathematized by the above constitutional limitations. R. Inc. including –whenever applicable – the income tax that is determined after applying the corresponding tax rates to taxable income.. R. taxing the same subject or object twice. A tax deduction is defined as a subtraction fro income for tax purposes.) ââ 23. for the same taxing purpose 4. A tax credit reduces the tax due. inserting the provision imposing a 70% limit on the amount of input tax to be credited against . Allowing foreign taxes as a deduction from gross income. et al. by the same taxing authority 3. 1999) ââ 27. The City of Davao.R. there is no violation of the equal protection clause because all subjects and objects that are similarly situated are subject to the same burdens and granted the same privileges without any discrimination whatsoever.. Double taxation a valid defense against the legality of a tax measure if the double taxation is direct duplicate taxation. G.. The petitioners allege that the R-VAT law is constitutional because the Bicameral Conference Committed has exceeded its authority in including provisions which were never included in the versions of both the House and Senate such as inserting the stand-by authority to the President to increase the VAT from 10% to 12%. taxing all of the subjects and objects for the first time. 159647. ââ 24. this would be known as international juridical double taxation which is the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical grounds. 127105. 2008. G. b) The presence of the 2nd element. No. Tax credits where foreign taxes are allowed as deductions from local taxes that are due to be paid. 2005) 29. No. No. No. Distinguish tax from debt. etc. in consequence of Articles 1278 and 1279 of the Civil Code.) v. Are the contentions of such weight as to constitute grave abuse of discretion which may invalidate the law ? Explain briefly. where the local government and the taxpayer are in their own right reciprocally debtors and creditors of each other. (Republic v. b) Taxes are not contractual obligations but arise out of a duty to. et al. 168056. contract or judgment as is allowed to be setoff.. including those which are cooperatively owned. et al. September 1. Compensation takes place by operation of law. Ermita. 4 SCRA 622) c) Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt. The Bicameral Conference Committee merely exercised the judicially recognized long-standing legislative practice of giving said conference committee ample latitude for compromising differences between the Senate and the House. 2005 and companion cases] 31. and including the amendments introduced only by Senate Bill No. other the exemptions granted to cooperatives. TAX Basis Failure to Pay Mode of Payment Assignability Payment Interest Authority Prescription based on law may result in imprisonment generally payable in money no imprisonment payable in money. OTHER CONCEPTS ââ1. R. Sales taxes are also regressive. No. (Domingo v. and that the debts are both due and demandable. [Abakada Guro Party List (etc.. demand. G. 235 SCRA 630] 32. 168056. Garlitos. sales taxes which perhaps are the oldest form of indirect taxes. would have been prohibited with the proclamation of the constitutional provision. Ermita. 2. 2005 and companion cases citing Tolentino v. Otherwise. 115455. The VAT while regressive is NOT violative of the mandate to evolve a progressive system of taxation. [Abakada Guro Party List (etc.. All revenues and assets of non-stock. G. 8 SCRA 443) ââ 3. directly and exclusively used for educational purposes shall be exempt from taxation. No... September 1. There was no grave abuse of discretion because all the changes and modifications made by the Bicameral Conference Committee were germane to subjects of the provisions referred to it for reconciliation. et al. 33. Secretary of Finance. . G. and are the positive acts of government. Revenues and assets of proprietary educational institutions. there was a violation of the constitutional mandate that revenue bills shall originate exclusively from the House of Representatives. etc. SUGGESTED ANSWER: No. R.the output tax. SUGGESTED ANSWER: As a general rule. non-profit educational institutions that are actually. Mambulao Lumber Co. 1950 regarding other kinds of taxes in addition to the value-added tax. There is no law at the present which grants exemptions.. there could be no compensation or set-off between a tax and a debt for the following reasons: a) Lifeblood theory. to the making and enforcing of which the personal consent of the individual taxpayer is not required.) v. property or service DEBT based on contract or judgment not assignable assignable unless it becomes a debt is not subject to compensation or set-off may be a subject does not draw interest unless delinquent imposed by public authority Prescriptive periods for tax under NIRC draws interest if stipulated or delayed can be imposed by private individuals debt under the Civil Code WARNING: Do not use the above arrangement in answering Bar questions. May there be compensation or set-off between a national tax and a debt? Reason out your answer. may be entitled to exemptions subject to limitations provided by law including restrictions on dividends and provisions for reinvestments. Do you agree ? The mandate to Congress is not to prescribe but to evolve a progressive system of taxation. . R. August 25. Thus. No. 1994. 453 SCRA 668) 8. (Quezon City. The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it does so clearly. In case of doubt. et al. tax laws must be construed strictly against the State and liberally in favor of the taxpayer because taxes. is not the similar doctrine as that applied to tax exemptions. Inc. No. Garlitos. Garlitos. 8 SCRA 443. fairness and equality of . Compensation takes place by operation of law under Art. a case decided by the Supreme Court whose factual antecedents are similar to the problem. In answering the question of who is subject to tax statutes. (South African Airways v. Accordingly. 2005. September 11. No. (Lincoln Philippine Life Insurance Company. 1996. taxation is the rule. No. February 16. 2008 citing CIR v. 8 SCRA 443) The Supreme Court upheld the validity of a set-off between the taxpayer and the government. No. statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority. The parties in this case are mutually debtors and creditors of each other. 8 SCRA 443) Compensation takes place by operation of law. R. (Ibid. The basis for the rule on strict construction to statutory provisions granting tax exemptions or deductions is to minimize differential treatment and foster impartiality. (Commissioner of Internal Revenue v. p. 120082. the BIR’s obligation to refund or off-set arises from the moment the tax was paid. 1279 of the Civil Code. Intermediate Appellate Court) ââ4. 2003 ed. Court of Appeals. 680) The burden of proof rests upon the party claiming the exemption to prove that it is in fact covered by the exemption so claimed.R. as burdens which must be endured by the taxpayer. compensation takes place by operation of law. ABS-CBN Broadcasting Corporation. v.. the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. This is in consequence of Article 1278 and 1279 of the Civil Code. Inc.. Inc 172 SCRA 364) While judgment should be rendered in favor of Republic for unpaid taxes. 172 SCRA 623) b) c) d) e) ââ 5. Ericta. 330-331 (1997)] As burdens. citing CIR v. 1200 in relation to Arts. and unambiguously. Upon receiving an assessment for municipal sales taxes from the Municipal Treasurer. G. Garlitos. demandable and fully liquidated. May the Municipal Treasurer validly accept the assignment? Why? SUGGESTED ANSWER: Yes. the government admitted the fact of over-payment.E.. v. G. Esso Standard Eastern. (Republic v. March 18. Such was the holding in Domingo v. Interpretation in the imposition of taxes. Thus. A tax cannot be imposed without clear and express words for that purpose. 99) 7. it is basic that in case of doubt. Philippine American Accident Insurance Company. October 6.. it is correct to say that the offsetting of a taxpayer’s tax refund with its alleged tax deficiency is unavailing under Art. G. where the government and the taxpayer are in their own right reciprocally debtors and creditors of each other. v. Statutory Construction. Gilbert obtained a judgment for a sum of money against the municipality of Camiling. [Commissioner of Internal Revenue v. etc.. Fortune Tobacco Corporation. July 21. expressly.. taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax laws. the claims of the taxpayers therein were certain and liquidated. a) Where both claims already become overdue and demandable as well as fully liquidated. judgment ought at the same time to issue for Sampaguita Pictures commanding payment to the latter by the Republic of the value of the backpay certificates which the Republic received. R. 6. In both cases. Otherwise stated. A claim of tax exemption must be clearly shown and based on language in law too plain to be mistaken. (Domingo v. and since both of the claims became overdue. 1279 and 1290 all of the Civil Code. Gilbert executed a partial assignment of his judgment sufficient to cover the assessment in favor of the Municipality. Esso Standard Eastern. 180356. G. Inc. They are the lifeblood of the nation. Taxes are what civilized people pay for civilized society. (Commissioner of Internal Revenue v. (Domingo v. 172 SCRA 364) In case of a tax overpayment. Exceptions: When set-off or compensation allowed for local taxes.. 293 SCRA 92. 167274-75. 261 SCRA 667. supra citing Agpalo. which applied Francia v. (Quezon City. The claims were certain since there were no doubts or disputes as to their refundability. Court of Appeals.Thus. 166408. Commissioner of Internal Revenue. 2010 reiterating Caltex Philippines.. The judgment has become final although execution has not issued.. 301) 9. 141658. should not be presumed to go beyond what the law expressly and clearly declares. Nos. Strict interpretation of tax exemption laws. REASON: Solutio indebeti. et al. Inc. Commission on Audit. such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import. Rationale for strict interpretation of tax exemption laws. and that the debts are both due and demandable.R. Marcos. 2008 citing Mactan Cebu International Airport Authority v.R. 338 Phil. R. In fact. exemption is the exception. G. 322. Court of Appeals. 2008) He who claims an exemption from his share of common burden must justify his claim that the legislature intended to exempt him by unmistakable terms. Commissioner of Internal Revenue. Acetylene Co. L-30644. it must hold itself against the same standard in refunding excess (or erroneous) payments of such taxes. (Quezon City. R. G. v. G. [Commissioner of Internal Revenue v. Unless shown otherwise. In such case. Inc. 119 Phil. Inc. 2008) Tax refunds (or tax credits). which cannot be allowed unless granted in the most explicit and categorical language. 357-358. 472 (1967). supra at 732-733. 11. supra) 14.. where the BIR’s obligation to refund or set-off arises from the moment the tax was paid under the principle of solutio indebeti. 2008 citing Surigao Consolidated Mining Co. v. Sr. v. Manila Electric Company v. R. No.. Court of Appeals. 13. Puyat & Sons v. Nos. July 21. 172 SRCA 364) 12. [Commissioner. Mathay.R. But note Nestle Phil. v. et al. Inc. 365 . (Commissioner. v. 2154 and 2155). a legislative grace. City of Manila. 985 (1963)] The dynamic of erroneous payment of tax fits to a tee the prototypic quasi-contract. 510. 461. et al. v. Hon. et al. supra citing AB Leasing and Finance Corporation v.R. They must be expressed in the clearest and most unambiguous language and not left to mere implications. Mathay. supra citing Phil. supra with a note to see Surigao Consolidated Mining Co. Tokyo Shipping Co. (Commissioner. Commission of Internal Revenue. For exemptions from taxation are not favored in law. supra.R. Strict interpretation of a tax refund that partakes of the nature of a tax does not apply to tax refund based on erroneous payment or where there is no law that authorizes collection of the tax. Commissioner of Internal Revenue. 297 in turn citing BPI-Family Savings Bank. supra] A claim for tax refund may be based on statutes granting tax exemption or tax refund. In case of a tax overpayment. supra citing Agpalo. Inc. since taxation is the rule and exemption the exception. p. October 6. nor are they presumed. (Commissioner. Commissioner of Internal Revenue. 22 October 1975. (Commissioner. supra citing Commissioner of Internal Revenue v. Philex Mining Corp. July 21. L-29987. (Commissioner of Internal Revenue v. on the other hand. 9 March 1987. 148 SCRA 315. The taxpayer must show that the legislature intended to exempt him from the tax by words too plain to be mistaken. solutio indebiti. Inc. There is parity between tax refund and tax exemption only when the former is based either on a tax exemption statute or a tax refund statute. (Quezon City. Fortune Tobacco Corporation. the rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption. No. Commissioner of Internal Revenue and Court of Tax Appeals. Arts. And he who claims an exemption from the burden of taxation must justify his claim by showing that the legislature intended to exempt him by words too plain to be mistaken. 302) 10. 453 Phil.. Ramie Textiles.. the taxpayer expects fair dealing from the Government. It has been held that “exemptions are never presumed the burden is on the claimant to establish clearly his right to exemption and cannot be made out of inference or implications but must be laid beyond reasonable doubt. are not founded principally on legislative grace but on the legal principle which underlies all quasi-contracts abhorring a person’s unjust enrichment at the expense of another. R. given its essence. 482 (1979). (Commissioner of Internal Revenue v. [Commissioner. Tax refunds premised upon a tax exemption strictly construed. Vera. 117 Phil. 167274-75. supra citing Commissioner of Internal Revenue v. v. v. Tax exemption is a result of legislative grace. 