Part I: Taxation in General CHAPTER I: GENERAL PRINCIPLES OF TAXATION I. TAXATION 1.

Definition: The power by which the sovereign raises revenue to defray the necessary expenses of government; a way of apportioning costs of government among those privileged to enjoy its benefits and must bear its burdens. 2. Nature of Internal Revenue Laws: 1. Inherent in sovereignty 2. Legislative in character 3. Subject to Constitutional and Inherent limitations 4. Civil, not political Hilado v CIR: Internal revenue laws are not political in nature and as such were continued in force during the period of enemy occupation and in effect were actually enforced by the occupation government. Such tax laws are deemed to be the laws of the occupied territory and not the occupying enemy. 3. Scope of Taxation: Subject to the will of legislative bodies and the discretion of the authorities which exercise it, the power of taxation is: 1. Comprehensive, 2. Unlimited, 3. Plenary, 4. Supreme. It involves the subjects/objects to be taxed, the purpose of the tax (public purpose), amount or rate, manner/means/agencies for collection. a. S28, A6 Consti: 1. The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. Uniform: All taxable articles of the same class shall be taxed at the same rate; Equitable: Its burden falls upon those better able to pay; Progressive: Tax rate goes up as tax base goes up. Phases: 1. Levying/Imposition Determine persons/property to be taxed, sums raised, rate, time and manner of levying, collecting, receiving tax 2. Collection Prescribe manner of reinforcing the obligation 3. Payment by taxpayer Chamber of Real Estate v Romulo Taxes are the lifeblood of the govt. The exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and the common good. Taxation is an inherent attribute of sovereignty. It is a power that is purely legislative. In the legislature primarily lies the discretion to determine the nature/kind, object/purpose, extent/rate, coverage/subjects, and situs/place of taxation. It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons/things within its jurisdiction. The legislature weilds the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom/what, and where it shall be imposed. As a general Paolo Miguel Javier

rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature to its constituency. Nevertheless, it is circumscribed by constitutional limitations, but carries a presumption of constitutionality. Sison v Ancheta The power to tax is an attribute of sovereignty, and for all its plenitude, the power is not unconfined. There are restrictions set forth by the consti. Adversely affecting property rights, both the due process and equal protection clauses may properly be invoked to invalidate a revenue measure. The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the consti. It is inherent in the power to tax that a state be free to select the subjects of taxation, and inequalities which result from a singling out of one particular class for taxation infringe no constitutional limitation. The rule of taxation shall be uniform and equitable, and this is met when the tax operates with the same force and effect in every place where the subject may be found. Uniformity does not call for perfect uniformity or equality, it just means that all taxable articles of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. All that is required is that the tax applies equally to all persons placed in similar situations. It is enough that the classification must rest upon substantial distinctions. Sarasola v Trinidad Taxation is an attribute of sovereignty. It is the strongest of all the powers of government. Public policy decrees that since upon the collection of revenue depends the existence of government, whatever determination shall be arrived at by the legislature should not be interfered with unless there be a clear violation of some consti inhibition. 4. Underlying Theory & Basis: Existence of government is a necessity, cant continue without means to pay its expenses, and for those means it has the right to compel all citizens to contribute; state demands taxes so it may be enabled to perform functions of government; for contributions received, the government renders no special benefit but only secures to the citizen that general benefit which results from protection to his person/property. Benefits Received Principle: The basis of taxation is found in the reciprocal duties of protection and support between state & its inhabitants. In return for contribution, taxpayer receives general advantages & protection from government. CIR v Algue Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. Such collection should be made in accordance with law as any arbitrariness will negate the very reason for government. Taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, every person who is Page 1

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able to must contribute his share in the running of the govt. The govt, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. 5. Principles of a Sound Tax System: 1. Fiscal Adequacy sources of revenue be adequate to meet government expenditures 2. Equality ability to pay principle: the tax burden should be in proportion to the taxpayers ability to pay 3. Administrative Feasibility Capable of just, convenient, and effective administration 6. Comparison with Police Power & Eminent Domain Similarities: 1. Rest on Necessity, no effective government without them 2. Exist Independently of the Constitution 3. Ways by which the State Interferes with private rights/property 4. Legislative in nature & character, although exercise is Executive 5. Presupposes Equivalent Compensation Police Power power of the state to enact such laws in relation to persons/property as may promote public health, morals, safety and the general prosperity and welfare of its inhabitants Eminent Domain power of the state to take private property for public use upon paying to the owner a just compensation to be ascertained by law

Amount of imposition

Generally no limit

Relationsh ip to consti Police Power

Subject to limitations

from the maintenance of a healthy economic standard of society Not more than sufficient to cover cost of license & necessary espenses Relatively free from limits

No limit but the amount shoud be based on market value Subject to limits

Power to Tax Exercised for the purpose of raising revenue

Exercised for the promotion of the public welfare by means of Regulation of dangerous/potentially dangers businesses Not subject to consti restrictions applicable to tax Power of Eminent Domain Originated in political necessity Exercised for public purpose Requires just compensation for taking private property for public

Subject to consti limitations

Power to Tax Originated in political necessity Exercised for public purpose Does not require just compensation

Taxation Exercising Authority Govt/Political subdivisions

Police Power Govt/Political subdivisions

Eminent Domain May be granted to pub service companies/pu b utilities Public use/ benefit Must be w/ just compensation Entity/individu al as owner of property Transfer of right to the property Market value of property

*If the primary purpose of a statute exacting an imposition is to raise revenue, it is an exercise of the TAXING POWER, but if for regulation of some particular occupation/calling/activity, it is an exercise of the POLICE POWER, even if it incidentally produces revenue. *An exaction which is invalid as an exercise of the taxing power may not be upheld as an exercise of the police powere where it is clear that the legislature did not intend it to be such; BUT an exaction which is an invalid exercise of the taxing power may be upheld as a regulatory measure where the primary purpose in imposing it was regulation. Gerochi v DOE The theory behind the exercise of the power to tax emanates from necessityl without taxes, govt cannot fulfill its mandate of promoting general welfare. Police power is the power of the state to promote public welfare by restraining and regulating the use of liberty and property. As an inherent attribute of sovereignty, the power to regulate means the power to protect, foster, promote, preserve, and control, with due regard for the interests of the public, then of the utility and of its patrons. Matalin Coconut v Mun of Malabang A fixed tax denominated as a police inspection fee is void where it is not for a public purpose, just and uniform, becuase the Page 2

Purpose

Support of government

Regulated for promoting general welfare

Persons affected Effect

Class of entities/indivi duals Becomes part of public funds Protection, general benefits

Class of entities/individu als Restraint on injurious use of property No direct or immediate benefit But only such as may arise

Benefits received

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Taxation Law Reviewer

police do nothing but count the number of cassava sacks shipped out. The only service rendered by the municipality by way of inspection, is for the policeman to verify from the driver of the tructs passing by the checkpoint the number of bags to be shipped out based on the trip tickets to compute the total amount of tax to be collected. Lutz v Araneta As the protection and promotion of the sugar industry is a matter of public concern, the legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. The legislative discretion must be allowed full play, subject only to the test of reasonableness. If object and methods are constitutionally valid, no reason is seen why the state may not levy taxes to raise funds. Taxation may be made the implement of the states police power. NTC v CA Since congress has the power to exercise the states inherent powers of police power, eminent domain and taxation, the distinction between police power and tax which could be significant if the exercising authority were mere political subdividsions (since delegation by it to such political subdivisions of one power does not necessarily include the other) would not be of any moment when congress itself exercises the power. II. TAXES 1. Definition: Enforced pecuniary contribution levied by lawmaking body of state having jurisdiction over the subject of the burden for the support of government and all public needs (Phil Rabbit case) Republic v Phil Rabbit Tax refers to a financial obligation imposed by a state on persons, whether natural/juridical, within its jurisdiction for property owned/income earned, business/profession engaged in, or any such activity analogous in character for raising the necessary revenues to take care of the responsibilities of government. As distinguished from other pecuniary burdens, the differentiating factor is that the purpose to be subserved is the raising of revenue. A tax then is neither a penalty that must be satisfied or a liability arising from contract, nor a licenes or a fee as a manifestation of an exercise of the police power. Unlike a tax, a regulatory fee has not for its object the raising of revenue but looks rather to the enactment of specific measures that govern relations not only as between individuals but also as between private parties and the political society. 2. Essential Characteristics: 1. Enforced contribution 2. Levied by the state which has jurisdiction over persons/property 3. Levied by the lawmaking body 4. Generally payable in money 5. Proportionate in character 6. Levied on persons/property 7. Levied for public purpose Paolo Miguel Javier

3. Taxes distinguished from: a. Debts: General Rule: Taxes are NOT subject to set off Exception: If amounts are due & demandable and liquidated, tax may be subject to set off Tax Liability/obligation Based on law Cannot be assigned Payable in money Cannot be subject to set off/compensation Can be imprisoned for nonpayment, except poll tax Governed by special prescriptive periods Does not draw interest except when delinquent Debt Liability/obligation Based on contract Assignable Payable in money/kind Can be subject to set off/compensation Cannot be imprisoned for nonpayment Ordinary prescription Draws interest when stipulated/when there is default

Caltex v COA Taxation is not only a measure to raise revenue, but may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power. The oil industry is greatly imbued with public interest as it vitally affects the general welfare. Any unregulated increase in oil prices could hurt the lives of people and cause economic crisis. The stabiliation then of oil prices is one of prime concern, which the state via police power may address. Eo 137 provides that the OPSF is taxation. A taxpayer may not offset taxes due from claims he may have against the government. Taxes cannot be the subject of compensation because the govt and taxpayer are NOT mutually creditors and debtors of each other and a claim for taxes is not such a debt/demand/contract as is allowed to be set off. Elements of Compensation: 1. Each one of the obligors be bound principally, and he be at the same time a principal creditor of the other 2. Both debts consist in a sum of money, or of kind, be the same quality, 3. Both debts are due, 4. Both debts are liquidated and demandable, 5. There be no retention/controversy by third persons Francia v IAC By legal compensation, obligations of persons who in their own right are reciprocally debtors and creditors of each other are extinguished . there can be no offsetting of taxes against the claims that the taxpayer may have against the govt. A person cannot refuse to pay a tax on the ground that the govt owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the govt. No

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setoff is admissible against demands for taxes levied for general/local govt purposes. Reason: taxes are not in the nature of contracts between the parties but grouw out of duty to and are the positive acts of the govt to the making and enforcing of which, the personal consent of individual taxpayer is not required. Philex Mining v CIR Taxes cannot be subject to compensation because the govt and the taxpayer are not creditors and debtors of each other. Distinction: Debts are due to the govt in its corporate capacity while taxes are due to the govt in its sovereign capacity. A person cannot refuse to pay a tax on the ground that the govt owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the govt. Tax is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any taxpayer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the govt revenue system. A taxpayer cannot refuseto pay his taxes when they fall due simply because he has a claim against the govt or that the collection of the tax is contingent on the result of the lawsuit if filed. b. License Fees imposition on right to use/dispose of property, pursue business, or exercise a privilege; imposed under police power Tax Enforced contribution assessed by the sovereign authority to defray public expenses Revenue Taxing power Generally no limit on amount of tax that may be imposed License Fee Legal compensation/reward for specific services

Progressive Devt Co v QC A license fee is imposed in the exercise of police power primarily for purposes of regulation while a tax is imposed under the taxing power for raising revenues. Thus if the generating of revenue is the primary purpose and regulation merely incidental, the imposition is a tax, but if regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax. To be considered license, the imposition must relate to occupation/activity that so engages the public interes in health, morals, safety and devt as to require regulation for protection and promotion of public interes, the imposition must also bear a reasonable relation to the probable expenses of regulation, taking into acct the cost of direct regulation but also its incidental consequences. When an activity is of a character that inspection/supervision is reasonably necessary for the safeguarding of the general welfare, the legislature may provide that such inspection shall be carried out at the expense of persons engaged in such occupation or performing such activity, and no one shall engage in the occupation until a fee sufficiton to cover the cost has been paid. Accordingly, a charge of a fixed sum which bears no relation at all to the cost of inspection may be held to be a tax rather than a license. PAL ESSO v CIR A tax is levied to provide revenue for govt operations while the proceeds of the margin fee are applied to strengthen our countrys international reserves, and thus is a police measure. c. Special Assesments/Special Levies: Enforced proportional contribution from onwers of lands especially benefited by public improvements. Characteristics: 1. Levied on land, 2. Not personal liability of the person assessed, 3. Based wholly on benefits, 4. Exceptional time & place. Exemption from taxation does not include exemption from special assessment. Apostolic Prefect v Treasurer of Baguio An assessment is confined to local impositions upon property for the payment of the cost of public improvements in its immediate vicinity and levied with reference to special benefits to the property assessed. The imposition of a charge on all property in a prescribed area is a tax although the purpose is to make a local improvement on a street, while a charge imposed only on property owners benefited is a special assessment, even if the statute calls it a tax. d. Tolls: a sum of money for the use of something, generally applied to the consideration paide for use of a road/bridge of a public nature Taxes Levied for support of government Regulated by governments necessities Tolls Compensation for the use of anothers property/improvements Determined by cost of property and consideration of Page 4

Regulation Police power Amount should be limited to the necessary expense of inspection And regulation Imposed on right to exercise a privilege Failure to pay makes the act/business illegal

Imposed on persons and property Failure to pay does not make the business illegal

*Exemption from taxes may not include exemption from license fees; the power to regulate as an exercise of police power does not include the power to impose fees for revenue; an exaction can be considered both a tax and a license fee. But a tax may have only a regulatory purpose. Imposition is a tax if primary purpose is generate revenue and regulation merely incidental. If regulation is primary purpoes, the fact that incidentally revenue is obtained does not make imposition a tax.