324-325. 330 SCRA 507. 134114. G. 37 (1963)] The rule is that tax exemptions must be strictly construed such that the exemption will not be held to be conferred unless the terms under which it is granted clearly and distinctly show that such was the intention.. Inc. et al.treatment among taxpayers. 33. Inc. No. Fortune Tobacco Corporation. Esso Standard Eastern. [Commissioner. 178 Phil. 167274-75. No. Gonzales Puyat & Sons v. 2003 ed. July 6. supra at 338) If the State expects its taxpayers to observe fairness and honesty in paying their taxes. ABS-CBN Broadcasting Corporation. [Commissioner. the intention to make an exemption ought to be expressed in clear and unambiguous terms. which covers not only mistake in fact but also mistake in law. supra) Indeed. Fireman’s Fund Insurance Co. In other words. 166408. supra citing Ramie Textiles. CIR. a claim for tax refund necessitates only preponderance of evidence for its approbation like in any other ordinary civil case. The Government is not exempt from the application of solutio indebiti. Statutory Construction. G. the disputable presumption of regularity of performance of duty lies in favor of the Collector of Customs. supra citing CIVIL CODE. G.. 67 SCRA 351. v.E.. Why are tax exemptions are strictly construed against the taxpayer and liberally in favor of the State? SUGGESTED ANSWER: Taxes are necessary for the continued existence of the State. Surigao Consolidated Mining Co.. 518 (2000)] And so. and the latter has the duty to refund without any unreasonable delay what it has erroneously collected. 2001 which held that in order for the rule on solutio indebeti to apply it is an essential condition that the petitioner must first show that its payment of the customs duties was in excess of what was required by the law at the time the subject 16 importations of milk and milk products were made. v. G. Nos. R. It should not unjustly enrich itself at the expense of taxpayers. 127 Phil. City of Manila. 2142.. No. 2002. C5) There may be instances where a particular income is exempt from taxation in order to encourage foreign investments which may lead to economic development.” or ”deliberate and not accidental”. (Banas. much like a tax exemption. 220. G. The grant of a tax amnesty. R. 2004) âââ21. Commissioner of Internal Revenue. Court of Appeals. the payment of less than that known by the taxpayer to be legally due. Tax sparing is a provision in some tax treaties which provides that the state of residence allows as credit the amount that would have been paid. 28. (Ibid. (Lincoln Philippine Life Insurance Company. must be construed strictly against the taxpayer and liberally in favor of the taxing authority. 354 Phil. (Commissioner of Internal Revenue v. L-46881. etc. a) b) c) Tax avoidance is legal while tax evasion is illegal. Tax Treaties: Trick or treat ?. Sheridan. 579 (1999). G. the tax benefits are cancelled out. January 30. (Florer v.. It is an immunity or privilege. there would be no more tax to credit since there is no more tax to credit as a result of the tax exemption. Effect of a BIR reversal of a previous ruling interpreting a law as exempting a taxpayer. 314 Phil. G.Phil. A reversal of a BIR ruling favorable to a taxpayer would not necessarily create a perpetual exemption in his favor.R. such incentives are siphoned off since.) Thus. Klaus on Double Taxation Conventions. . Ltd. 137 Ind. Commissioner of Internal Revenue v. February 10. No. p. a) Tax amnesty is an immunity from all criminal. Tokyo Shipping Co. 147188. 572. for after all the government is never estopped from collecting taxes because of mistakes or errors on the part of its agents. p. Consequently. The purpose of tax amnesty is to a) b) give tax evaders who wish to relent a chance to start a clean slate. Tax amnesty distinguished from tax exemption. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. and a course of action or failure of action which is unlawful. 228 (1995)] 15. etc. 99) 16. 2009) 17. December 6. civil and administrative liabilities arising from nonpayment of taxes (People v.. in effect. when the tax method credit method is applied to these items of income. Jr. R. The objective of tax avoidance in most instances is merely to reduce the tax that is due while is tax evasion the object is to entirely escape the payment of taxes. 1988) WHILE a tax exemption is an immunity from civil liability only. v. an accompanying state of mind which is described as being “evil” on “bad faith. 170574. 22. September 15. 20.e. et al. A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or a tax law. 102967. Philippine Daily Inquirer. administrative and criminal penalties while tax avoidance does not.... G. v. . b) 19. and to give the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case. 2000) 18. similar to a tax exemption. Davao Gulf Lumber Corp. Tax evasion connotes the integration of three factors: a) b) c) The end to be achieved. etc. The Estate of Benigno P. 36 NE 365) Tax amnesty applies only to past tax periods.. Inc..1255 cited in Segarra. supra) WHILE tax exemption has prospective application. No. or the nonpayment of tax when it is shown that a tax is due.. 293 SCRA 92. Tax avoidance distinguished from tax evasion. the need for the tax sparing provision. Toda. . i. as if no reduction has been made. hence of retroactive application (Castaneda. September 14.. (Vogel. et al. Court of Appeals. Castaneda. Tax avoidance is the use of legally permissible means to reduce the tax while tax evasion is the use of illegal means to escape the payment of taxes. A tax amnesty. If the tax credit method is used. Third Edition. No. Jr. v. is never favored nor presumed in law.. Commissioner of Internal Revenue.R. v. 891-892 (1998). Tax evasion warrants the imposition of civil. (Philippine Banking Corporation.” “willful. Venice H. a freedom from a charge or burden to which others are subjected. 1405. BIRC of 1997] ââ 4. 140. Fortune Tobacco Corporation.) Persons who contribute property or funds to a common enterprise and agree to share the gross returns of that enterprise in proportion to their contribution.NATIONAL INTERNAL REVENUE CODE ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE 1. without becoming partners. 166 SCRA 560) b) c) 5. include: a) b) General professional partnerships. the Commissioner of Internal Revenue is only authorized to inquire into the bank deposits of: a) b) c) a decedent to determine his gross estate. and therefore not subject to tax as corporations. (Commissioner of Internal Revenue v. coal. R. 139 SCRA 436) There is no contribution or investment of additional capital to increase or expand the inherited properties. Commissioner of Internal Revenue.. Commissioner of Internal Revenue. pursuant to an operation or consortium agreement under a service contract with the Government. Commissioner of Internal Revenue. (Elements of the Law of Partnership by Floyd R. (Obillos. through or by means of which any business. medium and low-priced based on their net retail price and accordingly graduating tax rates. Nos. 3. pool. Sec. but who severally retain the title to their respective contribution. 24 (B) of the NIRC of 1997] 2. and other energy operations. Rep. to ensure an equitable distribution of the tax burden and to simplify tax administration by classifying cigarettes. whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. group. the Bank Deposits Secrecy Law prohibits inquiry into bank deposits. no matter how created or organized. 5 (F).. 2008) TAX ON INCOME 1. 2008) 3. They have no common stock capital. 142 S. As exceptions to Rep. 14. G. In Evangelista v. are not thereby rendered partners. cited in Pascual v. Act No. 167274-75. NIRC of 1997] A taxpayer who authorizes the Commissioner to inquire into his bank deposits. p. or venture is carried on. joint venture or other unincorporated organization. 22 (B). 363. Nos. Act No. The common ownership of property does not itself create a partnership between the owners. 102 Phil. (Ibid. 2. though they may use it for purpose of making gains. Jr. The Tax Code has included under the term “corporation” partnerships. Wilson. [Sec. Sec. July 21. The shift from the ad valorem system to the specific tax system is likewise meant to promote fair competition among the players in the industries concerned. joint accounts (cuentas en participacion). into high. (Spurlock v. the Supreme Court held citing Mertens that the term partnership includes a syndicate. financial operation. App. Certain business organizations do not fall under the category of “corporations” under the Tax Code. July 21. and they may. associations. There must be an unmistakable intention to form a partnership or joint venture. Collector. Joint venture or consortium formed for the purpose of undertaking construction projects engaging in petroleum. 167274-75. or insurance companies. joint-stock companies. 74 cited in Pascual v. R. G. 24 now Sec. Revenue generation has undoubtedly been a major consideration in the passage of the Tax Code. among others. Purpose of the NIRC of 1997. Mechem.W. v. [Sec. and any taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity to pay his tax liability. Purpose of shift from ad valorem system to specific tax system in taxation of cigarettes.. 166 SCRA 560) . 2nd Ed. merely continuing the dedication of the property to the use to which it had been put by their forebears. 83. (Commissioner of Internal Revenue v. and no community of interest as principal proprietors in the business itself from which the proceeds were derived. Fortune Tobacco Corporation. [1st sentence. Co-heirs who own inherited properties which produce income should not automatically be considered as partners of an unregistered corporation subject to income tax for the following reasons: a) The sharing of gross returns does not of itself establish a partnership. are among themselves as to the management and use of such property and the application of the proceeds therefrom. 160 No. 1405. geothermal. . Jr. (b) gift. No. January 20. less the deductions and/or personal and additional exemptions. (Dumaguete Cathedral Credit Coopertive [DCCC)] etc. (Sec. An insolvent debtor does not realize taxable income from the cancellation or forgiveness. The cancellation and forgiveness of indebtedness may amount to (a) payment of income. 586 (2005). G. 1999) 8. in consideration thereof. v. 43 Fd 327 CCA 10th) 12. Simmons Gin Co. The Schedular system of income taxation is a system employed where the income tax treatment varies and is made to depend on the kind or category of taxable income of the taxpayer. Regs. Inc.” (Ibid. the transaction has the effect of payment of a dividend. Section 10 of Article II of the Constitution declares that it is a policy of the State to promote social justice in all phases of national development. if any. (Tan v. . NIRC of 1997) 9. Compensation income is considered as having been earned in the place where the service was rendered and not considered as sourced from the place of origin of the money. 2) 15. cancels the debt. 50. (Commissioner v. For example. No. 11. 16. et al. No. Section 2 of Article XIII of the Constitution states that the promotion of social justice shall include the commitment to create economic opportunities based on freedom of initiative and self-reliance. 331) 18. If an individual performs services for a creditor who. 237 SCRA 324. citing Commissioner of Internal Revenue v. bought from the earnings of co-owned properties. 331) 17.R.. If a corporation to which a stockholder is indebted forgives the debt.. January 22. del Rosario. authorized for such types of income by the Tax Code or other special laws. (Philippine Branch). 182722. from labor or from both combined. it is income to the extent of the amount realized by the debtor as compensation for his services. or to a (c) capital transaction depending upon the circumstances. Commissioner of Internal Revenue. we find that an interpretation exempting the members of cooperatives from the imposition of the final tax under Section 24(B)(1) of the NIRC (tax on interest earned by deposits) is more in keeping with the letter and spirit of our Constitution. Article XII of the Constitution considers cooperatives as instruments for social justice and economic development. shall be treated as the income of an unregistered partnership to be taxable as a corporation because of the clear intention of the brothers to join together in a venture for making money out of rentals. 31. 19. No less than our Constitution guarantees the protection of cooperatives. 237 SCRA 324. including their members. American Express International. 2010) In closing.. Section 15. Cruz: “The power of taxation. The Global system of income taxation is a system employed where the tax system views indifferently the tax base and generally treats in common all categories of taxable income of the individual. is not absolute and may be subordinated to the demands of social justice. deserve a preferential tax treatment because of the vital role they play in the attainment of economic development and social justice. G. Commissioner 36 BTA (F) 289) 13. Rev. (Lakeland Grocery Co. Income is gain derived and severed from capital. 108576. If a creditor merely desires to benefit a debtor and without any consideration therefor cancels the amount of the debt it is a gift from the creditor to the debtor and need not be included in the latter’s income.. the State’s power to tax must give way to foster the creation and growth of cooperatives. (Commissioner of Internal Revenue v. Thus. although taxes are the lifeblood of the government. 14. In relation thereto. (Sec. Bearing in mind the foregoing provisions. to tax a stock dividend would be to tax a capital increase rather than the income. cooperatives. Members of cooperatives not subject to tax on the interest earned from their deposits with the cooperative. The insolvent debtor realizes income resulting from the cancellation or forgiveness of indebtedness when he becomes solvent. 