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return Demand of sovereignty Imposed only by government Demand of proprietorship Imposed by government or private individuals/entities

e. Penalties: any sanction imposed as punishment for violation of law or acts deemed injurious Tax Raise revenue Imposed only by governement Penalty Regulate conduct Imposed by govt/private individuals/entities

burden of the taxes which they could shift to NPC if NPC did not enjoy examption from indirect taxes. The NPC may refuse to pay that part of the normal purchase price of oil which represents all/part of the taxes previously paid by the oil cos to BIR. If NPC does buy oil, it is entitled to be reimbursed by the BIR for that part of the buying price of NPC which represents the tax already paid by the oil co vendor to the BIR. 3. As to Determination of Amount a. Specific tax of a fixed amount imposed by some standard of weight/measurement, requires no assessment or valuation other than a listing or classification of the objects to be taxed b. Ad Valorem (according to value) Tax of a fixed proportion of the value of the property with respect to which the tax is assessed; requires the intervention of assessors/appraisers to estimate the value of such property before the amount due from each taxpayer can be determined. 4. As to Purposes a. General/Fiscal/Revenue imposed for general purposes of the government, to raise revenue for governmental needs b. Special/Regulatory imposed for a special purpose, to achieve some social/economic ends irrespective of whether revenue is actually raised/not 5. As to Scope: National or Municipal/Local 6. As to Graduation/Rate a. Proportional tax based on a fixed percentage of the amount of the property/receipts, or other basis to be taxed b. Progressive/Graduated The rate increases as the tax base increases c. Regressive Rate decreases at the tax base increases IV. DOCTRINES IN TAXATION 1. Prospectivity of Tax Laws Hydro Resources v CA - EO 860 which was the basis for the imposition of the ad valorem duty took effect December 1982. The importations were effected in 1978 and 1979 by NIA. It is a cardinal rule that laws shall have no retroactive effect unless contrary is provided. EO 860 does not provide for its retroactivity. The Deputy Minister of Finance even clarified that letters of credit opened prior to the effectivity of EO 860 are not subject to its provisions. In the case, the procurement of the equipment was not on a tax exempt basis as the import liabilities have been secured to paid under a financial scheme. It is a matter of implementing a pre-existing agreement, hence, the imported articles can only be subject to the rates of import duties prevailing at the time of entry or withdrawal from the customs custody. 2. Imprescriptibility of Taxes CIR v Ayala Securities Where the government has not by express statutory provision provided a limitation upon its Page 5

NDC v CIR The jap shipbuilders were liable to tax on interest remitted to them (interest derived from sources within the phils shall bell treated as gross income and liable to tax. It is not the NDC that is being taxed. Therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the jap shipbuilders. f. Customs Duties: taxes imposed on goods exported/imported. Taxes is broader as it includes custom duties. III. CLASSIFICATION OF TAXES 1. As to Subject matter a. Personal/Poll/Capitation tax of a fixed amount, imposed on persons within a specified territory without regard to their property or business b. Property tax imposed on real/personal property in proportion to valiuw or other reasonable method of ascertainment c. Excise a charge imposed upon the performance of an act, the enjoyment of a privilege or engaging in an occupation, profession, or business 2. As to Incidence/Burden a. Direct Demanded from the person who also shoulders the burden of the tax; the taxpayer is directly/primarily liable and cannot shift the burden b. Indirect Demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, falling finally upon the ultimate purchaser/consumer; tax imposed upon goods before they reach the consumer who ultimately pays for it not as tax but part of the price Maceda v Macaraig The oil companies w/c supply oil to NPC have to pay the taxes. By the very nature of indirect taxation, the exonomic burden of such taxation is expected to be passed on through the channels of commerce to the user or consumer of the goods sold. Because the NPC has been exempted from both direct & indirect taxation, the NPC must be held exempted from absorbing the economic burden of indirect taxation. This means that the oil companies which wish to sell to NPC must absorb all or part of the exonomic Paolo Miguel Javier

Taxation Law Reviewer

right to assess unpaid taxes, such right is imprescriptible. There is no time limit on the right of the CIR to assess the tax on unreasonable accumulated surplus since there is no express statutory provision limiting such right or providing for its prescription. 3. Double Taxation: Not every kind of duplicate taxation is proscribed. Although taxation of the same person twice because of his ownership of the same property is sometimes referred to as unconstitutional, there are limits: 1. Both taxes must have been imposed in the same year 2. For the same purpose 3. Upon property owned by the same person 4. By the same taxing authority 5. Both impositions must be taxes *Double taxation is to be avoided and the intention of the legislature to impose it will not be presumed, must be should by clear language Villanueva v Iloilo The ordinance which imposed a municipal license tax is valid. It is not a real estate tax, as it does not possess its attributes. It is not a tax on the land on which the tenement houses are erected although both land and tenement houses may belong to the same owner. The tax is not a fixed proportion of the assessed value of the tenement houses and does not require the intervention of assessors. It is not payable at a designated time and is not enforceable against the tenement houses either by sale or distraint. Therefore, there is no double taxation. In order to constitute double taxation, the same property must be taxed twice when it should be taxed but once; must be imposed on the same property/subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period, and must be the same kind/character of tax. A real tax and the tenement tax, although imposed by the same taxing authority are not of the same kind/character. Sanchez v CIR Sanchez falls within the definition of real estate dealers. The kind and nature of the building shows that it was from the beginning intended for lease asa asource of income. Appellant argues that she is already paying real estate taxes and income taxes, so that to further subject its rentals to the real estate dealers tax amounts to double taxation. Rejected, saying that licens tax may be levied upon a business although the land or property used therein is subject to property tax; and that the state may collect an ad valorem tax on property used in a calling and at the same time impose a license tax on the pursuit of that calling, the imposition of the latter kind of tax being in no sense a double tax. Punzalan v Mun Board Mla Double taxation may not be invoked where one tax is imposed by the state and the other by the city. There is nothing inherently obnoxious in the requirement that license fees/taxes be exacted with respect Paolo Miguel Javier

to the same occupation/calling/activity by both the state and the political subdivisions thereof. Mla v CocaCola Bottlers Double taxation means taxing the same property twice when it should be taxed only once taxing the same person twice by the same jurisdiction for the same thing (direct duplicate taxation) the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period, and the taxes must be of the same kind/char. 4. Methods of avoiding the occurrence of Double Taxation a. Tax Treaty CIR v SC Johnson International Juridical Double Taxation: the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subj matter and for identical periods. Reason for doing away with double taxation: encourage the free flow of goods and services and the movement of capital, technology, and persons between countries, conditions deemed vital in creating robust and dynamic ecomnomies. Double taxation usually takes place when a person is a resident of a contracting state and derives income from/owns capital in the other contracting state and both states impose tax on that income/capital. In order to eliminate double taxation, a TAX TREATY resorts to several methods: 1. It sets out the respective rights to tax of the state/source/situs and of the state of residence with regard to certain classes of income/capital. In some cases, an exclusive right to tax is conferred on one of the states, however, for other items, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. 2. Applies whenever the state of source is given a full/limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. There are 2 methods of relief: 1. Exemption method: income/capital which is taxable in the state of source/situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate applicable to the remaining income. 2. Credit method: although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference is that in the exemption method, the focus is on the income/capital itself, while the credit method focuses upon the tax. b. Tax Credit CIR v Lednicky Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity. In the present case, although the taxpayer would have to pay two taxes on the same income but the phil govt only receives the proceeds of one tax, there is no obnoxious double taxation. Page 6

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CHAPTER II: LIMITATION UPON THE POWER OF TAXATION I. INHERENT LIMITATIONS: Public purpose, Inherently Legislative (may not be delegated), International comity, Territoriality/Situs of taxation 1. Public Purpose a purpose affecting the inhabitants of the state/taxing district as a community and not as individuals. Reason: tax levied for a private purpose constitutes taking of property without due process; since the govt is established for public purposes, public money can only be spent for a public purpose. The purposes need not be exclusively public. Although private individuals are directly benefit, the tax is still valid, provided it is only incidental. Test: not as to who receives the money, but the character of the purpose for which it is expended. Not the result of the expenditure, but the ultimate result. Tax must be used: 1. For support of the govt, 2. For any of the recognized objects of government, or 3. To promote the welfare of the community. Pascual v Sec of Pub Works The legislature is without power to appropriate public revenue for anything but a public purpose. It is the essential character of the direct object of the expenditure which must determine its validity as justifying the tax and not the interests to be affected nor the degree to which the general advantage of the community, and thus the public welfare may be ultimately benefited by their promotion. Incidental advantage to the public or to the state which results from the promotion of private interests and the prosperity of private interprises or business does not justify their aid by the use of public money. The test of the constitutionality of a statute requiring the use of public funds is whether the statute is designed to promote the public interests as opposed to the furtherance of the advantage of individuals although each advantage to individuals might incidentally serve the public. Tio v VRB A tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. In imposing a tax, the legislature acts upon its constituents. The tax here is not only a regulatory but also a revenue measure prompted by the realization that earning of videogram establishments have not been subjected to tax, thereby depriving the govt of an additional source of revenue. The levy of the tax here is for a public purpose. It was imposed primarily to answer the need for regulating the video industry, particularly because of piracy, violation of IP rights, and proliferation of porn. And while it was also an objective to protect the movie industry, the tax remains a valid imposition 2. Taxing power is Inherently Legislative General Rule: Taxing power may not be delegated the power of taxation is purely legislative and congress may not delegate it to others. The limitation arises from the doctrine of separation of powers. Paolo Miguel Javier

Exception: 1. Local Government Units: the power to create municipal corporations for the purpose of local self government carries with it the power to confer the power to tax on such local governments. Municipal corporations are instrumentalities of the state for better administration of the govt in matters of local concern. QC v Bayantel The power to tax is primarily vested in the congress, however, it may be exercised by local legislative bodies, no longer by delegation, but by direct authority conferred by s5 a10 of the consti. The exercise of the power may be subject to such guidelines and limits as the congress may provide, which must be consistent with the basic policy of local autonomy. The grant of taxing powers to lgus under the consti does not affect the power of congress to grant exemptions to certain persons. The legal effect of the consti grant to LGUs simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations. 3. Delegation to the President the consti expressly allows congress to authorize the pres to fix tariff rates, import or export quotas, tonnage and wharfage dues and other duties or imposts. Since the delegation is constitutionally authorized, there can be no legal objection. The authorization is justified in the need for speedy action on such matters. 4. Administrative Rate Fixing aspects of the taxing process that are not legislative in character may be vested in admin agencies. Powers: power to value property pursuant to fixed rules, assess and collect taxes, perform details of computation, appraisement, and adjustment, and delegation. Canot be delegated: determination of the subjects, purpose, amount, manner, means, and agencies of collection of tax. Philcomsat v Alcuaz Delegation of legislative power may be sustained only upon the ground that some standard for its exercise is provided and that the legislature in making the delegation has prescribed the manner of the xercise of the delegated power. Thus, when NTC (admin) establishes a rate, its act must be non confiscatory and established in the manner prescribed by the legislature, otherwise, the delegation becomes unconstitutional. In case of delegation of rate fixing power, the only standard which the legislature is required to prescribe for the guidance of the admin authority is that the rate be reasonable and just. NTC is limited in the exercise of its rate fixing power by the standards of public safety, interest, reasonable feasibility, and reasonable rates, which satisfy the requirements of a valid delegation of legislative power. Smith Bell & Co. V CIR Where the intention of the law to impose a specific tax on wines is clear, leaving to the officers charged with its administration no more than the administrative function of determining whether a particular wine falls on one class or the other, there is no undue delegation of legislative powers. Page 7