10. 7. Court of Appeals. Jr. v.6. while indispensable.. Under the National Internal Revenue Code the global system is applicable to taxable corporations and the schedular to individuals. del Rosario.. 500 Phil. The term taxable income means the pertinent items of gross income specified in the Tax Code. At the same time. The income from the rental of the house. (Tan v. R. To borrow the words of Justice Isagani A. Flowers. NIRC] He is allowed to avail of the itemized deductions including the personal and additional exemptions subject to the rule on reciprocity. Gifts given during Christmas and major anniversary celebrations not exceeding P5. and Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage. 2) WHILE deductions are the amounts which the law allows to be subtracted from gross income in order to arrive at net income. Rev. fruits. 21. No.g. However.000. (2) It is exempted by statute. etc. [Sec. is considered as having been earned at the place where the activity or service was performed.000 ceiling of “other benefits” provided under Section 32 (B)(7)(e) of the Code.00 received by an employee under an established written plan which does not discriminate in favor of highly paid employees. birth of a baby. Regs. which must be in the form of a tangible persona property other than cash or gift certificate. Exclusions are something received or earned by the taxpayer which do not form part of gross income WHILE deductions are something spent or paid in earning gross income. ââ 25.000 per employee per annum. Payment for services. for length of service or safety achievement. ââ 22.1 (A) (3).000. and (3) It does not come within the definition of income (Sec. Distinguish exclusions from deductions.. SUGGESTED ANSWER: Exclusions from gross income refer to a flow of wealth to the taxpayer which are not treated as part of gross income for purposes of computing the taxpayer’s taxable income. Exclusions pertain to the computation of gross income WHILE deductions pertain to the computation of net income. Income subject to “final tax” refers to an income collected through the withholding tax system.000. marriage. Regs. or similar items given to employees under special circumstances. What are considered as deminimis benefits not subject to withholding tax on compensation income of both managerial and rank and file employees ? SUGGESTED ANSWER: Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year. shall constitute as deductible expense upon such employer. The recipient is no longer required to include the income subjected to a final tax as part of his gross income in his income tax return. shall be considered as a non-resident alien doing business in the Philippines. 8-2000] 23. 2. An example of an exclusion from gross income are life insurance proceeds. further.g. rice per month amounting to not more than P1. whether classified as de minimis benefits or fringe benefits.00 ceiling.00 or one (1) sack of 50-kg. What are excluded from gross income ? a) b) c) . a) b) c) d) e) f) g) h) i) j) The amount of de minimis benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30. on account of illness.00 per annum. e. e. other than compensation income. 2-98 as amended by Rev. The payor of the income withholds the tax and remits it to the government as a final settlement of the income tax as a final settlement of the income tax due on said income.00 per annum.000. A non-resident alien. ââ 24. due to the following reasons: (1) It is exempted by the fundamental law. Employees achievement awards.78. [Sec.000. provided. Laundry allowance not exceeding P300 per month.20.000. 25 (A) (1). Medical cash allowance to dependents of employees not exceeding P750. and an example of a deduction are losses. who has stayed in the Philippines for an aggregate period of more than 180 days during any calendar year. Consequently.00. Rice subsidy of P1. Uniforms and clothing allowance not exceeding P3. 61. books. the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the P30. Rev.00 per employee per semester or P125 per month. with an annual monetary value not exceeding P10. No. that any amount given by the employer as benefits to its employees. if the employer pays more than the ceiling prescribed by these regulations. he shall be subject to income tax on his income derived from sources from within the Philippines. Actual yearly medical benefits not exceeding P10. Regs. Rev. plus the amounts of any damages received on whether by suit or agreement on account of such injuries or sickness. [1st par. hence tax-exempt? SUGGESTED ANSWER: Retirement benefits received under Republic Act No. resident alien individuals and nonresident alien individuals who are engaged in trade and business. What kind of separation (retirement) pay is excluded from gross income. Resident citizens. c) d) .. Amounts received for beyond control separation. devise. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Foreign social security. sickness or other physical disability. Rev. Regs. employee or by his heirs. USVA benefits. Sec. 32 (B) (6) (a). such as retrenchment. Not less than fifty (50) years of age at time of retirement. Resident citizens. 7641 and those received by officials and employees of private firms. NIRC of 1997] The retiring official or employee should not have previously availed of the privilege under the retirement plan of the same or another employer. The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer’s profession. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. or upon surrender of the contract. pensions. In the service of the same employer for at least ten (10) years. Domestic corporations. on their gross incomes other from compensation income are allowed to deduct these expenses. For any cause beyond the control of said official or employee [Sec. Value of property acquired by gift. on their gross incomes other from compensation income are allowed to deduct these expenses. redundancy and cessation of business. trade or business. What are the Itemized deductions from gross income and who may avail of them? a) b) Ordinary and necessary trade. Taxes paid or incurred within the taxable year in connection with the taxpayer’s profession. 2. estates and trusts may also deduct this expense. Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines. retirement gratuities. No. bequest. Retiring official or employee 1. SSS benefits and GSIS benefits. Domestic corporations. What are the conditions for excluding retirement benefits from gross income.78 (B). in accordance with the employer’s reasonable private benefit plan approved by the BIR. Availed of the benefit of exclusion only once. losses from casualty. 2. 2. 3. Amounts received. âââ Ordinary losses. or 2. 2-98] a) b) c) 28. estates and trusts may also deduct this expense. business or professional expenses. theft or embezzlement. through accident or health insurance or Workmen’s Compensation Acts as compensation for personal injuries or sickness. [Sec. No. 7641. Amounts received by the insured as a return of premiums paid by him under life insurance. and net operating losses. 32 (B) (6) (b). resident alien individuals and nonresident alien individuals who are engaged in trade and business. Sec.78 (B) (1). (1) (b). 2-98] a) b) ââ 27. Retirement benefits received under Republic Act No. etc. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense.. Retirement received from reasonable private benefit plan after compliance with certain conditions.a) b) c) d) e) f) SUGGESTED ANSWER: Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured whether in a single sum or otherwise. NIRC of 1997]. âââ 26. whether individual or corporate. Regs. Death. From the employer As a consequence of separation of such official or employee from the service of the employer because of 1. endowment or annuity contracts either during the term. hence tax-exempt? SUGGESTED ANSWER: Any amount received by an official. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. or descent. or at maturity of the term mentioned in the contract. [1st par. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. resident alien individuals and nonresident alien individuals who are engaged in trade and business. on their gross incomes other from compensation income are allowed to deduct these expenses. on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations. trade or business. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Insurance premiums for health and hospitalization. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Resident citizens. estates and trusts may also deduct this expense. on their gross incomes other from compensation income are allowed to deduct these expenses. actually ascertained to be worthless and charged off within the taxable year. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Resident citizens. estates and trusts may also deduct this expense. resident alien individuals and nonresident alien individuals who are engaged in trade and business. resident alien individuals and nonresident alien individuals who are engaged in trade and business. Domestic corporations. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct these premiums. Resident citizens. Domestic corporations. resident alien individuals and nonresident alien individuals who are engaged in trade and business. on their gross incomes other from compensation income are allowed to deduct these expenses. resident alien individuals and nonresident alien individuals who are engaged in trade and business. âââ Charitable and other contributions. estates and trusts may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. Personal and additional exemptions. âââ Bad debts due to the taxpayer. Resident citizens. Domestic corporations. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. estates and trusts may also deduct this expense. resident alien individuals and nonresident alien individuals who are engaged in trade and business. Depletion or deduction arising from the exhaustion of a non-replaceable asset. Resident citizens. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. Domestic corporations. estates and trusts may also deduct this expense. on their gross incomes other from compensation income are allowed to deduct these expenses.e) f) g) h) i) j) k) l) Resident citizens. resident alien individuals and nonresident alien individuals who are engaged in trade and business. Nonresident citizens on their gross incomes from . Resident citizens. usually a natural resource. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. wear and tear (including reasonable allowance for obsolescence) of property used in trade or business. not sustained between related parties. on their gross incomes other from compensation income are allowed to deduct these expenses. Contributions to pension trusts. on their gross incomes other from compensation income are allowed to deduct these expenses. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. on their gross incomes other from compensation income are allowed to deduct these expenses. Depreciation or a reasonable allowance for the exhaustion. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. business or profession. Resident citizens. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Domestic corporations. Resident citizens. Research and development expenditures treated as deferred expenses paid or incurred by the taxpayer in connection with his trade. and resident alien on their gross incomes and from compensation income are allowed to deduct these premiums. estates and trusts may also deduct this expense. connected with profession. Domestic corporations. Nonresident citizens and nonresident alien individual engaged in trade or business in the Philippine on their gross incomes from within may also deduct these premiums. resident alien individuals and nonresident alien individuals who are engaged in trade and business. not deducted as expenses and chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. estates and trusts may also deduct this expense. No. Isabela cultural Corporation. The BIR disallowed the deduction? Who is correct. SUGGESTED ANSWER: Ordinary expenses are those which are common to incur in the trade or business of the taxpayer WHILE capital expenditures are those incurred to improve assets and benefits for more than one taxable year. Amounts of income accrue where the right to receive them becomes fixed. (Commissioner of Internal Revenue v. The accrual of income and expense is permitted when the all-events test has been met. In 2005 XYZ Law Firm and ABC Auditing Firm rendered various services which were billed by these firms only during the following year 2006. 2. (Commissioner of Internal Revenue v. The two (2) principal accounting methods for recognition of income are the (a) accrual method. Isabela cultural Corporation. ââ 29. 2007) NOTES AND COMMENTS: Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. Recognition of income and expenses under the accrual method of accounting. it must have been paid or incurred during the taxable year dependent upon the method of accounting upon the basis of which the net income is computed. 3. fixing of a right to income or liability to pay. are incurred when fixed and determinable in nature without regard to indeterminacy merely of time of payment. No. Ordinary expenses are usually incurred during a taxable year and benefits such taxable year. . (Ibid. or professional expenses. (Commissioner of Internal Revenue v. Proof by evidence or records of the deductions allowed by law including compliance with the business test. Isabela cultural Corporation. Isabela Cultural Corporation. 2007). 4. G. there was already an obligation to pay them. kickbacks or other illegal expenditures Compliance with the substantiation test. 172231. This test requires: 1. like expenses paid for legal and auditing services? SUGGESTED ANSWER: the expense must be ordinary and necessary. What are the requisites for the deductibility of ordinary and necessary trade. 2007). No. Nonresident alien individuals engaged in trade or business in the Philippines are allowed to deduct these exemptions under reciprocity. No. TMG deducted the same from its 2006 gross income. Must be ordinary and necessary. it must be supported by receipts. February 12. 172231. ââ 30. Must be paid or incurred within the taxable year. Must be paid or incurred in carrying on a trade or business. Must not be bribes. 172231.) All-events test. 172231. a) b) c) The test does not demand that the amount of such income or liability be known absolutely. where there is created an enforceable liability. TMG should have deducted the professional and legal fees in the year they were incurred in 2005 and not in 2006 because at the time the services were rendered in 2005.. a) b) ââ 31. records or other pertinent papers. business. (Commissioner of Internal Revenue v. and 2. G. Since the bills for legal and auditing services were received only in 2006 and paid in the same year. February 12. G. R. Liabilities. February 12. R.within may also deduct this expense. 2007) a) b) c) âââ 32. R. February 12. Necessary expenses are those which are appropriate or helpful to the business. R. TMG or BIR? Explain. TMG Corporation is issuing the accrual method of accounting. G. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. SUGGESTED ANSWER: The BIR is correct. Distinguish ordinary expenses from capital expenditures. and the (b) cash method. What are the requisites for the deductibility of business expenses? SUGGESTED ANSWER: The following are the requisites for deductibility of business expenses: Compliance with the business test: 1. the availability of the reasonable accurate determination of such income or liability. only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. No. NIRC of 1997. and de minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue. [1st par. 8-2000] . f) Membership fees. Benefits given to the rank and file employees. Accrual method of accounting presents largely a question of fact. i) Educational assistance to the employee or his dependents. Regs.1 (A) (3). It is also referred to as the “cash receipts and disbursements method” because both the receipt and disbursements are considered.33 (A). goodwill. Sec. and j) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. Regs. Sec. if such facilities are offered or furnished by the employer merely as a means of promoting the health. No. Contributions of the employer for the benefit of the employee to retirement. No. February 12.. within the taxable year. Rev. granted or paid by the employer to the employee. R. G. such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. Regs. 33. contentment. whether granted under a collective bargaining agreement or not. Sec. or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees).33 (B). No.. The propriety of an accrual must be judged by the fact that a taxpayer knew. 32(A). The amount of liability does not have to be determined exactly. 32 (C). g) Expenses for foreign travel.33 (C). the test is satisfied where a computation may be unknown. (Commissioner of Internal Revenue v. Rev. 2-98 as amended by Rev.The all-events test is satisfied where computation remains uncertain. Rev. 3-98] ââ36. insurance and hospitalization benefit plans. 33 (B). 2007) d) Under the cash method income is to be construed as income for tax purposes only upon actual receipt of the cash payment. or so-called “courtesy discounts” on purchases). d) Household personnel. 2. driver and others. Thus. Sec. or could reasonably be expected to have known. Rev. 1st par. Regs. it must be determined with “reasonable accuracy” implies something less than an exact or completely accurate amount. [1st par. h) Holiday and vacation expenses. What is meant by “fringe benefit” for purposes of taxation? SUGGESTED ANSWER: For purposes of taxation. if its basis is unchangeable.. such as maid. business or profession of the employer. such as but not limited to: a) Housing. service. Isabela cultural Corporation.78.. De minimis benefits are facilities and privileges (such as entertainment. or efficiency of his employees. 1st par. 2. furnished or offered by an employer to his employees. 2. The fringe benefits tax is a final withholding tax imposed on the grossed-up monetary value of fringe benefits furnished. No.. but is not as much as unknowable. Fringe benefits that are not subject to the fringe benefits tax: a) b) c) d) e) f) When the fringe benefit is required by the nature of. 3-98] Fringe benefits which are authorized and exempted from income tax under the Tax Code or under any special law. dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations. [Sec. medical services. 3-98] 35. c) Vehicle of any kind. income is recognized only upon actual receipt of the cash payment but no deductions are allowed from the cash income unless actually disbursed through an actual payment in cash. NIRC of 1997. 2. Regs. Rev. [Sec. at the closing of its books for the taxable year. except rank and file employees. 2.33 (A). Regs. They are not considered as compensation subject to income tax and consequently to withholding tax. No. or necessary to the trade. e) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted. 3-98] ââ 34. 172231. Sec. or When the fringe benefit is for the convenience or advantage of the employer. fringe benefit means any good. b) Expense account. [Sec. NIRC of 1997. No. and lineal descendants. spouse. where the result of his business operation was a net loss even without deduction of the bad debts written-off). or The fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust. The debts are uncollectible despite diligent effort exerted by the taxpayer. The term is also applied to amortization of the value of intangible assets the use of which in the trade or business is definitely limited in duration. then his subsequent recovery thereof shall be treated as a mere recovery or a return of capital. (Sec. Regs. of amounts due the taxpayer by others. 4. Regs. 36 (B). 3. Regs.â 37.. 103. NIRC of 1997. 34 (E) (1). 25-2002.e. Sec. The methods of depreciation are the following: a) Straight line method. What are the requisites for valid deduction of bad debts from gross income? SUGGESTED ANSWER: There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable. he realized a reduction of the income tax due from him on account of the said deduction. directly or indirectly. not treated as receipt of realized taxable income. and . [Sec. in whole or in part. (Sec. Regs. NOTES AND COMMENTS: If in the year the taxpayer claimed deduction of bad debts written-off. hence. arising from money lent or from uncollectible amounts of income from goods sold or services rendered. 43. 2) a) b) c) d) e) f) g) : ââ 41. No. NIRC of 1997] a) b) c) d) e) f) ââ 40. A grantor and a fiduciary of any trust. b) Declining balance method. and The debt must be actually ascertained to be worthless and uncollectible during the taxable year. Rev. (Revenue Memorandum Circular No. by or for the same individual. Rev. Rev. directly or indirectly. or A fiduciary of a trust and a beneficiary of such. Bad debts are those which result from the worthlessness or uncollectibility. 17-71) âââ 38. The family of an individual shall include only his brothers and sisters (whether by the whole or half-blood). Preferred shares are considered capital regardless of the conditions under which such shares are issued and dividends or “interests” paid thereon are not allowed as deductions from the gross income of corporations. business or practice of profession. 5-99) ââ 39. Regs. Philippine Refining Corporation v. 256 SCRA 667] Must have been reported as receivables in the income tax return of the current or prior years. et al.a. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year. The same must be connected with the taxpayer’s trade. Depreciation is the gradual diminution in the useful value of tangible property resulting from ordinary wear and tear and from normal obsolescence. Court of Appeals. 5-99) If the said taxpayer did not benefit from the deduction of the said bad debt written-off because it did not result to any reduction of his income tax in the year of such deduction (i. Rev. 5-99 reiterated in Rev. What is the “tax benefit” rule? SUGGESTED ANSWER: The “tax benefit rule” posits that the recovery of bad debts previously allowed as deduction in the preceding year or years shall be included as part of the taxpayer’s gross income in the year of such recovery to the extent of the income tax benefit of said deduction. The same must not be sustained in a transaction entered into between related parties. (Sec. [Sec. No. Who are related parties? SUGGESTED ANSWER: The following are related parties: Members of the same family. 2. his subsequent recovery thereof from his debtor shall be treated as a receipt of realized taxable income. Two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned. An individual and a corporation more than fifty percent (50%) in value of the outstanding stock of which is owned. by or for such individual. 5-99) a) b) 42. ancestors. Regs. (Sec. Rev. 4. c) Sum of years digits method. 000. 10-2008. G. No. No. Regs. These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence. Thus. Rev. [Sec. NIRC of 1997 as amended by Rep.79 (I) (1) (b). 9504] NOTES AND COMMENTS: It is clear that under the amendment. What are the amounts of additional exemptions? SUGGESTED ANSWER: “An individual. Rafferty and Concepcion. 9504. Regs. 2-98 as amended by Rev. 9504 that each of the spouses may claim the P50.00) for each qualified dependent child.. 414. 44. only such spouse shall be allowed the personal exemption. Revaluation method. Act No.000. Act No.” [2nd par. provided that the total number of dependents for which additional exemptions may be claimed 1. Sec. R. [Pansacola v.d) Any other method prescribed by the Secretary of Finance upon the recommendation of the Commissioner of Internal Revenue: 1. Sec. 2-98 as amended by Rev. Sec. single individuals may now claim for the additional exemptions. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers and until our lawmakers make new adjustments on these personal exemptions. 3. NIRC of 1997 as amended by Rep. 10-2008] NOTES AND COMMENTS: It is clear from Rep. No. the distinctions between the concepts of single. and 4. Sinking fund method. as amended by Rep. 2006 citing Madrigal and Paterno v. Regs. 2. Commissioner of Internal Revenue.” [1st par. because of mental or physical defect. No. taking into account the personal status and additional qualified dependents of the taxpayer. “A dependent means 1. What are personal and additional exemptions? SUGGESTED ANSWER: These are the theoretical persona. is incapable of self-support 3. Hours of productive use. not gainfully employed or if such dependent. No. Act No. Act No. whether single or married. 35 (B).00. ââ45. shall be allowed an additional exemption of Twenty-Five Thousand Pesos (P25.000) for each individual taxpayer. 1. arrangement and numbering supplied. In the case of married individuals where only one of the spouse is deriving gross income. 2. 9504] a) b) c) d) a) b) c) d) . 159991. No.00. living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. arrangement and numbering supplied. 2. 2. November 16. a legitimate. Regs.79 (I) (1) (a).. 2-98 as amended by Rev. 2. the concept of head of a family does not find application anymore. 418 (1918)] ââ45. Regs. the total familial basic personal exemption for spouses is P100. Furthermore. Furthermore. Act No. 35 (A). 38 Phil. chiefly dependent upon and living with the taxpayer if such dependent is 1. NIRC of 1997. No. 10-2008. Regs. Rev.000. married and head of the family for purpose of availing of the basic personal exemption has already been eliminated by Rep. shall not exceed four (4) dependents. What is the amount allowed as basic personal exemption? SUGGESTED ANSWER: There shall be allowed a basic personal exemption amounting to Fifty thousand pesos (P50. not more than twenty-one (21) years of age. illegitimate or legally adopted child 2. 9504. Sec. Sec. the amounts allowed to be deducted by a taxpayer are fixed as predetermined by Congress. unmarried and 3. Rev. Apportionment to units of production.79 (I) (1) (b). 35 (b). regardless of age 2. 3. e) Paintings. trailers and trucks of a hauling company. Act No. Examples of ordinary assets hence not capital assets: a) The machinery and equipment of a manufacturing concern subject to depreciation. as amended by Rep.e) It is to be noted that under the NIRC of 1997. 9504. b. 3rd par. No. Capital assets shall refer to all real properties held by a taxpayer. owned by an individual engaged in business. objects of arts which are not used in trade or business. Act No. No. or c) Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.. namely: a) Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of a taxpayer if on hand at the close of the taxable year. whether single detached. and as such. Rev. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets. c) The condominium building owned by a realty company the units of which are for rent or for sale. or b) Other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year. glue. 39 (A) (1).. capitalized words. “The Expanded Senior Citizens Act of 2003”] ââ47. Rev. No. as amended. numbering and arrangement supplied. the employment of an attorney-in-fact for the purpose of developing. Act 9257. 1968) g) “Real property used by an exempt corporation in its exempt operations. and other collateral relatives are not qualified dependents to be claimed as additional exemptions.a. d) Automobiles not used in trade and business. stamp collections. April 26. 9504. Court of Tax Appeals. as brothers or sisters. buildings and/or improvements).” (last sentence. Senior citizen shall be treated as dependents provided for in the National Internal Revenue Code. 7-2003) h) “Real property. 