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5. Territoriality/Situs of Taxation General Rule: A state may not tax property lying outside its borders or lay an excise/privilege tax upon the exercise/enjoyment of a right/privilege derived from the laws of another state. Reason: Tax laws do not operate beyond a countrys territorial limits; property which is wholly and exclusively within the jurisdiction of another state receives no of the protection for which a tax is supposed to be a compensation. Exception: A person may be taxed where there is between him and the taxing state a privity of relationship justifying the levy. (citizens income may be taxed abroad, and entitled to protection of his govt) a. Situs of Taxation the place of taxation. The state where the subject to be taxed has a situs may rightfully levy and collect the tax, and the situs is necessarily in the state which has jurisdiction or which exercises dominion over the subject. b. Determination of situs: a. Residence of subject, b. Place of Taxation, c. Source of income c. Situs of subjects of taxation: Depends on: nature of the tax, subject matter, the possible protection and benefit that may accrue both to the govt and taxpayer, residence/citizenship of the taxpayer, source of income. d. Persons 1. Poll tax - may properly be levied upon persons who are inhabitants or residents of the state: 18, regularly employed at least 30 days, owns real property of P1k or more, pay P5 and additional P1 for every P1k of income. Corporate: annual community tax of P500 2. Real Property Lex Rei Sitae: subject to tax in the state in which it is located w/n owner is resident/nonresident 3. Personal Property Lex Rei Sitae: Taxable in the state where it has actual situs/physically located. Intangible: situs is at domicile 4. Income Dividends: Manila Gas v Collector No state may taxanything not within its jurisdiction without violating the due process clause. The taxing power of a state does not extend beyond its territorial limits, but within such limits, it may tax persons, property, income, or business. If an interest in property is taxed, the situs must be found within the state. If income is taxed, the recipient must have a domicile within the state or the property/business out of which the income issues must be situated within the state so that the income may be said to have a situs therein. Personal property may be separated from its owner, and he may be taxed at the place where the property is although it is not his domicile and though he is not a citizen or resident. But Paolo Miguel Javier

debts owing by corps are obligations of the debtors and only possess value in the hands of the creditors. The place of payment even if conceded to be outside of the country cannot alter the fact that the income was derived from the phils. The word source conveys only one idea, that of origin, and the origin of the income was the phils. Services: CIR V Baier Nickel it is the situs of the activity which determines whether an income is taxable in the philippines. Source of income relates to the property, activity or service that produced the income. CIR v Marubeni a contractors tax is a tax imposed upon the privilege of engagin business. It is generally in the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on products and is directly collectible from the person exercising the privilege. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges, or business are done or performed within the jurisdiction of said authority. Like property taxes, it cannot be imposed on an occupation or privilege outside the taxing district. Services made and completed in japan, thus outside the taxing jurisdiction of the phils, are not subject to contractors tax. 5. Business, occupation, transaction the power to levy an excise tax depends upon the place where the business is done or the occupation engaged in or the transaction made. Manila Electric v Yatco Where the insured is within the phils, the risk insured against also within, the phils has the power to impose the tax on the insured, regardless of whether the contract is executed in a foreign country and with a foreign corp. Substantial elements of the contract may be said to be so situated in the phils as to give its govt the power to tax. Even if it be assumed that the tax imposed upon the insured will ultimately be passed on to the insurer, it would still be valid because the foreign corp has subjected itself to the taxing jurisdiction of the phils. 6. Transfer of property by death or gift subject to taxation in the state where the transferor/donor is a citizen/resident or where the property is located. Wells Fargo v COL The actual situs of the shares of stock is in the phils, the corp being domiciled therein. The certificates of stock have remained here up to the time when the deceased died in Cali. Mobilia sequuntur personam: it is the identity or association of intangibles with the person of their owner at his domicile which gives jurisdiction to tax. But when the taxpayer extends his acts with respect to his intangibles so as to avail himself of the protection and benefit of the laws of another state in such a way as to bring his person or property within the reach of the tac gatherer there, the reason for a single place of taxation no longer obtains. The state of domicile is not Page 8

Taxation Law Reviewer

deprived by the taxpayers activities elsewhere of its constitutional jurisdiction to tax. Shares of corporate stack may be taxed at the domicile of the shareholder and also at tha of the corporation which the taxing state has created and controls, and income may be taxed both by the state where it is earned and by the state of the recipients domicile. 6. International Comity property of a foreign state may not be taxed by another state. Grounds: 1. Sovereign equality (one state cannot exercise its sovereign powers over another), 2. Usage among states (when one enters the territory of another, there is an implied understanding that the former does not intend to degrade its dignity by placing itself under the jurisdiction of the latter), 3. A foreign govt may not be sued without its consent II. CONSTITUTIONAL LIMITATIONS: Due Process, Equal Protection, Rule of Taxation shall be Uniform and Equitable, Non-impairment of Contracts, Non-Imprisonment for nonpayment of poll tax, Prohibition against taxation of real property of charitable institutions/churches/parsonages/convents/ mosques/nonprofit cemeteries, Prohibition against taxation of nonstock/non profit educational institutions, passage of tax bills, granting of tax exemption, veto power of the president, double taxation, judicial power to review legality of tax 1. Due Process Com of Customs v CTA & Campos Rueda Where the law does not provide that an article imported for electrical lighting and signalling for vehicles, if imported alone, shall be classified as electrical apparatus for making and breaking electrical circuits, that provision should not be read into the law 2. Equal Protection all persons subject to legislation shall be treated alike under like circumstances and conditions both in privileges conferred and liabilitiess imposed. As long as there are rational/reasonable grounds, congress may group the persons/properties to be taxed and it is sufficient if all of the same class are subject to the same rate and the tax is administered impartially upon them. Ormoc Sugar v Treasurer of Ormoc The questioned ordinance does not meet the classification, for it taxes only sugar produced and exported by ormoc and none other. The classification to be reasonable, should be in terms applicable to future conditions. The ordinance should not be singular and exclusive as to exclude any subsequently established sugar central of the same class. Shell v Vano the fact that there is no other person in the locality engaging in the privilege of the occupation of installation manager does not make it discriminatory, as it will be applicable to any person/firm who exercises such calling/occupation. Paolo Miguel Javier

Tiu v CA if the groupings are characterized by substatial distinctions that make real differences, one class may be treated and regulated differently from another. It must be germane to the purpose of the law and must apply to all those belonging to the same class. It does not demand absolute equality, it merely requires that all persons shall be treated alike, under like circumstances. It was reasonable for the president to have delimited the application of some incentives to the confines of the former subic base. It is this specific area which the govt intends to transform and develop from its status as an abandoned facility into a self sustaining zone. The classification is therefore germane to the intent of the law. 3. Rule of Taxation shall be uniform and equitable Uniformity: all taxable articles of the same class shall be taxed at the same rate, wherever the subject is found. Equality in burden, not in amount. Equity: apportionment of the tax burden should be just in the light of taxpayers ability to shoulder it on the basis of the benefits he receives. Progressive: tax laws shall place emphasis on direct rather than indirect taxation Baguio v De Leon Equality and uniformity in taxation means that all taxable articlesof the same class shall be taxed at the same rate. A tax is uniform when it operates with the same force and effect in every place where the subject may be found. Where the statute applies equally to all persons placed in similar situation, there is no infringement of the rule on equality. Inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation. Eastern Theatrical v Alfonso Equality and uniformity means that all taxable articles of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation and appellants cannot point out what places of amusement taxed by the ordinance do not constitute a class by themselves and which can be confused with those not included in the ordinance British American Tobacco v Camacho A legislative classification, to survive an equal protection challenge, must show that the classifications are reasonable and rest on some ground of difference having a fair and substantial relation to the object of the legislation. The classification freeze provision is not arbitrary nor does it favor older brands, it was the result of congress earnest efforts to improve the efficiency of the tax administration over sin products while trying to balance the same with other state interests. Administrative concerns may provide a legitimate, ratinoal basis for legislative classification. The provision was intended to generate revenues and eliminate potential areas for corruption. The provision uniformly applies to all newly introduced brands in the market, whether imported or locally Page 9

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manufactured. It does not purport to single out imported cigarettes in order to unduly favor locally produced ones. 4. Non-impairment of contracts the obligation of a contract is impaired when its terms or conditions are changed by law or a party without the consent of the other. Ex: a tax exemption based on a contract is revoked by a later taxing statute Imus Electric v CTA A municipal franchise is subject to the power of congress to alter/modify/repeal. The franchise tax is such an alteration. So the holder of a municipal franchise to operate an electric plant and imposing a franchise tax is subject to a newer statute imposing a higher tax. The newer statute is an exercise of the power reserved to congress to amend/repeal the franchise. Phil Rural Electric v DILG The constitutional prohibition on the impairment of the obligation of contracts does not prohibit every change in existing laws. To fall within the prohibition, the change must not only impair the obligation of the existing contract, but the impairment must be substantial. The withdrawal by the LGC of the tax exemptions previously enjoyed by petitioners does not impair the obligation of the borrower, lender, or beneficiary under loan agreements as in fact, no taxation is granted therein. 5. Non-imprisonment for non-payment of poll tax 6. Prohibition against taxation of real property of charitable institutions, churches, parsonages or convents, mosques and non-profit cemeteries: (lands buildings, improvements used actually directly & exclusively for religious, charitable, educational purposes). Abra College v Aquino The test of exemption from taxation is the use of the property for purposes mentioned in the constitution. The keeping of a lodging and boarding house and restaurant do not constitute business in the ordinary acceptance. A vegetable garden and a lot formerly used a cemetery is included in the exemption. The exemption in favor of property used exclusively for charitable or educational purposes is not limited to property actually indispensable but extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes, such as in hospitals, a training schoo and st athletic fields. But lease of the 1 floor to a corporation is not incidental to educational purpose Lung Center v QC To determine w/n an institution is charitable, the elements which should be considered include the statute creating the enterprise, its corp purpose, its constitution and by laws, the methods of admin, the nature of the actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties. A charity may be fully defined as a gift for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the Paolo Miguel Javier

influence of education or religion, by assisting them to establish themselves in life. The test is w/n it exists to carry out a purpose recognized in law as charitable or w/n it is maintained for gain, profit, or private advantage. Lung center was organized for welfare of filipinos to combat lung diseases. A charitable institution does not lose its character and exemption simply because it derives income from paying patients, so long as the money is devoted to the charitable object which it is intended to achieve, and no money inures to private benefit of managers. But real property leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes. 7. Prohibition against taxation of non-stock non-profit educational institutions: (revenues &assets used actually directly and exclusively for educational purposes; proprietary also entitled, subject to legal limitations; covers income, property, donors taxes, and customs duties) CIR V YMCA A claim of statutory exemption should be manifest and umistakable. The claimed exemption must be expressly granted in a statute. In this case, the exemption claimed by the YMCA is expressly disallowed because the NIRC subjects to tax the rent income of the YMCA from its real property. What is exempted is not the institution itself, those exempted from real estate taxes are the lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable, and educational purposes. YMCA is exempt from property rax, but not income tax on the rentals. The bare allegation that it is a nonstock nonprofit educ inst is insufficient to justify its exemption. For YMCA to be granted exemption, it should prove that it falls under the the classification, and that the income it seeks to be exempted from is used actually directly and exclusively for educ purposes. YMCA is also not an educational inst because it is not a school, seminary, college, or educational establishment. CIR v Ateneo To impose the contractors tax on ateneo it should be sufficiently proven that it is selling its services for a fee in pursuit of an independent business. There is no evid that ateneo ever sold its services for a fee or was ever engaged in business apart from and independently of the academic purposes. 8. Passage of tax bills originate exclusively in HR but senate may propose/concur with amendments (appropriation/revenue/tariff) Tolentino v Sec Finance All appropriation, revenue or tariff bills must originate exclusively in the HR but the senate may propose/concur with amendments. In the exercise of this power, the senate may propose an entirely new bill as a substitute measure. A committee to which a bill is referred may: 1. Endorse the bil without changes, Page 10

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2. Make changes in the bill or adding sections or altering its language, 3. Make and endorse an entirely new bill as a substitute (committee bill), 4. Make no report at all. To except from this procedure the amendment of bills which are required to originate in the HR by prescribing that the number of the House bill and other parts must be preserved although the test of the senate amendment may be incorporated in place of the original body of the bill is to insist on a mere technicality. No rule prescribing this form. 9. Veto power of the President power to veto any particular item in an appropriation, revenue or tariff bill, but the veto shall not affect the item/s to which he does not object. The president may not veto a bill in part and approve it in part. 10. Granting of tax exemption concurrence of majority of all members of congress John Hay v Lim Tax exemption cannot be implied as it must be categorically and umistakably expressed if it were the intent of the legislature to grant to John Hay the same tax exemtion and incentives to Subic, it would have so expressly provided in RA 7227. 11. Judicial Power to review legality of tax review, revise reverse, modify, affirm on appeal/cert final judgments and orders of lower courts in all cases involving the legality of any tax, impost, assessment or toll or any penalty imposed in relation. Congress cannot take away from the SC the power given to it by the consti as the final arbiter of tax cases. CHAPTER III: EXEMPTIONS FROM TAXATION I. In General 1. Definition the grant of immunity to particular persons/corporations of a particular class from a tax which persons and corporations generally within the same state/taxing district are obliged to pay; immunity/privilege, freedom from a financial charge/burden which other are subjected 2. Kinds: 1. Express, 2. Implied (tax levied on classes, without mentioning other classes. All those not mentioned are deemed exempted). 3. Rationale: presumption that public interest will be subserved; grant of exemption rests upon theory that such will benefit public, and not upon idea of lessening burden. Public interest sufficient to offset monetary loss of grant of exemption. 4. Nature: 1. National: inherent attribute of sovereignty.