72003) ââ49. Regs. Sec. 2. not used in trade or business as evidenced by a certification from the Barangay Chairman or from the head of administration. as well. f) Inherited large tracts of agricultural land which were subdivided pursuant to the government mandate under land reform. No. Regs. BUT DOES NOT INCLUDE: a) Stock in trade of the taxpayer. be they relatives or not shall be accorded the privileges granted by the Code insofar as having dependents are concerned. of a character which is subject to the allowance for depreciation. 2. b) Jewelry not used for trade and business. and therefore considered as capital asset. Rev. then sold to tenants. 2.e. NIRC of 1997. 7-2003) The term “capital assets” means property held by the taxpayer (whether or not connected with his trade or business). administering and selling the lots. e) Inherited parcels of land of substantial areas located in the heart of Metro Manila. (Roxas v. as amended by Rep. whether or not connected with his trade or business. 5 (a). However. or b) Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. c) Residential houses and lands owned and used as such. 7432. paint. if they are senior citizens they may qualify as additional exemptions under the “Senior Citizens Law” but not under the NIRC of 1997. or d) Property used in the trade or business. 7-2003] ââ48. Act No. or real property used in the trade or business of the taxpayer. (Sec. such as a corporation included in the enumeration of Section 30 of the Code. parents. sales made with frequency and continuity.. varnish.a.. . sculptures. etc. townhouse or apartment. shall not be considered used for business purposes. which are the raw materials of a furniture factory.” (last par. or d) Real property used in trade or business of the taxpayer. which were subdivided into smaller lots then sold on installment basis after introducing comparatively valuable improvements not for the purpose of simply liquidating the estate but to make them more saleable . 7-2003) ââ 50. as amended by Rep. [Sec. Grandparents. or c) Real property used in trade or business (i. [last par. only qualified dependent children are considered for additional exemptions. d) The wood. b) The tractors. Sec. Regs. shall be treated as capital asset. (Sec. and as validated from the existing available records of the Bureau of Internal Revenue. Examples of capital assets: a) Stock and securities held by taxpayers other than dealers in securities. nails. of a character which is subject to the allowance for depreciation. or condominium unit. Rep. Rev. Sec. Rev. individual taxpayers caring for them. in case of condominium unit.b. No. 3. townhouse. Sec. Regs. Regs. etc. L-25043. and which are not included among the real properties considered as ordinary assets.b. managing. b) Real property received as dividend by stockholders who are not engaged in the real estate business and who not subsequently use such real property in trade or business shall be treated as capital assets in the hands of the recipient even if the corporation which declared the real property dividend is engaged in real estate business. 144 SCRA at p. otherwise known as the ‘Civil Code of the Philippines. Rev. will use in business the property received in the exchange. classified as capital assets. 57. [Sec. The basis for the final presumed capital gains tax of six per cent (6%) is whichever is the higher of the a) gross selling price.f. shall be considered as a capital asset in the hands of the heir or donee. No. The tax is “imposed upon capital gains presumed to have been realized from the sale. Gonzales v. no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. 58 SCRA 170) Inherited agricultural property improved by introduction of good roads. The classification of such property in the hands of the buyer/transferee shall be determined in accordance with the following rules: a) Real property transferred through succession or donation to the heir or donee who is not engaged in the real estate business with respect to the real property inherited or donated. NIRC of 1997] Revenue Regulations No. and the heir was not a stranger to the real estate business. Regs. and who does not subsequently use such property in trade or business.” [Sec. exchange. Regs. (Tuazon. 72003 has defined real property as having “the same meaning attributed to that term under Article 415 of Republic Act No. The property forms part of the stock in trade of the owner. The tax liability. (Sec. 3135. 4-99] 55. based on the bid price of the highest bidder but only upon the expiration of the one year period of redemption provided for under Sec. classified as capital assets. Rev. or 2. 4118. as amended by Act No. 101 Phil. hence an ordinary asset. et al. c) or other disposition. Holding period not applied to the taxation of the presumed capital gains derived from the sale of real property considered as capital assets. 386. v. Commissioner of Internal Revenue. 3 (2). Court of Tax Appeals. 7-2003) ââ 52. of individual taxpayers (not corporate). or to a taxpayer who. or other disposition” includes taking by the government through condemnation proceedings. No. (Calasanz v. 24 (D) (1) in relation to Sec. 4-99] ââ 56. No. It is the transaction that is taxed not the gain. ââ 58. Court of Tax Appeals. 6 (E).’ (Sec. c) The real property received in an exchange shall be treated as ordinary asset in the hands of the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business. [Sec. both of the NIRC of 1997] It does not matter whether there was an actual gain or loss because the tax is a “presumed” capital gains tax. even if not engaged in real estate business. 861) 54. Jr. et al. 24 (D) (1`). In case of non-redemption of the property sold upon a foreclosure of mortgage sale. drainage and lighting systems converts the property to an ordinary asset. as the owner is now engaged in the business of subdividing real estate.f) annual sales income from the sales was considerable. and shall be paid within thirty (30) days from the expiration of the said one-year redemption period. on gains from sales or other dispositions of real property. if any. Regs. In case the mortgagor exercises his right of redemption within one (1) year from the issuance of the certificate of sale. to the government or any of its political subdivisions or agencies or to government owned or . in a foreclosure of mortgage sale of real property. Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the buyer/transferee. concrete gutters. Rev. Tax treatment of real properties that have been transferred. Regs. Lingad. 7-2003) ââ 53. or b) the current fair market value as determined below: 1. No. the presumed capital gains tax shall be imposed. Transactions covered by the presumed capital gains tax on real property: a) sale.. 3 (1). the fair market value or real properties located in each zone or area as determined by the Commissioner of Internal Revenue after consultation with competent appraisers both from the private and public sectors.c.. the fair market value as shown in the schedule of values of the Provincial and City Assessors. NIRC of 1997. 672) ââ51. 3. [Sec. [Sec. exchange. b) exchange. 713. 121 Phil. (Gutierrez v. or other disposition of real property located in the Philippines. 6 of Act No.. 24 (D) (1). 2. numbering and arrangement supplied] d) Sale. including pacto de retro sales and other forms of conditional sales. This is so. Rev. In 2000. [Sec. NIRC of 1997] ââ 60. 24 (D) (1) in relation to Sec. 3. it ceased operations that year by reason of insolvency and its assets and liabilities were placed under the charge of a governmentappointed receiver. whether resident or not [Ibid. 27 (E) (1). it falls under the category of an existing corporation recommencing its banking operations. Due to the BIR’s inaction. (Sec. whichever comes later. The MCIT shall be imposed beginning in the fourth taxable year immediately following the year in which the corporation commenced its business operations. the BSP authorized MBC to operate as a thrift bank. G. 25 (B) in relation to Sec. 25 (A) (3) in relation to Sec. MBC was incorporated in 1961 and engaged in commercial banking operations since 1987. 168118. BIR then ruled that cessation of business activities as a result of being placed under involuntary receivership may be an economic reason for suspending the imposition of the MCIT. Excepted from the payment of the presumed capital gains tax are those presumed to have been realized from the disposition by natural persons of their principal place of residence: a) the proceeds of which is fully utilized in acquiring or constructing a new principal residence. is hereby imposed on a corporation taxable under this Title. 1. pays the presumed capital gains tax whether: a) an individual [Sec.” [Sec. 24 (A) (1). in relation to Sec. 6. As a result of the ruling MBC filed an application for refund of the P33 million. both of the NIRC of 1997] 59. then to the schedular tax [Sec. Regs. Nonresident alien not engaged in trade or business in the Philippines [Sec. Citizen. Should the refund be granted ? SUGGESTED ANSWER: Yes. 24 (D) (2). c) a domestic corporation. Commissioner of Internal Revenue. 4. both of the NIRC of 1997]. R. 24 (D) (1). The seller of the real property. On May 22. On June 23. the corporate existence was never affected. No. 24 (D) (1). 1999 when it was authorized by the BSP to operate as a thrift bank before the MCIT should be applied to it. 4-95) Clearly then. b) an estate or trust (Ibid. 1999. [Sec. classified as a capital asset. 27 (D) (5). Thus. NIRC of 1997] 61. [Sec. 1987.]. [Sec. both of the NIRC of 1997]. by including the proceeds as part of gross income to be subjected to the allowable deductions and/or personal and additional exemptions. 24 (D) (1). beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations. MBC filed a petition for review with the CTA.controlled corporations shall be determined. Rev. NIRC of 1997]. the taxable year in which business operations commenced shall be the year in which the domestic corporation registered with the Bureau of Internal Revenue (BIR). a) b) . at the option of the taxpayer. In a volte facie the BIR now maintains that MBC should pay the MCIT beginning January 1. (Manila Banking Corporation v. 27 (E) (1). when the minimum corporate income tax is greater than the tax computed under Subsection (A) of this section for the taxable year. No. b) within eighteen (18) calendar months from the date of sale or disposition c) the BIR Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption. NIRC of 1997] The date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board.). “(5) Specific rules for determining the period when a corporation becomes subject to the MCIT (minimum corporate income tax) – For purposes of the MCIT. NIRC of 1997] Period when a corporation becomes subject to the MCIT. Even if placed under receivership. 1998 as it did not close its business operations in 1987 but merely suspended the same. 24 (D) (1).]. “A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year. The CTA denied the petition on the ground that MBC is not a newly organized corporation. 2. as defined herein. Resident alien [Ibid. August 26. 6 (E). It sought the BIR’s ruling on whether it is entitled to the four (4) year grace period for paying on the basis of MCIT reckoned from 1999. both of the NIRC of 1997] or the final presumed capital gains tax of six percent (6%). 2006) NOTES AND COMMENTS: The MCIT and when should be imposed and the four (4) year grace period. Nonresident alien engaged in trade or business in the Philippines [Sec. and d) the said tax exemption can only be availed of once every ten (10) years. MBC is entitled to the grace period of four years from June 23. It filed its tax return for the year 1999 paying the amount of P33 million computed in accordance with the minimum corporate income tax (MCIT). 1998. 9-98 because Rev. Thus. a) The decedent takes the insurance policy on his own life. [Sec. or • administrator 2. No. a condominium unit at the Twin Towers Building at Pasig. intangible or mixed. tangible. 85 (E). 168118. situated in the Philippines. 85 (E). It does not come as a surprise then when many companies reported losses in their initial years of operations. Proceeds of life insurance NOT included in a decedent’s gross estate. • his executor. The amounts are receivable by • the decedent’s estate. (Manila Banking Corporation v. • his executor. 168118. ââ 2. an American citizen. No. a resident alien. R. are his properties abroad to be included. 2006 did not apply Rev. or • administrator irrespective of whether or not the insured retained the power of revocation. Regs. He died in San Francisco. What assets shall be included in the Estate Tax Return to be filed with the BIR? SUGGESTED ANSWER: All of the assets should be included in the Estate Tax Return to be filed with the BIR. Commissioner of Internal Revenue. situated in the Philippines. the lawmaking body saw the need to provide a grace period of four years from their registration before they pay their minimum corporate income tax. wherever situated. No. intangible or mixed. tangible. ââ 3. tangible. G. Smith. The amounts are receivable by any beneficiary designated in the policy of insurance as revocable beneficiary. The gross estate of a Filipino citizen or a resident alien comprises all his real property. Thus. all his personal property. Regs.) Purpose of the four (4) year grace period. real or personal. 