2. Local: municipal corps have no inherent power to tax, but when granted, they also have the power to exempt (legislature may delegate such power to exempt) 5. Grounds for tax exemption: 1. Contract: contained in charter of corporation to which exemption is granted, 2. Public policy: encourage new industries, foster charitable institutions, 3. Treaty; grounds of reciprocity/lessen rigors of international double taxation 6. Constitutional Exemptions: charitable institutions, nonstock nonprofit educ institutions 7. Legislative Grant of Exemptions: Tax Code & Special Laws CIR v Botelho: Although the GR is that tax exemption must be clear and explicit, and in this case, there is no express provision for the retroactivity of exemption, retroactivity of the provision is necessary to prevent discrimination. Otherwise, there will be discrimination in favor of buyers after the amendment and against buyers before the amendment. CIR v GCL Retirement The tax exemption privilege of employees trusts as distinguished from any other kind of property held in trust springs from the NIRC. Manisfest is that the law has singled out employees trusts for tax exemption. The tax advantage was conceived in order to encourage the formation and establishment of such private plans for the benefit of laborers and employees outside the social security act. 8. Exemption created by treaty 9. Exemption of government agencies PPA v CIR Nothing can prevent congress from decreeing that even agencies of the govt performing governmental functions may be subject to tax. The fact that tax exemptions of goccs have been expressly withdrawn clearly attests against PPAs claim of absolute exemption of govt agencies from local taxation.if indeed PPA was not subject to local tax, its charter would not have specifically provided for its exemption from the payment. Its exemption therefore proves that it was only an exception to the general rule of taxability. Given that said privilege was withdrawn by subsequent law, petitioners claim from exemption fails. The reason for withdrawal of tax exemption granted to goccs was that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises, hence resulting in the need for these entities to share in the requirements of development by paying taxes. Phil Fisheries v CA The authority is not a gocc but an instrumentality of the national govt which is generally exempt from payment of real property tax, except for those portions which have been leased to private entities. When an

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instrumentality of the natl govt grants to a taxable person the beneficial use of a real property owned by the republic, said instrumentality becomes liable to pay real property taxes. 10. Construction: General Rule: Exemptions are not favored and construed in strictissimi Juris against taxpayer. Taxation is the rule and exemption the exception. Whoever claims exemption must be able to justify his claim by a grant expressed int erms too plain to be mistaken and too categorical to be misinterpreted -Refund: Nature of exemptions; must be granted clearly and categorically Resins v Auditor As a refund undoubtedly partakes of a nature of an exemption, it cannot be allowed unless granted in the most explicit and categorical language. Exemption from taxation is not favored and is never presumed, so if granted, must be strictly construed against taxpayer Kepco v CIR Tax refunds are in the nature of tax exemptions laws granting exemptions are construed strictly against taxpayer and liberally in favor of govt. Exceptions (Liberal Construction): 1. Law expressly provides for liberal construction, 2. Exemption in favor of govt/agencies (gr exempt), 3. Religious, charitable, educational institutions, 4. Express mention/taxpayer within purviuw of clear legislative intent, 5. Special taxes involving special classes of people. Luzon Stevedoring v Trinidad As the power of taxation is a high prerogative of sovereignty, the relinquishment is never presumed, and any reduction must be strictly construed and must be couched in clear and unmistakable terms in order that it may be applied. The gr is that any claim for exemption from the tax statute should be strictly construed against the taxpayer. Petitioners tugboats do not fall under passenger vessels. Where a provision of law speaks categorically, the need for interpretation is obviated. Iloilo v Smart He who claims an exemption must justify his claim by showing that the legislature intended to exempt him by words to plain to be beyond doubt or mistake. A tax exemption cannot arise from vague inference tax exemption must be clear and unequivocal; a taxpayer claiming a tax exemption must point to a specific provision of law conferring on the taxpayer exemption. Rodriguez v Coll Exemption from taxation is not favored and is never presumed. If granted, the grant must be strictly construed against the taxpayer. Must point to some positive provision of law creating the right, cannot exist on vague implication. Wonder Mechanical v CTA An industry to be entitled to tax exemption must be new and necessary and that the tax Paolo Miguel Javier

exemption was granted to new and necessary industries as an incentive to greater production of products made scarce by WW2 and will contribute to the attainment of a stable and balanced national economy. For these reasons, we are convinced that petitioner was granted tax exemption in the manufacture and sale of machines for making pails etc, but not for the manufacture and sale of the articles produced by those machines. Tax exemption must be clearly expressed and cannot be established by implication. Cant exist on a vague implication. Rep Flour Mills v CIR It is true that tax exemptions are not favored and construed strictly against the taxpayer, but where the provision of the law is clear and unambiguous so that there is no occasion for the courts seeking the legislative intent, the law must be taken as it is. II. TAX AMNESTY 1. Definition General pardon/intentional overlooking by state of its authority to impose penalties on persons otherwise guilty of evasion/violation of revenue/tax laws. Partakes of an absolute forgiveness/waiver by the government of its right to collect what is due to it and give tax evaders who wish to repent a chance to start with a clean slate. It is never favored nor presumed. If granted, terms construed strictly against taxpayer and liberally in favor of taxing authority. Phil Banking v CIR A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of violation of a tax law. 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. A tax amnesty, much like a tax exemption, is never favored nor presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority. The DST is one of the taxes covered by the Tax Amnesty Program under RA 9480. Petitioner is clearly liable to pay the DST on its SSDA for the years 1996 and 1997. However, petitioner, as the absorbed corporation, can avail of the tax amnesty benefits granted to Metrobank. Records show that Metrobank, a qualified tax amnesty applicant, has duly complied with the requirements enumerated in RA 9480. Considering that the completion of these requirements shall be deemed full compliance with the tax amnesty program, the law mandates that the taxpayer shall thereafter be immune from the payment of taxes, and additions thereto, as well as the appurtenant civil, criminal or administrative penalties under the NIRC of 1997, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years. RA 9480 is specifically clear that the exceptions to the tax amnesty program include "tax cases subject of final and executory judgment by the courts." The present case has not become final and executory when Metrobank availed of the tax amnesty program. Page 12

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2. Voluntary Assessment program/last priority in audit CIR v Ariete Recording of the information in the official registry book of the BIR is a mandatory requirement before a taxpayer may be excluded from the coverage of the VAP. CIR v Gonzalez Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case. Even assuming arguendo that the issuance of RR No. 2-99 is in the nature of tax amnesty, it bears noting that a tax amnesty, much like a tax exemption, is never favored nor presumed in law and if granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority. Availment by LMCEC of VAP through payment before the said program ended did not amount to settlement of its assessed tax deficiencies nor immunity from prosecution for filing fraudulent return and attempt to evade or defeat tax. As correctly asserted by petitioner, from the express terms of the aforesaid revenue regulations, LMCEC is not qualified to avail of the VAP granting taxpayers the privilege of last priority in the audit and investigation of all internal revenue taxes for the taxable year 2000 and all prior years under certain conditions, considering that first, it was issued a PAN on February 19, 2001, and second, it was the subject of investigation as a result of verified information filed by a Tax Informer . III. TAX AVOIDANCE V TAX EVASION 1. Definitions a. Tax Avoidance: Tax saving device within the means sanctioned by law b. Tax Evasion: a scheme used outside of lawful means and when availed of usually subjects the taxpayer to further/additional civil/crim liabilities. 3 Factors: 1. The end to be achieved the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due, 2. Bad Faith, 3. A course of action/failure of action which is unlawful CIR v Estate of Toda Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad Paolo Miguel Javier

faith," "willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful. The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud. The objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonagas sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability The intermediary transaction, which was prompted more on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion. CHAPTER IV: SOURCES AND CONSTRUCTION OF TAX LAWS Tax statutes receive a reasonable construction to carry out their purpose/intent. Good faith of the taxpayer is not a sufficient justification for exemption, which is construed to avoid possibility of tax evasion. When in doubt, no person/property subject to tax unless within plain import of the law; tax is construed strictly against the government and liberally in favor of the taxpayer When the language is plain, strict constuction against government is not applicable. Exemption strictly construed against taxpayer, liberally for government The omission to follow mandatory provisions renders the act invalid, but not for directory provisions Tax laws are generally prospective except when expressly declared or is clearly the legislative intent. But there is no retroactivity if the application would be harsh and oppressive Phil health care v CIR If it had been the intent of the legislature to impose DST, it could have done so in clear and categorical terms 1. Statutes NIRC, Book 2 LGC, Tariff & Customs Code, BCDA Law, PEZA Law, Omnibus Investment Law 2. Revenue regulations: enforce NIRC; clarify/explain; details of administration & procedure. The power to make regulations is not the power to legislate, and under the guise of regulation, legislation may not be enacted. A statute which is being administered may not be altered or added to by regulations. Asturias v Comm The doctrine of judicial respect for administrative construction is aplicable only where the court Page 13

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of last resort has not previously interpreted the statute. The interpretation of an uncertain statute by the executive agence charged with its enforcement is entitled to consideration and respect. The correctness of an interpretation given a statute by the agency charged with administering its provision is indicated where it appears that congress, with full knowledge of the agencys interpretation, has made significant additions to the statute without amending it to depart from the agencys view. BPI Leasing v CA Administrative issuances may be distinguished according to their nature and substance legislative and interpretative. RR 1986 was issued pursuant to the rule-making power of the secretary, thus making it legislative. When an administrative rule goes beyond merely providing for the means that can facilitate the implementation of the law and substantially increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard and informed before the issuance is given the force and effect of law. Statutes, including admin rules and regs, operate prospectively only, unless the legislative intent to the contrary is manifest by express terms or implication. 3. BIR Rulings: less general interpretations of tax laws at the administrative level. Issued by tax officials in performance of assessment functions; made at the request of the taxpayers to clarify. Such regulations, once established and found in consonance with the general purposes and objects of law have the force and effect of law (binding). If in conflict with the law, null and void. CIR v Burroughs any revocation, modification or reversal of any of the rules & regs promulgated by the commissioner shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayer except when: 1. Taxpayer deliberately misstates or omits material facts from his return, 2. The facts subsequently gathered by BIR are materially different from the facts on which the ruling is based, or 3. Taxpayer acted in bad faith. CIR v Phil Health Care Providers Rulings, etc promulgated by comm have no retroactive effect if to apply them would prejudice the taxpayer; exceptions. The failure of a taxpayer to describe itself as a health maintenance organization is not tantamount to bad faith at a time when the term did not yet have any particular significance for tax purposes. Exceptions: PBCOM v CIR: the non-retroactivity of ruling by the commissioner is not applicable where the nullity of a revenue memorandum circular was declared by courts and not by the commissioner. Revenue memorandum circulars are considered admin rulings and the interpretation placed upon a statute by exec officers is entited to respect. But such interpretation is not conclusive and will be ignored if judicially found to be erroneous. Thus courts will not countenance admin issuances that override instead of remaining Paolo Miguel Javier

consistent and in harmony with the law they seek to apply and implement. 4. Opinions of the Secretary of Justice when there is conflict between opinions of BIR and DOF; generally binding and effective Part II: INCOME TAX I. Overview of Income Tax 1. Income Tax a tax on all yearly profits arising from property, professions, trades or offices; tax on persons income, emoluments, profits. Income tax is a direct tax on actual or presumed income of a taxpayer during the taxable year. Fisher v Trinidad Income is the amount of money coming to a person or corp within a specified time, whether as payment for services, interes, or profit from investment. A mere advance in the value of the property of a person in no sense constitutes income. Such advance constitutes and can be treated merely as an increase of capital. Income means cash received or its equivalent, it doesnt mean unrealized increments. The revenue law employs income in its natural and obvious sense, something distinct from principal or capital. 2. Income Tax Systems: a. Global: total allowable deductions and personal and additional exemptions are deducted from the gross income to arrive at the net taxable income subject to the graduated income tax rates. All items are reported in one income tax return, and one set of tax rates are applied on the tax base b. Schedular: different types of incomes are subject to different sets of graduated/flat income tax rates. The applicable rates will depend on the classification of the taxable income and the basis could be gross or net income c. Semi Schedular or Semi Global: the compensation income, business income, capital gain and passive income not subject to final tax, and other income are added together to arrive at the gross income and after deducting the sum of allowable deductions, the taxable income is subjected to one set of graduated tax rates for an individual tax rate. With respect to the income, the computation is global, while the schedular tax system is applied to the capital gains and passive income subject to final tax at preferential tax rates. *in the phils, our individual tax system is schedular, while the corporate tax system is global; capital gains schedular, income global 3. Progressive/Graduated tax rate increases as tax base increases 4. Regressive tax rate decreases as tax base increases 5. Criteria in imposing income tax: Page 14

Taxation Law Reviewer

1. Nationality: citizen subject to phil income tax on worldwide income if he resides in the phils, or only on income from sources within the philes 2. Residence: resident alien liable to pay phil income tax only on his income sources within the philes but exempt from outside income 3. Source: alien subject to phil income tax because he derives income from sources within the phils. I. General Principles of Income Taxation SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code: (A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; (B) A nonresident citizen is taxable only on income derived from sources within the Philippines; (C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, 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; (D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; (E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. CHAPTER II: CLASSIFICATION OF INCOME TAXPAYERS I. Scope of Income Taxation 1. The term 'taxpayer' means any person subject to tax imposed by this Title. 2. The term 'person' means an individual, a trust, estate or corporation. 3. Person Liable to tax: CIR v Procter & Gamble The term taxpayer is any person subject to tax imposed by the title on tax on income. the therms liable for tax and subject to tax connot the legal obligation or duty to pay a tax. it is very difficult to consider a person who is statutroily made liable for tax as not subject to tax. by any reasonable standard, such a person should be regarded as a party in interest to bring a suit for refund of taxes. Silkair v CIR The proper party to question or claim a refund of an indirect tax is the statutory taxpayer, as it is the company on which the tax is imposed by law and which paid the same even if the burden was shifted to another. II. Individual Taxpayers 1. The term 'nonresident citizen' means:

(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. (5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section. 2. The term 'resident alien' means an individual whose residence is within the Philippines and who is not a citizen thereof. 3. The term 'nonresident alien' means an individual whose residence is not within the Philippines and who is not a citizen thereof. 4. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. III. Estates & Trusts Title V. - TRUSTS (n) CHAPTER 1: GENERAL PROVISIONS
Art. 1440. A person who establishes a trust is called the trustor; one in whom confidence is reposed as regards property for the benefit of another person is known as the trustee; and the person for whose benefit the trust has been created is referred to as the beneficiary. Art. 1441. Trusts are either express or implied. Express trusts are created by the intention of the trustor or of the parties. Implied trusts come into being by operation of law. Art. 1442. The principles of the general law of trusts, insofar as they are not in conflict with this Code, the Code of Commerce, the Rules of Court and special laws are hereby adopted. CHAPTER 2: EXPRESS TRUSTS Art. 1443. No express trusts concerning an immovable or any interest therein may be proved by parol evidence. Art. 1444. No particular words are required for the creation of an express trust, it being sufficient that a trust is clearly intended.Art. 1445. No trust shall fail because the trustee appointed declines the designation, unless the contrary should appear in the instrument constituting the trust. Art. 1446. Acceptance by the beneficiary is necessary. Nevertheless, if the trust imposes no onerous condition upon the beneficiary, his acceptance shall be presumed, if there is no proof to the contrary. CHAPTER 3: IMPLIED TRUSTS Art. 1447. The enumeration of the following cases of implied trust does not exclude others established by the general law of trust, but the limitation laid down in Article 1442 shall be applicable.

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Taxation Law Reviewer

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Art. 1448. There is an implied trust when property is sold, and the legal estate is granted to one party but the price is paid by another for the purpose of having the beneficial interest of the property. The former is the trustee, while the latter is the beneficiary. However, if the person to whom the title is conveyed is a child, legitimate or illegitimate, of the one paying the price of the sale, no trust is implied by law, it being disputably presumed that there is a gift in favor of the child.Art. 1449. There is also an implied trust when a donation is made to a person but it appears that although the legal estate is transmitted to the donee, he nevertheless is either to have no beneficial interest or only a part thereof. Art. 1450. If the price of a sale of property is loaned or paid by one person for the benefit of another and the conveyance is made to the lender or payor to secure the payment of the debt, a trust arises by operation of law in favor of the person to whom the money is loaned or for whom its is paid. The latter may redeem the property and compel a conveyance thereof to him. Art. 1451. When land passes by succession to any person and he causes the legal title to be put in the name of another, a trust is established by implication of law for the benefit of the true owner. Art. 1452. If two or more persons agree to purchase property and by common consent the legal title is taken in the name of one of them for the benefit of all, a trust is created by force of law in favor of the others in proportion to the interest of each. Art. 1453. When property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to another or the grantor, there is an implied trust in favor of the person whose benefit is contemplated. Art. 1454. If an absolute conveyance of property is made in order to secure the performance of an obligation of the grantor toward the grantee, a trust by virtue of law is established. If the fulfillment of the obligation is offered by the grantor when it becomes due, he may demand the reconveyance of the property to him. Art. 1455. When any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the purchase of property and causes the conveyance to be made to him or to a third person, a trust is established by operation of law in favor of the person to whom the funds belong. Art. 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes. Art. 1457. An implied trust may be proved by oral evidence.

provides security against certain hazards to which members of the plan may be exposed. It is an independent and additional source of protection and established for their exclusive benefit and no other purpose. IV. Corporations 1. 'Corporation' shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. a. Partnerships Ona v CIR From the moment petitioners allowed not only the incomes from their respective shares of the inheritance but even the inherited properties themselves to be used by ona as a common fund in undertaking transactions with the intention of deriving profit to be shared by them proportionally, such act was tantamount to actually contributing such incomes to a common fund and in effect thereby formed an unregistered partnership. For tax puposes, the coownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project of partition. Evangelista v CIR Created common fund, invested in a series of transactions, lots leased to several persons from which rentals collected, conditions existed over 15 yrs the collective effect of such circumstances leaves no room for doubt on the intent to divide the profits among themselves Afisco v CIR The fact that the pool does not retain any profit or income does not obliterate an antecedent fact, that of the pool being used in the transaction of business for profit. Their association was indispensable to the transaction of the business. If together they have conducted business, profit must have been the object as profit was earned. The pool is a taxable entity distinct from the individual corporate entities of the ceding companies. The tax on its income is obviously different from the tax on the dividends. b. Co-ownership Pascual v CIR Here, there is no evidence that petitioners entered into an agreement to contribute money, property or industry to a common fund and that they intended to divide the profits among themselves. The sharing of gross returns does not of itself establish a partnership whether or not the persons sharing therein have a joint right in the property. This only means that aside from the circumstance of profit, the presence of other elements constituting partnership is necessary, such as the clear intent to form a partnership, the Page 16

CIR v Visayas Electric Employees trust funds which form part of a pensionare exempt. However, in order to be exempt, the employees trust must refer to a definite program, scheme, or plan and must be set up in good faith. There must be a rule on non diversion of funds, which must not be controlled or used for the benefit of the company in any way. Here, the pension fund couldve been tax exempt, but there was lack of sufficient data which would show that it complied with the requirements. It did not appear that the trust was actually sound. CIR v GCL Employees trusts were exempt from income tax. gcl plan was qualified as exempt by the commissioner. The tax exemption privilege of employees trusts as distinguished from any other kind of property held in trust, springs from the tax code. Manifest is that the tax law has singled out employees trusts for tax exemption. And rightly so because employees trusts/benefit plans normally provide economic assistance to employees upon the occurrence of certain contingencies. It Paolo Miguel Javier

Taxation Law Reviewer

existence of a juridical personality different from that of the individual partners, and the freedom to transfer or assign any interest in the property by one with the consent of others. Here, there is clear evidence of coownership. No basis to say they formed a partnership. The two isolated transactions whereby they purchased properties and sold them did not make them partners. They shared in the profits as coowners and paid their capital gains taxes on their net profits and availed of the tax amnesty. Under the circumstances, they cannot be considered to have formed a partnership which is liable for corporate income tax. even assuming a partnership appears to have been formed, petitioners can be held individually liable as partners. However, as they have availed of tax amnesty, they are relieved of tax liability. 2. The term 'domestic,' when applied to a corporation, means created or organized in the Philippines or under its laws 3. The term 'foreign,' when applied to a corporation, means a corporation which is not domestic 4. The term 'resident foreign corporation' applies to a foreign corporation engaged in trade or business within the Philippines. 5. The term 'nonresident foreign corporation' applies to a foreign corporation not engaged in trade or business within the Philippines. CHAPTER III: TAX BASE & TAX RATES Citizen: Income (5-32%), Winnings (20%), Books (10%), EFCDS (7 %), Dividends (10%), Capital Gains on Stocks not over 100k (5%) excess of 100k (10%), Capital Gains sale of Real Property (6%) of Gross Selling Price or Fair Market Value Non-Resident Alien Engaged: Income (5-32%), Dividends (20%), Winnings (20%), Films (25%), Capital Gains on Stocks not over 100k (5%) excess of 100k (10%), Capital Gains sale of Real Property (6%) of Gross Selling Price or Fair Market Value Non-Resident Alien Not Engaged: Regional/Area HQ (15%), Offshore Banking Units (15%), Petroleum Services (15%) Domestic: Income (15% or 30%), Interest Deposits (20%), EFCDS (7 %), Capital Gains on Stocks not over 100k (5%) excess of 100k (10%), Capital Gains sale of Real Property (6%) of Gross Selling Price or Fair Market Value, MCIT (2%) of Gross Income Resident Foreign: Income (15% or 30%), MCIT (2%) of Gross Income, Branch Profit Remittance (15%), Interest Deposits (20%), EFCDS (7 %), Capital Gains on Stocks not over 100k (5%) excess of 100k (10%) Nonprofit Proprietary Educational Institutions/Hospitals: (10%) on taxable income except interest on deposits, EFCDS, CG Sale of stock/real propertyBUT IF gross income from unrelated trade exceeds 50% of total gross income from ALL sources, rate is (30%) Paolo Miguel Javier

International Carrier: Gross Philippine Billings (2 %) Offshore Banking units: Income from foreign currency transactions exemt on all taxes except specified net income; interest from foreign currency loans (10%) Regional Operating Headquarters: Taxable income (10%) Nonresident Foreign: Income (30%) Nonresident film owner/lessor/distributor: Gross Income (25%) Nonresident Vessels: Gross rentals (4 %) Nonresident Aircraft: Rentals (7 %) Foreign Loans: (20%) on interest Intercorporate Dividends: (15%) received from domestic corporation if tax credit given Reederit Amsterdam v Comm NV amsterdam is a foreign corporation not authorized or licensed to do business in the phils. It does not have a branch office in the phils and it made only 2 calls in phil ports. In order that a foreign corp may be considered engaged in trade or business, its business transactions must be continuous. A casual business activity in the phils by a foreign corp, does not amount to engaging intrade or business in the phils for income tax purposes. While a foreign corp doing business in the phils is taxable on income solely from sources within the phils, it is permitted to claim deductions. On the other hand, foreign corps not doing business are taxable on income from all sources in the phils. Amsterdam being a nonresident foreign corp not engaged in trade or business, it is taxable on all sources within the phils at higher rate (Branch Profit Remittance) Marubeni v Comm Marubeni is not a resident foreign corp for the purpose of branch profit remittance tax. a resident foreign corp is one that is engaged in trade or business in the phils. A single corporate entity cannot be both a resident and a nonresident corp depending on the nature of the particular transaction. Whether the dividends are paid directly to the head office or coursed through its local branch is of no moment for the head office and the branch constitute but one corporate entity, the marubeni corp, which under law, is a resident foreign corp because it is transacting business in the phils. When the foreign corp transacts business in the phils independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corp, not of the branch. Thus the taxpayer is the foreign corp, not the branch or the resident foreign corp. If the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corp. The alleged overpaid taxes were incurred for the remittance of dividend income to the head office in japan which is a separate and distince income taxpayer from the branch in the philippines. (Branch Profit Remittance) Bank of America v CA the branch profit remittance tax should be assessed on the amount actually remitted. There is nothing in the law which indicates that the tax on branch profit remittance is on the total amount of profit to be remitted abroad which shall be collected and paid. Nowhere is it said that the tax shall be based on the total Page 17

Taxation Law Reviewer

amount actually applied for by the branch with the central bank as profit to be remitted abroad. Where the law does not qualify that the tax is imposed and collected at source based on profit to be remitted abroad, that qualification should not be read into the law. In the remittance tax, the law specifies its own tax base to be on the profit remitted abroad. The tax is imposed on the amount sent abroad. (NRF: Dividends) Comm v Procter & Gamble PMC is but a withholding agent of the govt and therefore cannot claim reimbursement of the overpaid taxes. The real party in interest being the mother corporation, it follows that the american entity is the real party in interest. (NRF: Dividends) Comm v Wander The dividends received from a domestic corp liable to tax shall be 15% subject to the condition that the country in which the nonresident foreign corp is domiciled shall allow a credit against the tax due from the nonresident foreign corp taxes deemd to have been paind in the phils equivalent to 20% which represents the difference between the regular tax 35% on corps and the 15% tax on dividends. The fact that switzerland did not impose any tax or the dividends received by glaro from the phils should be considered as full satisfaction of the condition. (MCIT) Chamber of Real Estate v Romulo The primary purpose of any legit business is to earn a profit. Continued and repeated losses after operations render its financial statements suspect. The MCIT serves to put a cap on tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes. An income tax is arbitrary and confiscatory if it taxes capital because capital is not income. The MCIT is not a tax on capital, it is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods. The MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a corporation and uses the as base the corps gross income. (MCIT) Manila Banking v CIR The intent of congress relative to the MCIT is to grant a 4 year suspension of tax payment to newly formed corps. Corps still starting their business operations have to stabilize their venture in order to obtain a stronghold in the industry. The date of commencement of operations of a thrift bank is the date it was registered with the SEC or when Cert of Authority to operate was issued by the monetary board. Petitioner, being a thrift bank, is entitled to a grace period of 4 years counted from the date it was authorized by the BSP to operate as a thrift bank. (IAET) CIR v Tuason The Cirs determination that Tuason inc was a mere holding or investment company was presumptively correct because the corp did not involve itself in the development of subdivisions but merely subdivided its own lots and sold them for bigger profits. It derived its income mostly from interest, dividends and rental realized from the sale of Paolo Miguel Javier

realt. 99.99% of value of the outstanding stock of the co is owned by tuason himself. When the co accumulated instead of distributing a surplus of over P3M from its earnings, the purpose was to avoid the imposition of the progressive income tax on its shareholders. The touchstone of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends were for the purpose of using the undistributed earnings and profits for the reasonable needs of the business, that purpose would not fall within the interdiction of the statute. Cyanamid v CA IAET discourages tax avoidance through corporate surplus accumulation. When corps do not declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders. The tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said earnings could in turn, be taxed. Bardahl Formula: examination of whether the taxpayer has sufficient liquid assets to pay all of its current liabilities and any extraordinary expenses reasonably anticipated, plus enough to operate the business during one operating cycle (period of time to convert cash into raw materials, to inventory, to sales, and collect payment). If the CIR determined that the corp avoided the tax on shareholders by permitting earnings/profits to accumulate, and the taxpayer contested such a determination, the burden of proving the determination wrong, together with the corresponding burden of first going forward with evidence is on the taxpayer. This applies even if the corp is not a mere holding or investment company and does not have an unreasonable accumulation of earnings or profits. (Exemption: Educational) Jesus Sacred Heart v CIR The NIRC exempts the net income of corporation organized and operated exclusively for educational purposes provided only that no part of the net income inures to the benefit of any private stockholder or individual. the amount of fees charged by a school which depends upon the policy of a given admin is not conclusive of the purpose of the institution; otherwise such purpose would vary with the particular person in charge of the administration. The main evidence of the purpose of a corp should be its articles of incorporation and by laws for such purpose is required by statute to be stated there, and the by laws outline the admin organization which is supposed to insure the accomplishment of the purpose. Where in addition to establishing an education institution, the articles of incorporation and by laws provide that only religious members are qualified for admission, it is apparent that said corp is not organized for profit. (Exemption: Cooperatives) Dumaguete Cooperative v CIR Cooperatives are not required to withhold taxes on interest from savings and time deposits of their members. To encourage the formation of cooperatives and to create an atmosphere conducive to their growth and development, the state extends all forms of assistance, one of which is providing them with a preferential tax treatment. Although the tax Page 18