2006) ESTATE TAXES ââ1. the assets to be included in the Estate Tax Return to be filed with the BIR should be all property. and b) the proceeds are receivable by a beneficiary designated as irrevocable. August 26. all his personal property.c) Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January 1. x x x” (Rev. to the extent of his interest existing therein at the time of his death. irrespective of whether or not the insured retained the power of revocation. Proceeds of life insurance includible in a decedent’s gross estate. No. Commissioner of Internal Revenue. Florida. to the extent of his interest existing therein at the time of his death. if the decedent is a Filipino citizen or a resident alien. Metro Manila and a house and lot in Miami. [Sec. Corporations still starting their business operations have to stabilize their venture in order to obtain a stronghold in the industry. for Philippine estate tax purposes. The gross estate of a non-resident alien comprises all his real property. 4-95 specifically refers to thrift banks. other than the decedent takes the insurance policy on the life of the decedent 1. William Smith. In determining the gross estate of a decedent. in order to allow new corporations to grow and develop at the initial stages of their operations. Regs. a) The decedent takes the insurance policy on his own life 1. NIRC of 1997) . NIRC of 1997] b) One. to the extent of the interest that Smith has at the time of his death. Consequently. California. The amounts are receivable by • The decedent’s estate. wherever situated. He left 10. intangible or mixed. wherever situated. R. OR 2. August 26. The intent of Congress relative to the MCIT is to grant a four (43) – year suspension of tax payment to newly organized corporations. 9-98) Manila Banking Corporation v. all of the properties enumerated in the problem irrespective of where they are situated are includible in the gross estate of Smith. an American citizen and a permanent resident of the Philippines is considered. what constitutes gross estate ? SUGGESTED ANSWER: Yes. was a permanent resident of the Philippines. and more particularly. No. G.000 shares of San Miguel Corporation. ââ 4. The deduction allowed from the gross estates of citizens. but is against the interest or property right which the heir. or of a nonresident alien decedent. e) Standard deduction of P1 million. II v. either alone or in conjunction with any person. Court of Appeals. 85 (B). f) Medical expenses not exceeding P500.) c) Where the insurance was NOT taken by the decedent upon his own life and the beneficiary is not the decedent’s estate. losses.NOTES AND COMMENTS: The beneficiary must not be the decedent’s estate. the same can no longer be contested by means of a disguised protest. or from such prior decedent by gift. because the proceeds are includible as part of gross estate whether or not the decedent retained the power of revocation. or if the property was transferred to him by gift within the same period prior to his death. defined. g) Amount of exempt retirement received by the heirs under Rep. to designate the person who shall possess or enjoy the property or the income therefrom. executor or administrator. his executor or administrator. There is no transfer in contemplation of death if there is no showing that the transferor “retained for his life or for any period which does not in fact end before his death: (1) the possession or enjoyment of. legatee. h) Net share of the surviving spouse in the conjugal partnership. or if the property was transferred to him by gift within the same period prior to his death. The deduction is called a vanishing deduction because the deduction allowed diminishes over a period of five (5) years. It is also known as a deduction for property previously taxed. The probate court is determining issues which are not against the property of the decedent. devisee. NIRC of 1997. (Marcos. et al. whether resident or not. • 80% of the value if the prior decedent died more than one year but not more than two years prior to the death of the decedent. bequest. a) An amount equal to the value specified below of b) Any property forming a part of the gross estate situated in the Philippines c) Of any person who died within five years prior to the death of the decedent. claims. What is the donor’s tax rate if the donee is a stranger? . 273 SCRA 47) DONOR’S TAXES ââ 1. and • 20% of the value if the prior decedent died more than four years but not more than five years prior to the death of the decedent. c) Transfers for public use.” [Sec. • 40% of the value if the prior decedent died more than three years but not more than four years prior to the death of the decedent. The tax assessment having become final. of a resident alien decedent. The approval of the court sitting in probate. executory and enforceable. or e) Which can be identified as having been acquired in exchange for property so received: • 100% of the value if the prior decedent died within one year prior to the death of the decedent. The notices of levy were regularly issued within the prescriptive period. or a claim against the estate as such. NIRC of 1997] ââ 6. d) The Family Home up to a value not exceeding P1 million. or transferred to the decedent by gift within five years prior to his death. 86 (A) (2) and (B) (2). ââ 7. or inheritance. devise. [Sec. or if the property was transferred to him by gift within the same period prior to his death. arrangement and underlining supplied] ââ 8. or if the property was transferred to him by gift within the same period prior to his death.000. (Ibid. or as a settlement tribunal over the estate of the deceased is not a mandatory requirement for the collection of the estate. • 60% of the value if the prior decedent died more than two years but not more than three years prior to the death of the decedent. numbering. Items deductible from the gross estate of a resident or nonresident Filipino decedent or resident alien decedent: a) Expenses. Vanishing deduction (deduction for property previously taxed). 4. Act Mo. Vanishing deduction (property previously taxed) allowed as a deduction from the gross estate of a Filipino citizen.00. 5. b) Property previously taxed. or the right to the income from the property.. or (2) the right. indebtedness and taxes. d) Where such property can be identified as having been received by the decedent from the donor by gift. resident aliens and nonresident estates for properties which were previously subject to donor’s or estate taxes. or if the property was transferred to him by gift within the same period prior to his death. etc. 4917. has in the property formerly held by the decedent. and three minor children. would your answer be the same ? Explain. [Sec. the appraised value of the real property at the time of the gift shall be whichever is the higher of: a) the fair market value as determined by the Commissioner of Internal Revenue (zonal valuation) or b) the fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. are considered as strangers. b.2-2003) 5. or Relative by consanguinity in the collateral line within the fourth degree of relationship. 11. 2-2003) âââ 8. as in the case B. A died leaving as his only heirs. 99 (A). what is meant by “net gifts?” SUGGESTED ANSWER: The net economic benefit from the transfer that accrues to the donee. Is the renunciation subject to donor’s tax? Explain. 11. (4th par.” [Sec. Accordingly. 88 (B) both of the NIRC of 1997] â 7. 99 (A). Give some donations that are exempt from donor’s tax.SUGGESTED ANSWER: When the donee or beneficiary is a stranger. (last par.00 net donation during a calendar year is exempt from donor’s tax [Sec. (Sec. NIRC of 1997] 4. No. the tax payable by the donor shall be 30% of the net gifts. This is so because the renunciation was specifically and categorically done in favor of X and identified heir to the exclusion or disadvantage of Y and Z.000. Rev. if a mortgaged property is transferred as a gift. How are gifts of personal property to be valued for donor’s tax purposes ? SUGGESTED ANSWER: The market value of the personal property at the time of the gift shall be considered the amount of the gift. 102. then the net gift is measured by deducting from the fair market value of the property the amount of the mortgage assumed. in relation to Sec. X.No. Rev. B renounced her hereditary share in A’s estate to X who is a special child. For purposes of the donor’s tax. Supposing that instead of a general renunciation. of her share in the hereditary estate left by the decedent is not subject to donor’s tax. What is the tax base for donations? SUGGESTED ANSWER: The net gifts made during the calendar year. [Sec. irrespective of the degree. What is the valuation of donated real property for donor’s tax purposes ? SUGGESTED ANSWER: The real property shall be appraised at its fair market value as of the time of the gift. a. 99 (B). Regs. SUGGESTED ANSWER: The first P100. Sec. For purposes of the donor’s tax who is a stranger? SUGGESTED ANSWER: A stranger is a is person who is not a: Brother. sister (whether by whole or half-blood). Regs. but imposing upon the donee the obligation to pay the mortgage liability. 11.. ââ 2. Sec. Since B does not want to participate in the distribution of the estate. Y and Z. No. 2-2003) This is so because the general renunciation by B was not specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate. Regs. However. SUGGESTED ANSWER: My answer would be different. including the surviving spouse. Rev. The general renunciation by an heir.. his surviving spouse B. NIRC of 1997) 6. The renunciation in favor of X would be subject to donor’s tax. the other co-heirs in the hereditary estate. SUGGESTED ANSWER: No. spouse. a) . NIRC of 1997] NOTES AND COMMENTS: All relatives by affinity. NIRC of 1997] made by a resident or non resident. a) b) 3. ancestor and lineal descendant. she renounced her hereditary share in the estate. (4th par. Sec. 102.. 000. renders services. NIRC of 1997. No. A. Considering the limited period of time. This area is probably the most difficult area to forecast because there are no statistically perceived patterns. directly liable for its payment. donating P100.000. No. Gifts made by residents or non residents in favor of an educational and/or charitable. trust or philanthropic organization or research institution or organization: Provided. then the amount by which the fair market value of the property at the time of the execution of the Contract to Sell or execution of the Deed of Sale which is not preceded by a Contract to Sell exceeded the value of the agreed or actual consideration or selling price shall be deemed a gift. Value-added tax (VAT) is a tax which is imposed only on the increase in the worth. would you issue a tax assessment on the transaction? Explain your answer briefly.9) Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by residents who are parents to each of their legitimate. 11. âââ2. religious. If he donated the P200. The transaction.00 net gifts for each calendar year.00 is the totality of the net gifts for 2008. 1. which should have been subject to tax was made by nonresident aliens and took place outside of the Philippines. leases. however. or to any political subdivisions of the said Government. Leon would be enjoying the exemption for the first P100. foundation.000. 36. sells. Rep. (5th par. The proper VAT on the sale was paid.000 would be exempt and the remaining P50. 2009 the transaction would be exempt from donor’s tax.00 in 2008 the first P100. Act No.000.00 on December 30.000. goods or properties. SUGGESTED ANSWER: Donation or gift splitting is spreading the gift over numerous calendar years in order to avail of lower donor’s taxes. other than real property that has been subjected to the final capital gains tax. his first cousin. 153866.000 donation over two (2) calendar years.00 on January 1. In 2008 Leon was thinking of donating a P200. properties or services. numbering and arrangement supplied] Gifts made by non-resident aliens outside of the Philippines to Philippine residents are exempt from donor’s taxes because taxation is basically territorial. What is the concept of donation or gift splitting? Illustrate. If you are the BIR examiner assigned to review the sale. 7549) Political contributions made by a resident or non-resident individual if registered with the COMELEC irrespective of whether donated to a political party or individual. As such. Seagate Technology (Philippines). Rev. is transferred for less than an adequate and full consideration in money or money’s worth. ââ10. properties or services.000. or adopted children to the extent of the first ten thousand pesos (P10. Sec. February 11. 2-2003) VALUE-ADDED TAXES (VAT) WARNING !!! Approximately 10% of the total questions asked in the Bar Examination are sourced from VAT and its concepts. who in the course of trade or business. âââ1. and not on the total value of the goods or services being sold or rendered. cultural or social welfare corporation. barters. institution.. G.b) c) d) e) f) g) The donation by a resident or non-resident of a prize to an athlete in an international sports tournament held abroad and sanctioned by the national sports association is exempt from donor’s tax (Sec. 2008 and the remaining P100. SUGGESTED ANSWER: Donor’s taxes would be due on the insufficiency of consideration. (Corp. transferee or lessee of the goods. but in terms of its nature as a tax on consumption. The author has retained the “Stars System” for VAT. Title IV. It is also levied on every importation of goods . Code. ââ 9.000. it should be understood not in the context of the person or entity that is primarily. R.00 to Miklos. This is so even if the donation is separated only by two days because the basis is the calendar year. 2005 citing various authorities} VAT is a percentage tax imposed on any person whether or not a franchise grantee. Regs. [Sec. the reader is advised to focus on areas marked with stars and just browse the unmarked areas. recognized natural.00 would be subject to donor’s tax If Leon spreads the P200. Where property. Gifts made by residents or non-residents to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit.00). That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. [Commissioner of Internal Revenue v. 101 (A). The P200. and shall be included in computing the amount of gifts made during the calendar year. Nature of VAT. exchanges. VAT is an indirect tax that may be shifted or passed on to the buyer. the Corporation Code prohibits corporations from making political contributions.000. merit or importance of goods. who is engaged in the car “buy and sell” business sold to B P7 million Jaguar for only P4 million. Sec. However. in the course of his trade or business.) v. If a special law merely exempts a party as a seller from its direct liability for payment of the VAT. Who are liable for the value-added tax. et al.) 9. If however. properties. a) Cost deduction method. the amount of which may be shifted or passed on by the seller to the purchaser of the goods. Seagate Technology (Philippines). or 2. R. R. 1. No.. G. October 6. G. Regs. a) Any person who. Consumption is "the use of a thing in a way that thereby exhausts it. G. barters. Placer Dome Technical Services (Phils. This method relies on invoices. A VAT exempt seller sells to a non-VAT exempt purchaser. 164365. the term means the performance or "successful completion of a contractual duty. G. merit or improvement of the goods or services. 166408. It is when the output taxes exceed the input taxes that the excess has to be paid. and b) any person who imports goods xxx However. 153866. whether an individual or corporation and whether or not made in the course of his trade or business. (Ibid.) b) Tax credit method. Inc. No. The VAT is a tax on consumption. REASON: The VAT is a tax on consumption.. [Commissioner of Internal Revenue v. Ermita. No. No." Applied to services. Placer Dome Technical Services (Phils. 4. the input taxes exceed the output taxes.. inputs and imports. Such facilitation service has no physical existence. 2008) âââ3. This is a single-stage tax which is payable only by the original sellers. R. having been performed in the Philippines. The seller is still exempt because it could pass on the burden of paying the tax to the purchaser. (Abakada Guro Party List (etc. Sells. usually resulting in the performer's release from any past or future liability x x x" Unlike goods. [Commissioner of Internal Revenue v. G. in the Philippines. Inc. February 11. Meaning of consumption as used under the VAT system. June 8. September 1. Its services. The purchaser is subject to VAT because the VAT is merely added as part of the purchase price and not as a tax because the burden is merely shifted. No. the excess shall be carried over to the succeeding quarter or quarters. and therefore upon consumption. paraphrasing supplied) âââ8. any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes. no payment is required. properties or services. ABS-CBN Broadcasting Corporation.whether or not in the course of trade or business.). No.). (Ibid. exchanges or leases goods or properties. the output taxes charged by a seller are equal to the input taxes passed on by the suppliers.Sec. services cannot be physically used in or bound for a specific place when their destination is determined. . Instead." [Commissioner of Internal Revenue v. No. Seagate Technology (Philippines). transferor or lessor. 2007] 6. (Rev. Illustration of effects of exemptions from VAT which is an indirect tax. et al. 153866. 2005] If at the end of a taxable period. shall be liable to VAT xxx. 2005) 4. R. but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers. or services by the seller. the importer. the VAT is an indirect tax and can be passed on to the buyer. 2007] âââ7. v. [Commissioner of Internal Revenue v. The tax base of the VAT is limited only to the value added to such goods. R. (Quezon City. renders services. For example the services rendered by a local firm to its foreign client are performed or successfully completed upon its sending to a foreign client the drafts and bills it has gathered from service establishments here. Various VAT methods and systems. June 8. an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases. 2005 and companion cases) This was subsequently modified and a mixture of “cost deduction method” and “tax credit method” was used to determine the value-added tax payable. the purchase transaction is not exempt. The VAT utilizes the concept of the output and input taxes. Illustration of the meaning of consumption as used under the VAT system. 16-2005. etc. are therefore also consumed in the Philippines. 164365. there can only be a "predetermined end of a course" when determining the service "location or position x x x for legal purposes. Should the input taxes result from zero-rated or effectively zero-rated transactions or from acquisition of capital goods. 5. R.105-1. 168056. yet takes place upon rendition. Effect of exemptions from VAT which is an indirect tax. How the VAT is imposed on the increase in worth. in the case of importation of taxable goods. Further. February 11. G. 146984.A. It should be stressed that a person has no vested right in statutory privileges. 2006) âââ18.000. [Rev. 168207.00) shall be entitled to a transitional input tax on the inventory on hand as of the effectivity of their VAT registration.Output VAT less Input VAT = VAT due on the increase in worth.) 13.. And 2nd par.R. âââ12. 7716). mackerel. Regs. 4.500.110-1. the sales taxes paid at every level of distribution are not recoverable from the taxes payable. but all the time. equivalent to four percent (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production.00 (except franchise grantees of radio and television broadcasting whose threshold is P10. 8424). creditable against the output tax. 1st par. b) materials purchased for further processing. The right to credit the input tax be limited by legislation because it is a mere creation of law. but which have not yet undergone processing. G.111-1. d) goods in process for sale. and in manufacturing refined sugar. 2005. which are 3. No. NDC. The NDC decided to sell in one lot its NMC shares and five (5) of its ships. c) goods which have been manufactured by the taxpayer.A. (Rev..700 DWT Tween-Decker.00 in any 12-month period.4. Input tax is the value-added tax due on or paid by a VAT-registered person on importation of good or local purchases of goods or services... arrangement and numbering supplied] 15. . [Rev. No. No. 235 SCRA 630) 17. Regs. religious sects which sells and distributes religious literature is not violative of religious freedom. 10. it was only then that the crediting of the input tax paid on purchase or importation of goods and services by VAT-registered persons against the output tax was established. It includes c) input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. although a fixed amount is not imposed for the exercise of a privilege but only for the purpose of defraying part of the cost of registration. No. Sec. and The Tax Reform Act of 1997 (R. et al. 16-2005. The VAT registration fee does NOT violate religious freedom. Pursuant to a government program of privatization. Sec. G. No. much less a constitutional right. (a). a) the transitional input tax and b) the presumptive input tax xxx. shall be allowed a presumptive input tax. and companion cases. The registration fee is thus more of an administrative fee. a privilege that also the law can limit. or e) oods and supplies for use in the course of the taxpayer’s trade or business as a VAT-registered person. As used in this paragraph. properties or services by any VAT-registered person. and companion cases. the term processing shall mean pasteurization. 1st par. vs. It does not include isolated transactions. 273 imposing a 10% multi-stage tax on all sales. Interpretation of the term “In the Course of Trade or Business” as used in the VAT system. This continued with the Expanded VAT Law (R. The right to credit input tax as against the output tax is clearly a privilege created by law.000. on the following: a) goods purchased for resale in their present condition.000. Regs.. Included in the input tax. 4. not from time to time. (Rev. R. (Commissioner of Internal Revenue v. and milk.500. Secretary of Finance. July 28. Magsaysay Lines.4. Concept of transitional input tax credits on beginning inventories. Prior to the enactment of multi-stage sales taxation. Inc. Regs. 2nd sentence. 16-2005. Taxpayers who become VAT-registered persons upon exceeding the minimum turnover of P1. one not imposed on the exercise of a privilege. Persons or firms engaged in the processing of sardines.. No. The term "doing business" or “course of business” conveys the idea of business being done. (ABAKADA Guro Party List. arrangement and numbering supplied ) 14. (Tolentino v. et al. on the motion for reconsideration) âââ11. Ermita. The VAT registration fee imposed on non-VAT enterprises which includes among others.111-1.. etc. Concept of presumptive input tax credits. (b)] 16. including lease or use of properties.000. in the course of his trade or business. merit or improvement f the goods or services. 1st par. et al. Output tax is the value-added tax due on the sale or lease or taxable goods.110-1. No. With the advent of Executive Order No. paraphrasing. cooking oil and packed noodle-based instant meals. canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such a manner as to prepare it for special use to which it could not have been put in its original form or condition. decided to sell to private enterprise all of its shares in its wholly-owned subsidiary the National Marine Corporation (NMC). No. or who voluntarily register even if their turnover does not exceed P1. October 15. a VAT-registered entity created for the purpose of selling real property. Among the stipulated terms and conditions for the public auction was that the winning bidder was to pay "a value added tax of 10% on the value of the vessels. 2009. 162005. Baliwag Navigation.106-7 (a). to the NMC.registered person.00. b) Dissolution of a partnership and creation of a new partnership which takes over the business. a domestic corporation engaged in the real estate business. The sale which was involuntary and made pursuant to the declared policy of Government for privatization could no longer be repeated or carried on with regularity. or cessation. stock-in-trade. also its wholly-owned subsidiary. Sec. such as RA No. âââ23. Regs. (Rev. Sale of real properties primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT. 1. whether capital goods.106-3.000. (Commissioner of Internal Revenue v. then initially leased to Luzon Stevedoring Company. It should be emphasized that the normal VAT-registered activity of NDC is leasing personal property. barter. No. 12% on the gross selling price because the sale was made in the ordinary course of trade of business of X.106-7. Only real estate dealers are subject to VAT. paraphrasing. The NMC shares and the vessels were offered for public bidding.000. Is the sale subject to the value-added tax (VAT)? If so. This finding is confirmed by the Revised Charter of the NDC which bears no indication that the NDC was created for the primary purpose of selling real property. offered to buy the shares and the vessels for P168. xxx [Rev. Subsequently. No. Sale of or lease of real properties subject to VAT. 8763. On September 4. Regs. The bid was approved by the Committee on Privatization. R. 16-2005. Is the sale subject to VAT? SUGGESTED ANSWER: No. [Rev. or 1. XYZ. No. et al. not from time to time. The following sales of real properties are exempt from VAT. on a bareboat basis. 22. Inc... Inc. sold a building for P10. Creditors in payment of debt or obligation c) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned. 2006) âââ19. 2. The term "carrying on business" does not mean the performance of a single disconnected act. namely: a) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business. Inc.) Thus." Magsaysay Lines. and FIM Limited of the Marden Group based in Hongkong ."Kloeckner" type vessels. while "doing business" conveys the idea of business being done. "Course of business" is what is usually done in the management of trade or business. d) Retirement from or cessation of business. The vessels were constructed for the NDC between 1981 and 1984. 146984. G. July 28. 7279. the vessels were transferred and leased. 16-2005. "Course of business" or "doing business" connotes regularity of activity. otherwise known as the “Urban and Development Housing Act of 1992” and other related laws. xxx xxx xxx . but means conducting. the proprietor of a single proprietorship sells his entire business. whether or not the business is continued by the new owner or successor. The bid was made by Magsaysay Lines. In the instant case. 4. a) Change of ownership of the business. Regs. and a Notice of Award was issued to Magsaysay Lines. (4) paraphrasing. purportedly for a new company still to be formed composed of itself. b) Sale of real properties utilized for low-cost housing as defined by RA No. Transactions considered retirement or cessation of business “deemed sale” subject to VAT. the tax is imposed on sales. The VAT is also imposed on certain transactions “deemed sales” which include: a) Transfer. SUGGESTED ANSWER: Yes. arrangement and numbering supplied] 20. Consigned goods returned by the consignee within the 60-day period are not deemed sold. xxx b) Distribution or transfer to: 1. No. 7835 and RA No.. or exchange or goods and services.000. 4. 1st par. use or consumption not in the course of business or properties originally intended for sale or for use in the course of business. supplies or materials as of the date of such retirement. Inc. arrangement and numbering supplied] 21.. capital transactions of individuals are not subject to VAT.00. but all the time. the sale was an isolated transaction.. Sec. 4. Shareholders or investors as share in the profits of the VAT. how much? Explain. with respect to all goods on hand. prosecuting and continuing business by performing progressively all the acts normally incident thereof. a domestic corporation engaged in the real estate business. Magsaysay Lines. There is change in the ownership of the business where a single proprietorship incorporates. Sec.000. Under the Value Added Tax (VAT). xxx or 2. No. 7279. k) transportation contractors on their transport of goods or cargoes. Regs.000. goodwill. paraphrasing and numbering supplied] 24. “Sale or exchange of services”. and movie houses. 