Taxation Law Reviewer

exemption only mentions cooperatives, this should be construed to include the members pursuant to RA 6938. CHAPTER IV: INCOME I. TAXABLE INCOME 1. SEC. 31. Taxable Income Defined. - The term taxable income means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws. 2. Regulations No. 2
Sec. 36. Meaning of Net Income The tax imposed by law is upon income. In the computation of the tax, various classes of income must be considered: a. Income, in the broad sense, meaning all wealth which flows into the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains and profits, including gains derived from the sale or other disposition of capital assets. Income cannot be determined merely by reckoning cash receipts, for the statute recognizes as income determining factor other items, among which are inventories, accounts receivables, property exhaustion, and accounts payable for expenses incurred. b. Gross income, meaning income (in a broad sense) less income which is by statutory provision or otherwise exempt from the tax imposed by law. c. Net income, meaning gross income less statutory deductions. The statutory deductions are, in general, though not exclusively, expenditures other than capital expenditures, other than a corporation, net income less exemptions. Ordinarily the net income is to be computed in accordance with the method of accounting regularly employed in keeping the books of the taxpayer. Sec. 37. Computation of Net Income Net income must be computed with respect to a fixed period. That period is 12 months ending dec 31 of every year except in the case of a corporation filing returns on a fiscal year basis in which case net income will be computed on the basis of such fiscal year. Items of income and of expenditures, which as gross income and deductions are elements in the computation of net income, need not be in the form of cash. It is sufficient that such items maay be appraised in terms of money. The time as of which any item of gross income or any deduction is to be accounted for must be determined in light of the fundamental rule that the computation shall be made in such a manner as would clearly reflect the taxpayers taxable income. If the method of accounting regularly employed by him in keeping his books clearly reflects his income, it is to be followed with respect to the time as of which items of gross income and deductions are to be accounted for, otherwise the computation of net income shall be made in such a manner as in the opinion of the commisioner would clearly reflect it. Sec. 38. Bases of Computation Approved standard methods of accounting will be ordinarily regarded as clearly relfecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. All items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer and deductions taken accordingly, unless in order clearly to reflect income such amounts are to be properly accounted for as of a different period. For instance, in any case in which it is necessary to use an inventory, no accounting in regard to purchases and sales will correctly reflect income except an accrual method. A taxpayer is deemed to have received items of gross income which have been credited to or set apart for him without restriction. On the other hand, appreciation in value of property is not even an accrual

of income to a taxpayer prior to the realization of such appreciation through sale or conversion of the property.

3. Difference between Capital and Income Madrigal v Rafferty: The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the service of wealth. As Paterno has no estate and income, actually and legally vested in her and entirely distinct from her husbands property, the income cannot properly be considered the separate income of the wife for the purposes of the additional tax. To recapitulate, Vicente wants to half his declared income in computing for his tax since he is arguing that he has a conjugal partnership with his wife. However, the court ruled that the one that should be taxed is the income which is the flow of the capital, thus it should not be divided into 2. 4. Requisites for Income to be Taxable: Existence of income, Realization of income, Recognition of Income, Methods of accounting, Income is not exempt. || there must be gain or profit, the gain must be received/realized, the gain must not be excluded by law or treaty from taxation a. Existence of Income b. Realization of income; Actual v Constructive receipt: Limpan Investment Co v CIR: Whether or not the BIR was correct in assessing deficiency taxes against Limpan Corp. for undeclared rental income. Yes. Petitioner admitted that it indeed had undeclared income (although only a part and not the full amount assessed by BIR). Thus, it has become incumbent upon them to prove their excuses by clear and convincing evidence, which it has failed to do. When is there constructive receipt of rent? With regard to 1957 rents deposited with the court, and withdrawn only in 1958, the court viewed the corporation as having constructively received said rents. The noncollection was the petitioners fault since it refused to refused to accept the rent, and not due to nonpayment of lessees. Hence, although the corporation did not actually receive the rent, it is deemed to have constructively received them. c. Methods of Accounting: a. Cash method v accrual method b. Installment payment v deferred payment v percentage of completion d. Income is not exempt 5. Test in Determining Income/doctrines on Determination of Taxable Income a. Realization Test Page 19

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Taxation Law Reviewer

Eisner v Macomber: The stock dividend was not a realization of income by the taxpayer-shareholder for purposes of the Sixteenth Amendment: We are clear that not only does a stock dividend really take nothing from the property of the corporation and add nothing to that of the shareholder, but that the antecedent accumulation of profits evidenced thereby, while indicating that the shareholder is richer because of an increase of his capital, at the same time shows he has not realized or received any income in the transaction. In Towne v. Eisner, it had clearly stated that stock dividends were not income, as nothing of value was received by Towne - the company was not worth any less than it was when the dividend was declared, and the total value of Towne's stock had not changed. Although the Court acknowledged the power of the Federal Government to tax income under the Sixteenth Amendment, the Court essentially said this did not give Congress the power to tax as income anything other than income, i.e., that Congress did not have the power to re-define the term income as it appeared in the Constitution: Throughout the argument of the Government, in a variety of forms, runs the fundamental error already mentioneda failure to appraise correctly the force of the term "income" as used in the Sixteenth Amendment, or at least to give practical effect to it. It [the government] contends that the tax may be laid when earnings "are received by the stockholder," whereas [s]he has received none; that the profits are "distributed by means of a stock dividend," although a stock dividend distributes no profits; that under the Act of 1916 "the tax is on the stockholder's share in corporate earnings," when in truth a stockholder has no such share, and receives none in a stock dividend; that "the profits are segregated from his [her] former capital, and [s]he has a separate certificate representing his [her] invested profits or gains," whereas there has been no segregation of profits, nor has [s]he any separate certificate representing a personal gain, since the certificates, new and old, are alike in what they representa capital interest in the entire concerns of the corporation. The Court ordered that Macomber be refunded the tax she overpaid. Raytheon Production Co v CIR: Tax law treats recoveries as "income" when they represent compensation for loss of profits. Thus, the test for taxability is: What loss were the damages designed to compensate for? -- "In lieu of what were the damages awarded?" Tax law treats business good will not as future profits (which are fully taxable when recovered as damages), but as present capitaleven though evidence of future profitability must be introduced to evaluate it. Thus, damages for its destruction are designed to compensate for the destruction of a capital assetthey are a "return" of this capital. However, tax law does not exempt compensatory damages just because they are a return of capital -- exemption applies only to the portion that recovers the cost basis of that capital; any excess damages serve to realize prior appreciation, and should be taxed as income. In this case, the record is devoid of evidence as to the amount of that basis. This Court agrees Paolo Miguel Javier

with the Tax Court that "in the absence of evidence of the basis ... the amount of any nontaxable capital recovery cannot be ascertained." Since Raytheon could not establish the cost basis of its good will, its basis will be treated as zero. The Court concludes that the $350,000 of the $410,000 attributable to the suit is thus taxable income. Anderson v Posadas: Whether or not goodwill account is subject to income tax. YES. Good will is the reputation of good name of an establishment. If the good will, that is, the good reputation of the business is acquired in the course of its management and operation, it does not form part of the capital with which it was established. It is an intangible moral profit, susceptible of valuation in money, acquired by the business by reason of the confidence reposed in it by the public, due to the efficiency and honesty shown by the manager and personnel thereof in conducting the same on account of the courtesy accorded its customers, which moral profit, once it is valuated and used, becomes a part of the assets.In the case, the good will of P155,000 created by Anderson has been beneficial not only to him but also to Feldstein. Aside from the benefit, he also realized a gain of P70,838 from the sale of the 500 shares to Feldstein. When you add these two amounts, it totals to P161,250 which is more than what the CIR is trying to collect from Anderson. 6. Claim of right doctrine or Doctrine of ownership, command or control Commissioner v Tours Specialist: W/N amounts received by a local tourist and travel agency included in a package fee from tourists or foreign tour agencies, intended or earmarked for hotel accommodations form part of gross receipts subject to 3% contractors tax. No. Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayers benefit; and it is not necessary that there must be a law or regulation which would exempt such monies or receipts within the meaning of gross receipts under the Tax Code. Parenthetically, the room charges entrusted by the foreign travel agencies to the private respondents do not form part of its gross receipts within the definition of the Tax Code. The said receipts never belonged to the private respondent. The private respondent never benefited from their payment to the local hotels. This arrangement was only to accommodate the foreign travel agencies. Commissioner v Javier: Claim of right doctrine or doctrine of ownership, command or control- In this case, Javier is not liable for fraud penalty because the income he received is not yet a taxable gain since it is still under litigation. Whether or not Javier is liable for the 50% penalty.The court held that there was no actual and intentional fraud through willful and deliberate misleading of the BIR in the case. Javier even noted that the taxpayer was recipient of some money received abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation. Claim of right doctrine- a taxable gain is conditioned upon the Page 20

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presence of a claim of right to the alleged gain and the absence of a definite and unconditional obligation to return or repay. In this case, the remittance was not a taxable gain, since it is still under litigation and there is a chance that Javier might have the obligation to return it. It will only become taxable once the case has been settled because by then whatever amount that will be rewarded, Javier has a claim of right over it. 7. Economic Benefit Test Fernandez Hermanos Inc v CIR: That the circumstances are such that the method does not reflect the taxpayers income with reasonable accuracy and certainty and proper and just additions of personal expenses and other non-deductible expenditures were made and correct, fair and equitable credit adjustments were given by way of eliminating nontaxable items. Proper adjustments to conform to the income tax laws. Proper adjustments for non-deductible items must be made. Non-deductibles , as the case may be, must be added to the increase of decrease in the net worth. On the other hand, non- taxable items should be deducted therefrom. These items are necessary adjustments to avoid the inclusion of what otherwise are non-taxable receipts. Increases in the taxpayers net worth are not taxable increases in net worth if they are not the result of the receipt by it of unreported or unexplained taxable income, but are shown to be merely the result of the correction of errors in its entries in its books relating to its indebtednesses to certain creditors which had been erroneously overstated or listed as outstanding when in fact have been duly paid. Bradford v CIR: The fact is that by any realistic standard the petitioner never realized any income at all from the transaction in issue. In 1938 "without receiving any consideration in return," she promised to pay a prior debt of her husband's. In a later year she paid part of that debt for less than its face value. Had she paid $50,000 in 1938 to discharge $100,000 of her husband's indebtedness, the Commissioner could hardly contend that she thereby realized income. Yet the net effect of what she did do was precisely the same. In Commissioner of Internal Revenue v. Rail Joint Co., 2 Cir., 1932, 61 F.2d 751, a corporate taxpayer, after a reappraisal of its assets, distributed a dividend consisting of its own debenture bonds. In a subsequent year the corporation purchased some of these bonds at less than their face amounts, retired them, and credited the difference to surplus. The court rejected the Commissioner's claim that the corporation thereby realized income in the year the bonds were retired. Stripped of superficial distinctions, the Rail Joint Co. case is identical in principle with the present case. In that case, as in this, the taxpayer received nothing of value when the indebtedness was assumed. Although the indebtedness was discharged at less than its face value, the taxpayer was in fact poorer by virtue of the entire transaction. 8. Income from whatever source Paolo Miguel Javier

Sec. 50. Forgiveness of Indebtedness The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor, who, in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his service. If however, a creditor merely desires to benefit a debtor and without any consideration therefore cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latters gross income. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the payment of a dividend. Gutierrez v Collector: It is to be remembered that said property was acquired by the Government through condemnation proceedings and appellants' stand is, therefore, that same cannot be considered as sale as said acquisition was by force, there being practically no meeting of the minds between the parties. U.S jurisprudence has held that the transfer of property through condemnation proceedings is a sale or exchange within the meaning of section 117 (a) of the 1936 Revenue Act and profit from the transaction constitutes capital gain" "The taking of property by condemnation and the, payment of just compensation therefore is a "sale" or "exchange" within the meaning of section 117 (a) of the Revenue Act of 1936, and profits from that transaction is capital gain. The records show that the property in question was adjudicated to Maria Morales by order of the Court of First Instance of Pampanga on March 23, 1929, and in accordance with the aforequoted section of the National Internal Revenue Code, only the fair market price or value of the property as of the date of the acquisition thereof should be considered in determining the gain or loss sustained by the property owner when the property was disposed, without taking into account the purchasing power of the currency used in the transaction. The records placed the value of the said property at the time of its acquisition by appellant Maria Morales P28,291.73 and it is a fact that same was compensated with P94,305.75 when it was expropriated. The resulting difference is surely a capital gain and should be correspondingly taxed. James v US: The Supreme Court ruled that under section 22(a) of the Internal Revenue Code of 1939 and section 61(a) of the Internal Revenue Code of 1954, the receipt of embezzled funds was includable in the gross income of the wrongdoer and was taxable to the wrongdoer, even though the wrongdoer had an obligation to return the funds to the rightful owner. If a taxpayer receives income legally or illegally without consensual recognition of obligation to repay, that income is taxable. the scope of the Sixteenth Amendment was not limited to "lawful" income, a distinction which had been found in the Revenue Act of 1913. The absence of the "lawful" modifier indicated that the framers of the Sixteenth Amendment had intended no safe harbor for illegal income. The Court expressly overruled Commissioner Page 21