16-2005. telephone and telegraph. design or model.500. further. and franchise grantees of gas and water utilities. l) common carriers by air and sea relative to their transport of passengers. the amounts stated herein shall be adjusted to its present value using the Consumer Price Index. c) The supply of scientific. and p) similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed P1. processing. If two or more adjacent residential lots are sold or disposed in favor of one buyer. o) non-life insurance companies (except their crop insurances). trademark. and collected. including surety. Regs. goods or cargoes from one place in the Philippines to another place in the Philippines. i) dealers in securities. Also included in the phrase “sale or exchange of services.00.00) and below. arrangement and numbering supplied] 26. cafes and other eating places. defined. pension houses. inns.00). [NIRC of 1997. customs and immigration brokers. n) franchise grantees of electric utilities. provided. commercial or scientific equipment. radio and television broadcasting and all other franchise grantees except franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P10.000. manufacturing or repacking goods for others. 4. including those performed or rendered by the following: a) construction and service contractors. although covered by separate titles and/or separate tax declarations. for the purpose of utilizing the lots as one residential lot. arrangement and numbering supplied] 25. that such adjustment shall be published through revenue regulations to be issued not later than March 31 of each year. or house & lot and other residential dwellings valued at Two Million Give Hundred Thousand Pesos (P2. operators or keepers of hotels. indemnity and bonding companies. motels. a) The lease or the use of or the right or privilege to use any copyright. including the use or lease of properties. 1st par. 9337. including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes. Sec. m) sales of electricity by generation companies. b) a value-added tax equivalent to twelve percent (12%) of gross receipts c) derived from the sale or exchange of services.00) and below where the instrument of sale/transfer/disposition was executed on or after November 1. whether personal or real. assessed. 2009 and every three (3) years thereafter. a) There shall be levied. j) lending investors. patent. and other related laws wherein the price ceiling per unit is P225. and/or distribution companies. b) stock.A. h) proprietors or operators of restaurants. as amended by R. The term “sale or exchange of services” means the performance of all kinds of services in the Philippines for others for a fee. No. No. Rev. shall be presumed as a sale of one residential lot. 4. refreshment parlors. remuneration or consideration. theaters. or the right to use any industrial. resorts.500. [NIRC of 1997.000. [Rev. g) proprietors. plan. Sec. f) persons engaged in milling.108-2. 108 (A).000. transmission.c) d) Sale of real properties utilized for socialized housing as defined under RA No. That not later than January 31. as published by the National Statistics Office (NSO). technical.109-1 (B). fidelity.00 or as may from time to time be determined by the HUDCC and the NEDA and other related laws. (p).. real estate. . whether covered by one or separate Deed of Conveyance. trade brand or other like property or right. b) The lease or the use of. 108 (A). rest-houses. when sold or disposed of to one and the same buyer. whether in kind or in cash. c) lessors of property. d) persons engaged in warehousing services e) lessors or distributors of cinematographic films. Sec. xxx xxx xxx Sale of residential lot valued at One Million Five Hundred Thousand Pesos (P1. secret formula or process.000. 9337. industrial or commercial knowledge or information. commercial. 2005. provided.000. as amended by R. VAT on services and lease of properties. including clubs and caterers.500. No. Adjacent residential lots.A. However. Exception to the destination principle. b) The input tax on the purchases of a VAT registered person who has zero-rated sales may be allowed as tax credits or refunded WHILE the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt. American Express International. 16-2005. The tax rate is set at zero. G. or right as is mentioned in subparagraph (2) hereof or any such knowledge or information as is mentioned in subparagraph (3) hereof. June 29. The lease or the use of or the right to use radio. Regs. those destined for use or consumption within the Philippines shall be imposed the twelve percent (12%) VAT. The seller of such transactions charges no output tax. while imports are taxed. properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with Rev. This is so because the law neither makes a qualification nor adds a condition in determining the tax situs of a zerorated service. 153866. G. Regs. Zero-rated sale distinguished from exempt transactions: a) A zero-rated sale is a taxable transaction but does not result in an output tax WHILE an exempt transaction is not subject to the output tax. Sec. The tax paid or withheld is not deducted from the tax base. The law clearly provides for an exception to the destination principle. exports are zero-rated.) âââ27.) âââ28. R.. When applied to the tax base. 2005) âââ30. television. (Commissioner of Internal Revenue v. Inc.). (Philippine Branch). No. June 29. The place where the service is rendered determines the jurisdiction to impose the VAT Performed in the Philippines. for a zero percent VAT rate for services that are performed in the Philippines. R. of Internal Revenue v. No. assistance or services rendered in connection with technical management or administration of any scientific. No." âââ32. 2005] The “Cross Border Doctrine” is also known as the destination principle. Goods and services are taxed only in the country where they are consumed. industrial or commercial undertaking. As a general rule. 152609. or The supply of services by a non-resident person or his employee in connection with the use of property or rights belonging to. machinery or other apparatus purchased from such nonresident person. 150154. Hence. "paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [BSP]. the sale or exchange of a particular service is completely freed from the VAT. G. by way of a refund or as an input tax credit.” âââ31.. February 11. Concept of VAT zero-rating. Regulations No. Rationale for zero-rating of exports. (Rev. the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. [Commissioner of Internal Revenue v. that is. No. Destination principle under the VAT System. while. Thus. 16-2005.d) e) f) g) h) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property. The lease of motion picture films. 2005 citing various cases) 29. but can claim a refund or a tax credit certificate for the VAT previously charged by suppliers. The Philippine VAT system adheres to the Cross Border Doctrine. film tapes and discs.108-2. A zero-rated sale of goods or properties by a sale by a VAT-registered person is a taxable transaction for VAT purposes but the sale does not result in any output tax. Situs of taxation of zero-rated VAT services such as facilitating the collection of receivables from credit card members situated in the Philippines and payment to service establishments in the Philippines. (Philipppine Branch). No. such rate obviously results in no tax chargeable against the purchaser. 152609. 16-2005. American Express International. actual or constructive export of goods and services from the Philippines to a foreign country must be zero-rated for VAT. . the service is necessarily subject to its jurisdiction for the State necessarily has to have a “substantial connection” to it in order to enforce a zero rate. Zero-rated Sales of Goods or Properties. This is also known as the “Cross Border Doctrine. R. The place of payment is immaterial much less is the place where the output of the service will be further or ultimately used. (Rev. The supply of technical advice. Inc. August 9. project of scheme. [Commissioner of Internal Revenue v. 4. the input tax on the purchases of goods. the tax that is included in the cost of purchases attributable to the sale or exchange. or the installation or operation of any brand. venture. because the seller is entitled to recover. âââ33. satellite transmission and cable television time. No. 1st par. 2nd par. Inc. Toshiba Information Equipment (Phils. 2005] Under a zero-rating scheme. (Commissioner. no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. G. Seagate Technology (Philippines). according to which. R. American Express renders assistance to its foreign clients by receiving the bills of service establishments located in the country and forwarding them to their clients abroad.108-5 (a). “Ecozone”. R. August 31. While the service performed by American Express is subject to VAT it is zero-rated. b) Considered export sales under Executive Order No. c) For this service. 162005. The VAT system uses the destination principle which posits that the goods and services are taxed only in the country where they are consumed. d) It is not an entity exempt under any of our laws or international agreements. it is deemed a separate customs territory and is regarded in law as foreign soil. fortuitous. 16-2005. (Commissioner. Inc. the input tax on purchases of goods. (Commissioner of Internal Revenue v. having been performed in the . These sales are zero-rated or subject to a tax rate of zero percent. among which are the following: a) The service is performed in the Philippines. on a significant scale with a reasonable degree of frequency. it definitely receives consideration in foreign currency that is accounted for in conformity with law. An ECOZONE may contain any or all of the following: industrial estates (IEs).106-5. No. Toshiba Information Equipment (Phils. However. 16-2005. 152609. Sec. Notably. 150154. Regs. 2005] âââ38. G. R. (Rev. Zero-rated sales by VAT-registered persons. as follows: a) It regularly renders in the Philippines the service of facilitating the collection and payment of receivables belonging to a foreign company that is a clearly separate and distinct entity. words in italics supplied) âââ39. recreational. Inc. Regs. b) The services are within the categories provided for under the Tax Code. July 21.. export processing zones (EPZs). This is so because it meets all the requirements for VAT imposition. Zero rating is primarily intended to be enjoyed by the seller. Sale of gold to the Central Bank considered as export sales. defined. As export sales. or attenuated. tourist. Sec. but shall not result in any output tax. No. c) Foreign currency denominated sale.. such as PEZA. free trade zones and tourist/recreational centers. the law itself provides for clear exceptions under which the supply of services shall be zero-rated. investment and financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations. 2005) 40. no tax is chargeable to it as purchaser. An ECOZONE or a Special Economic Zone has been described as – [S]elected areas with highly developed or which have the potential to be developed into agro-industrial. Sec. G. 2005) 36. Sekisui Jushi Philippines. However.. hence. the sale of gold to the Central Bank is zerorated. 224. The services are performed or successfully completed upon send to its foreign clients the drafts and bills it has gathered from service establishments here. The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the Customs Territory. June 29. and BIR Revenue Regulations that alter the legal requirements for zero-rating are ultra vires and invalid. industrial. Service performed by American Express in facilitating the collection of receivables from credit card members situated in the Philippines and payment to service establishments in the Philippines in behalf of its Hong-Kong based client is subject to VAT but zero-rated. while an ecozone is geographically within the Philippines. and not at random. No. No. 4. and c) It is paid for in acceptable foreign currency of the Bangko Sentral ng Pilipinas. Sales to ecozone. [Commissioner of Internal Revenue v. Regs.R. (Commissioner of Internal Revenue v. of Internal Revenue v. August 9. American Express International. No. 2006 citing various authorities) 37. 153204. The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: a) Export sales. which charges no output VAT but can claim a refund of or a tax credit certificate for the input VAT previously charged to it by suppliers. and d) Sales to persons or entities deemed tax-exempt under special law or international agreement. banking. carried on over a sustained period of time. Its services. Zero-rated sale of service.. (Philippine Branch). No. considered export-sale.). commercial. G. Sales by suppliers from outside the borders of the ecozone to this separate customs territory are deemed as exports and treated as export sales. 149671. R. paraphrasing supplied) 35. Inc. Manila Mining Corporation. No. properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with Rev. G.c) Persons engaged in transactions which are zero rated being subject to VAT are required to register WHILE registration is optional for VAT-exempt persons. 4. A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT purposes. b) Such service is commercial in nature. [Rev. âââ34. defined. 2nd par. Philippines are therefore also consumed in the Philippines. R. [Commissioner. 2005] . G. (Philippine Branch). No. 152609. The BIR could not change the law. Thus. of Internal Revenue v. June 29. its services are exempt from the destination principle and are zero-rated. American Express International. Inc.