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v. Wilcox and ruled that James was therefore liable for the federal income tax due on his embezzled funds. Commissioner v Glenshaw Glass: The award of treble damages was taxable income. The language of section 22(a) (the predecessor of current section 61(a)) was employed by Congress in order utilize "the full measure of its taxing power," as provided for under the Sixteenth Amendment. Essentially, Congress, in enacting section 22(a), intended to tax all gains except those specifically exempted. The Court then held that the amounts received by the taxpayers in this case were "instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." This three-part "test" for determining income is broader than the earlier test employed by the Court in Eisner v. Macomber, and is to this day the preferred test for identifying gross income. Farmers & Merchants Bank v CIR: The gravamen of petitioner's action against the Reserve Bank was the injury inflicted to its banking business generally, and that the true measure of damages was compensation to be determined by ascertaining how much less valuable its business was by reason of the wrongful acts of the Reserve Bank. Injury to its business of course means injury to its financial standing, credit, reputation, good will, capital, and other possible elements. Profits were one of the chief indications of the worth of the business; but the usual earnings before the injury, as compared with those afterward, were only an evidential factor in determining actual loss and not an independent basis for recovery. We think that, if petitioner's case had proceeded to a verdict, the law would not have awarded to it what it might have expected to gain but only that which it had actually lost. We are not justified in reading an element into the compromise which was not therein distinctly recognized in fact and would not have been recognized in law. We think therefore that there is no logical basis upon which petitioner could be charged with gain. II. Gross Income 1. Sec. 32. Gross Income. - (A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; (2) Gross income derived from the conduct of trade or business or the exercise of a profession; (3) Gains derived from dealings in property; (4) Interests; (5) Rents; (6) Royalties; (7) Dividends; (8) Annuities; (9) Prizes and winnings; (10) Pensions; and (11) Partner's distributive share from the net income of the general professional partnership. Taxable Income the pertinent items of gross income specified in this Code less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this code or other special laws. 2. Classification of Income subject to tax

a. Compensation income: all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by this code. The name by which the remunerations for services is designated is immaterial. The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. Thus it may be paid on the basis of piece work or percentage of profits, hourly, daily, weekly, monthly or annually. Remuneration for services constitutes compensation even if the relationship of employer and employee does not exist any longer at the time when payment is made between the person in whose employ the services had been performed and the individual who performed them. (S2.78.1(A) RR2-98) Exception: Minimum wage earners shall be exempt from the payment of income tax on their taxable income Fringe Benefits: Definition and Inclusions:
33 (B) Fringe Benefit defined.- 'Fringe benefit' means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as, but not limited to, the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.

Rate and Tax Base: 33 (A) Imposition of Tax.- A final tax of thirty-two percent (32%), is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit bysixtyeight percent (68%): Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided, Page 22

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further, That the grossed -Up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25. Exceptions: (C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section: (1) fringe benefits which are authorized and exempted from tax under special laws; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and (4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. De Minimis Benefits: (exempt from the fringe benefits tax) shall in general, be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees: monetized unused vacation leave credits not exceeding 10 days, medical cash allowance to dependents not exceeding 750P or 125P/month, rice subsidy of 1.5k or 1 50kg sack per month, uniform and clothing allowance not exceeding 4k/year, actual yearly medical benefits not exceeding 10k/year, laundry allowance not exceeding 300/month, employee achievement awards not exceeding 10k/year, cmas/anniversary gifts not exceeding 5k/year, flowers/fruits/books given under special circumstances, daily meal allowance for overtime work not exceeding 25% of the minimum wage. All other benefits given by employers not included in the enumeration shall not be considered as de minimis benefits and shall be subject to income and withholding tax. Collector v Henderson: Whether or not the rental allowances and travel allowances furnished and given by the employer-corporation are part of taxable income? NO. Such claims are substantially supported by evidence. These claims are therefore NOT part of taxable income. No part of the allowances in question redounded to their personal benefit, nor were such amounts retained by them. These bills were paid directly by the employercorporation to the creditors. The rental expenses and subsistence allowances are to be considered not subject to income tax. Arthurs high executive position and social standing, demanded and compelled the couple to live in a more spacious and expensive quarters. Such subsistence allowance was a SEPARATE account from the account for salaries and wages of employees. The company did not charge rentals as deductible from the salaries of the Paolo Miguel Javier

employees. These expenses are COMPANY EXPENSES, not income by employees which are subject to tax. CIR v Castaneda: Whether or not terminal leave pay received by a government official or employee on the occasion of his compulsory retirement from the government service is subject to withholding (income) tax. The Court has already ruled that the terminal leave pay received by a government official or employee is not subject to withholding (income) tax. In the recent case of Jesus N. Borromeo vs. CSC the Court explained the rationale behind the employee's entitlement to an exemption from withholding (income) tax on his terminal leave pay as follows: . . . commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or employee who retires, resigns or is separated from the service through no fault of his own. In the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits. In fine, not being part of the gross salary or income of a government official or employee but a retirement benefit, terminal leave pay is not subject to income tax. b. Income from exercise of profession c. Income from business d. Income derived from dealings in property 1. Types of Properties a. Ordinary assets - stock in trade of the taxpayer, 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, property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, property used in the trade/business of a character which is subject to thet allowance for depreciation, real property used in the trade/business of the taxpayer b. Capital assets - property held by the taxpayer not included in the above 2. Types of Income from Dealings in Property Ordinary Income any gain from the sale or exchange of property which is not a capital asset. Ordinary Loss any loss from the sale or exchange of property which is not a capital asset.

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Net Capital Gain the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges Net Capital Loss the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges Holding Period, Limitation on Capital Losses, Net Loss Carry Over S39 3. Computation of Gain or Loss S40 General The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received Basis for Determining gain or loss - The basis of property shall be - (1) The cost thereof in the case of property acquired on or after March 1, 1913, if such property was acquired by purchase; or (2) The fair market price or value as of the date of acquisition, if the same was acquired by inheritance; or (3) If the property was acquired by gift, the basis shall be the same as if it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis is greater than the fair market value of the property at the time of the gift then, for the purpose of determining loss, the basis shall be such fair market value; or (4) If the property was acquired for less than an adequate consideration in money or money's worth, the basis of such property is the amount paid by the transferee for the property; or (5) The basis as defined in paragraph (C)(5) of this Section, if the property was acquired in a transaction where gain or loss is not recognized under paragraph (C)(2) of this Section. Exchange of Property General Rule: Except as herein provided, upon the sale or exchange or property, the entire amount of the gain or loss, as the case may be, shall be recognized. Exceptions: No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or (b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or Paolo Miguel Javier

(c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation. No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property. CIR v Filinvest: Can the CIR impute theoretical interest on the advances made by Filinvest to its affiliates? NO. Despite the seemingly broad power of the CIR to distribute, apportion and allocate gross income under (now) Section 50 of the Tax Code, the same does not include the power to impute theoretical interests even with regard to controlled taxpayers transactions. This is true even if the CIR is able to prove that interest expense (on its own loans) was in fact claimed by the lending entity. The term in the definition of gross income that even those income from whatever source derived is covered still requires that there must be actual or at least probable receipt or realization of the item of gross income sought to be apportioned, distributed, or allocated. Finally, the rule under the Civil Code that no interest shall be due unless expressly stipulated in writing was also applied in this case. e. Passive Income: Dividends SEC. 73. Distribution of dividends or Assets by Corporations. (A) Definition of Dividends. - The term 'dividends' when used in this Title means any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property. Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the case may be. (B) Stock Dividend. - A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits. Page 24

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(C) Dividends Distributed are Deemed Made from Most Recently Accumulated Profits. - Any distribution made to the shareholders or members of a corporation shall be deemed to have been made form the most recently accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received. (D) Net Income of a Partnership Deemed Constructively Received by Partners. - The taxable income declared by a partnership for a taxable year which is subject to tax under Section 27 (A) of this Code, after deducting the corporate income tax imposed therein, shall be deemed to have been actually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether actually distributed or not. CIR v CA, CTA & Anscor: An income taxpayer covers all persons who derive taxable income. ANSCOR was assessed by petitioner for deficiency withholding tax, as such, it is being held liable in its capacity as a withholding agent and not in its personality as taxpayer. A withholding agent, A. Soriano Corp. in this case, cannot be deemed a taxpayer for it to avail of a tax amnesty under a Presidential decree that condones the collection of all internal revenue taxes including the increments or penalties on account of non-payment as well as all civil, criminal, or administrative liabilities arising from or incident to voluntary disclosures under the NIRC of previously untaxed income and/or wealth realized here or abroad by any taxpayer, natural or juridical. The Court explains: The withholding agent is not a taxpayer, he is a mere tax collector. Under the withholding system, however, the agent-payer becomes a payee by fiction of law. His liability is direct and independent from the taxpayer, because the income tax is still imposed and due from the latter. The agent is not liable for the tax as no wealth flowed into him, he earned no income. 3. Exclusions from Gross Income
Sec. 32. (B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: (1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. (2) Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. (3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise

or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income. (4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness. (5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. (6) Retirement Benefits, Pensions, Gratuities, etc.(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. (b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death sickness or other physical disability or for any cause beyond the control of the said official or employee. (c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public. (d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration. (e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282. (f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees. (7) Miscellaneous Items. (a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments. (b) Income Derived by the Government or its Political Subdivisions. - Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof.

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(c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if: (i) The recipient was selected without any action on his part to enter the contest or proceeding; and (ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award. (d) Prizes and Awards in sports Competition. - All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations. (e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686; (ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; (iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year. (f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals. (g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the same or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years. (h) Gains from Redemption of Shares in Mutual Fund. Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22 (BB) of this Code. Sec. 2.78.1 (B) RR 2-98 (B) Exemptions from withholding tax on compensation. The following income payments are exempted from the requirement of withholding tax on compensation: (1) Remunerations received as an incident of employment, as follows: (a) Retirement benefits received under Republic Act under 7641 and those received by officials and employees of private firms, whether individual or corporate, under a reasonable private benefit plan maintained by the employer which meet the following requirements: (i) The plan must be reasonable; (ii) The benefit plan must be approved by the Bureau; (iii) The retiring official or employee must have been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of retirement; and (iv) The retiring official or employee should not have previously availed of the privilege under the retirement benefit plan of the same or another employer. (b) Any amount received by an official or employee or by his heirs from the employer due to death, sickness or other physical disability or for any cause beyond the control of the

said official or employee, such as retrenchment, redundancy, or cessation of business. rep The phrase "for any cause beyond the control of the said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. The separation was not of his own making. Whether or not the separation is beyond the control of the official or employee, being essentially a question of fact, shall be determined on the basis of prevailing facts and circumstances. It shall be duly established by the employer by competent evidence which should be attached to the monthly return for the period in which the amount paid due to the involuntary separation was made. Amounts received by reason of involuntary separation remain exempt from income tax even if the official or the employee, at the time of separation, had rendered less than ten (10) years of service and/or is below fifty (50) years of age. Any payment made by an employer to an employee on account of dismissal, constitutes compensation regardless of whether the employer is legally bound by contract, statute, or otherwise, to make such payment. (c) Social security benefits, retirement gratuities, pensions and other similar benefits received by residents or non-resident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions private or public; (d) Payments of benefits due or to become due to any person residing in the Philippines under the law of the United States administered by the United States Veterans Administration; (e) Payments of benefits made under the Social Security System Act of 1954 as amended; and (f) Benefits received from the GSIS Act of 1937, as amended, and the retirement gratuity received by government officials and employees. (2) Remuneration paid for agricultural labor (a) Remuneration for services which constitute agricultural labor and paid entirely in products of the farm where the labor is performed is not subject to withholding. In general, however, the term, "agricultural labor" does not include services performed in connection with forestry, lumbering or landscaping. (b) Remuneration paid entirely in products of the farm where the labor is performed by an employee of any person in connection with any of the following activities is excepted as remuneration for agricultural labor: (i) The cultivation of soil; (ii) The raising, shearing, feeding, caring for, training, or management of livestock, bees, poultry, or wildlife; or (iii) The raising or harvesting of any other agricultural or horticultural commodity. The term "farm" as used in this subsection includes, but is not limited to stock, dairy, poultry, fruits and truck farms, plantations, ranches, nurseries ranges, orchards, and such greenhouse and other similar structures as are used primarily for the raising of agricultural or horticultural commodities. (c) The remuneration paid entirely in products of the farm where labor is performed for the following services in the employ of the owner or tenant or other operator of one or more farms is not considered as remuneration for agricultural labor, provided the major part of such services is performed on a farm: (i) Services performed in connection with the operation, management, conservation, improvement, or maintenance of any such farms or its tools or equipments; or

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(ii) Services performed in salvaging timber, or clearing land brush and other debris left by a hurricane or typhoon. The services described in (i) above may include for example, services performed by carpenters, painters, mechanics, farm supervisors, irrigation engineers, bookkeepers, and other skilled or semi-skilled workers, which contribute in any way to the conduct of the farm or farms, as such, operated by the person employing them, as distinguished from any other enterprise in which such person may be engaged. Since the services described in this paragraph must be performed in the employ of the owner or tenant or other operator of the farm, the exception does not extend to remuneration paid for services performed by employees of a commercial painting concern, for example, which contracts with a farmer to renovate his farm properties. (d) Remuneration paid entirely in products of the farm where labor is performed by an employee in the employ of any person in connection with any of the following operations is not considered as remuneration for agricultural labor without regard to the place where such services are performed: (i) The making of copra, stripping of abaca, etc.; (ii) The hatching of poultry; (ii) The raising of fish;(iv) The operation or maintenance of ditches, canals, reservoirs, or waterways used exclusively for supplying or storing water for farming purposes; and (v) The production or harvesting of crude gum from a living tree or the processing of such crude gum into gum spirits or turpentine and gum resin, provided such processing is carried on by the original producer of such crude gum. (e) Remuneration paid entirely in products of the farm where labor is performed by an employee in the employ of a farmer or a farmer's cooperative, organization or group in the handling, planting, drying, packing, packaging, processing, freezing, grading, storing or delivering to storage or to market or to carrier for transportation to market, of any agricultural or horticultural commodity, produced by such farmer or farmermembers of such organization or group, is excepted as remuneration for agricultural labor. Services performed by employees of such farmer or farmer's organization or group in handling, planting, drying, packaging, processing, freezing, grading, storing, or delivering to storage or to market or to carrier for transportation to market of commodities produced by persons other than such farmer or members of such farmer's organization or group are not performed "as an incident to ordinary farming operation". All payments made in cash or other forms other than products of the farm where labor is performed, for services constituting agricultural labor as explained above, are not within the exception. (3) Remuneration for domestic services. Remuneration paid for services of a household nature performed by an employee in or about the private home of the person by whom he is employed is not subject to withholding. However, the services of household personnel furnished to an employee (except rank and file employees) by an employer shall be subject to the fringe benefits tax pursuant to Sec. 33 of the Code, as amended. A private home is the fixed place of abode of an individual or family. If the home is utilized primarily for the purpose of supplying board or lodging to the public as a business enterprise, it ceases to be a private home and remuneration paid for services performed therein is not exempted. In general, services of a household nature in or about a private home include services rendered by cooks, maids, butlers,

valets, laundresses, gardeners, chauffeurs of automobiles for family use. The remuneration paid for the services above enumerated which are performed in or about rooming or lodging houses, boarding houses, clubs, hotels, hospitals or commercial offices or establishments is considered as compensation; Remuneration paid for services performed as a private secretary, even if they are performed in the employer's home is considered as compensation; (4) Remuneration for casual labor not in the course of an employer's trade or business. The term "casual labor" includes labor which is occasional, incidental or regular. The expression "not in the course of the employer's trade or business" includes labor that does not promote or advance the trade or business of the employer. Thus, any remuneration paid for labor which is occasional, incidental or irregular, and does not promote or advance the employer's trade or business, is not considered as compensation. EXAMPLE: A's business is that of operating a sawmill. He employs B, a carpenter, at an hourly wage to repair his home. B's work is irregular and he spends, the greater part of two days in completing the work. Since B's labor is casual and is not in the course of A's business, the remuneration paid for such services is exempted. Any remuneration paid for casual labor, that is, labor which is occasional, incidental or irregular, but which is rendered in the course of the employer's trade or business, is considered as compensation. EXAMPLE: E is engaged in the business of operating a department store. He employs additional clerks for a short period. While the services of the clerks may be casual, they are rendered in the course of the employer's trade or business and therefore the remuneration paid for such services is considered as compensation. Any remuneration paid for casual labor performed for a corporation is considered as compensation; (5) Compensation for services by a citizen or resident of the Philippines for a foreign government or an international organization. Remuneration paid for services performed as an employee of a foreign government or an international organization is exempted. The exemption includes not only remuneration paid for services performed by ambassadors, ministers and other diplomatic officers and employees but also remuneration paid for services performed as consular or other officer or employee of a foreign government or as a nondiplomatic representative of such government. (6) Damages. Actual, moral, exemplary and nominal damages received by an employee or his heirs pursuant to a final judgment or compromise agreement arising out of or related to an employer-employee relationship. (7) Life Insurance. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, provided however, that interest payments agreed under the policy for the amounts which are held by the insured under such an agreement shall be included in the gross income. (8) Amount received by the insured as a return of premium. The amount received by the insured, as a return of premium or premiums paid by him under life insurance, endowment, or annuity contracts either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. (9) Compensation for injuries or sickness. Amounts received through Accident or Health Insurance or under

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Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness. (10) Income exempt under treaty. Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines. (11) Thirteenth (13th ) month pay and other benefits. (a) Thirteenth (13th) month pay equivalent to the mandatory one (1) month basic salary of officials and employees of the government, (whether national or local), including government-owned or controlled corporations, and or private offices received after the twelfth (12th) month pay; and (b) Other benefits such as Christmas bonus, productivity incentive bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices. The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the year provided that the total amount shall not exceed thirty thousand pesos (P30,000.00) which may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. (12) GSIS, SSS, Medicare and other contributions. GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individual employees.

claimed under law, otherwise, the same will be disallowed. There has been no attempt to define ordinary and necessary with precision. However, as guiding principle in the proper adjudication of conflicting claims, an expenses is considered necessary where the expenditure is appropriate and helpful in the development of the taxpayers business. It is ordinary when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. Assuming that the expenditure is ordinary and necessary in the operation of the taxpayers business; the expenditure, to be an allowable deduction as a business expense, must be determined from the nature of the expenditure itself, and on the extent and permanency of the work accomplished by the expenditure. Herein, ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires; which is erroneous. Claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations. Zamora v Collector: There shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year, in carrying on any trade or business. Since promotion expenses constitute one of the deductions in conducting a business, same must testify these requirements. Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurred. That to be deductible, said business expenses must be ordinary and necessary expenses paid or incurred in carrying on any trade or business; that those expenses must also meet the further test of reasonableness in amount; that when some of the representation expenses claimed by the taxpayer were evidenced by vouchers or chits, but others were without vouchers or chits, the court should determine from all available data, the amount properly deductible as representation expenses. Considering, as heretofore stated, that the application of Mrs. Zamora for dollar allocation shows that she went abroad on a combined medical and business trip, not all of her expenses came under the category of ordinary and necessary expenses; part thereof constituted her personal expenses. There having been no means by which to ascertain which expense was incurred by her in connection with the business of Mariano Zamora and which was incurred for her personal benefit, the Collector and the CTA in their decisions, considered 50% of the said amount of P20,957.00 as business expenses and the other 50%, as her personal expenses. We hold that said allocation is very fair to Mariano Zamora, there having been no receipt whatsoever, submitted to explain the alleged business expenses, or proof of the connection which said expenses had to the business or the reasonableness of the said amount of P20,957.00. While in situations like the present, absolute certainty is usually not possible, the CTA should make as close an approximation as it can, bearing heavily, if Page 28

4. Source Rules a. Interests s42(A)(1) and (C)(1) b. Dividends s42(A)(2) and (C)(2) c. Services s42(A)(3) and (C)(3) d. Rentals s42(A)(4) and (C)(4) e. Royalties s42(A)(4) and (C)(4) f. Sale of Real Property s42(A)(5) and (C)(5) g. Sale of Personal Property s42(E) in relation to (a)(6) h. Sale of Shares of Stock of corporation CHAPTER V: DEDUCTIONS I. CONDITIONS FOR DEDUCTIBILITY OF BUSINESS EXPENSES: 1. It must be ordinary and necessary, 2. It must be paid or incurred during the taxable year, 3. it must be paid or incurred in carrying on, or which are directly attributable to the development, management, operation, and/or conduct of the trade, business or exercise of profession, 4. It must be supported by adequate invoices or receipts, 5. It is not contrary to law, public policy or morals, 6. The tax required to be withheld on the expense paid or payable was remitted to the BIR 1. It must be ordinary and necessary a. Test of Deductibility Esso v CIR: For an item to be deductible as a business expense, the expense must be ordinary and necessary; it must be paid or incurred within the taxable year; and it must be paid or incurred in carrying on a trade or business. In addition to meeting the business test, the taxpayer must substantially prove by evidence or records the deductions Paolo Miguel Javier

Taxation Law Reviewer

it chooses, upon the taxpayer whose inexactness is of his own making. Kuenzle & Streiff v CIR: Whether or not the bonuses in question was reasonable and just to be allowed as a deduction? No. It is a general rule that `Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered. The condition precedents to the deduction of bonuses to employees are: (1) the payment of the bonuses is in fact compensation; (2) it must be for personal services actually rendered; and (3) bonuses, when added to the salaries, are `reasonable ... when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer. Here it is admitted that the bonuses are in fact compensation and were paid for services actually rendered. The only question is whether the payment of said bonuses is reasonable. There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends upon many factors, one of them being the amount and quality of the services performed with relation to the business. Other tests suggested are: payment must be 'made in good faith'; the character of the taxpayer's business, the volume and amount of its net earnings, its locality, the type and extent of the services rendered, the salary policy of the corporation'; 'the size of the particular business'; 'the employees' qualifications and contributions to the business venture'; and 'general economic conditions. However, 'in determining whether the particular salary or compensation payment is reasonable, the situation must be considered as a whole. It seems clear from the record that, in arriving at its main conclusion that the bonuses were not reasonable, the tax court considered, inter alia, the following factors: 1) The paid officers, in the absence of evidence to the contrary, that they were competent, on the other the record discloses no evidence nor has petitioner ever made the claim that all or some of them were gifted with some special talent, or had undergone some extraordinary training, or had accomplished any particular task, that contributed materially to the success of petitioner's business during the taxable years in question. 2) All the other employees received no pay increase in the said years. 3) The bonuses were paid despite the fact that it had suffered net losses for 3 years. Furthermore the corporation cannot use the excuse that it is 'salary paid' to an employee because the CIR does not question the basic salaries paid by petitioner to the officers and employees, but disallowed only the bonuses paid to petitioner's top officers at the end of the taxable years in question. b. Test of Reasonableness CM Hoskins v Commissioner: Whether or not the disallowance of the 4 items of deduction were proper.NOT deductible. It did not pass the test of reasonableness which is: General rule, bonuses to employees made in good faith Paolo Miguel Javier

and as additional compensation for services actually rendered by the employees are deductible, provided such payments, when added to the salaries do not exceed the compensation for services rendered. The conditions precedent to the deduction of bonuses to employees are: 1. Payment of bonuses is in fact compensation, 2. Must be for personal services actually rendered, 3. Bonuses when added to salaries are reasonable when measured by the amount and quality of services performed with relation to the business of the particular taxpayer. There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends upon many factors, one of them being the amount and quality of the services performed with relation to the business. Other tests suggested are: payment must be made in good faith, the character of the taxpayers business, the volume and amount of its net earnings, its locality, etc. However, in determining whether the particular salary or compensation mayment is reasonable, the situation must be considered as a whole. Ordinarily, no single factor is decisive. It is important to keep in mind that it seldom happens that the application of one test can give satisfactory answer, and that ordinarily it is the interplay of several factors, properly weighted for the particular case, which must furnish the final answer. The right of an employer to fix the compensation of its officers and employees is conceded but for income tax purposes, the employer cannot claim such bonuses as deductible expenses unless they are shown to be reasonable. To hold otherwise would open the gate of rampant tax evasion. In the case, Hoskins fails to pass the test. CTA was correct in holding that the payment of the company to Mr. Hoskins of the sum P99,977.91 as 50% share of supervision fees received by the company was inordinately large and could not be treated as an ordinary and necessary expenses allowed for deduction. CIR v General Foods Inc: W/N the subject media advertising expense for Tang was ordinary and necessary expense fully deductible under the NIRC. No. Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in favor of the taxing authority, and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. Deductions for income taxes partake of the nature of tax exemptions; hence, if tax exemptions are strictly construed, then deductions must also be strictly construed. To be deductible from gross income, the subject advertising expense must comply with the following requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers. While the subject advertising expense was paid or incurred within the corresponding taxable year and was incurred in carrying on a trade or business, hence necessary, the parties views conflict as to whether or not it was ordinary. To be deductible, an advertising expense should not only be necessary but also ordinary. The Commissioner maintains that the subject Page 29

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advertising expense was not ordinary on the ground that it failed the two conditions set by U.S. jurisprudence: first, reasonableness of the amount incurred and second, the amount incurred must not be a capital outlay to create goodwill for the product and/or private respondents business. Otherwise, the expense must be considered a capital expenditure to be spread out over a reasonable time. There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising expense. There being no hard and fast rule on the matter, the right to a deduction depends on a number of factors such as but not limited to: the type and size of business in which the taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditure itself; the intention of the taxpayer and the general economic conditions. It is the interplay of these, among other factors and properly weighed, that will yield a proper evaluation. The Court finds the subject expense for the advertisement of a single product to be inordinately large. Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under then Section 29 (a) (1) (A) of the NIRC. Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services and (2) advertising designed to stimulate the future sale of merchandise or use of services. The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayers trade or business or for the industry or profession of which the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt such expenditures are deductible as business expenses. If, however, the expenditures are for advertising of the second kind, then normally they should be spread out over a reasonable period of time. The companys media advertising expense for the promotion of a single product is doubtlessly unreasonable considering it comprises almost one-half of the companys entire claim for marketing expenses for that year under review. Petition granted, judgment reversed and set aside. 2. It must be paid or incurred during the taxable year CIR v Isabela Cultural Co: Whether or not the expenses for professional and security services are deductible. No. The requisites for the deductibility of odinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services are: a. The expense must be ordinary and necessary, b. It must have been paid or incurred during the taxable year, c. It must have been paid or incurred in carrying on the trade or business of the taxpayer, and d. It must be supported by receipts, records or other pertinent papers. The requisite that it must have been paid or incurred during the taxable year is further qualified by sec 45 wihch states, the deduction shall be taken for the taxable year in which paid or accrued, dependent upon the method of accounting upon the basis of which the net income is computed. One of the requisites for the deductibility of ordinary and Paolo Miguel Javier

necessary expenses is that it must have been paid or incurred during the taxable year. This requisite is dependent on the method of accounting of the taxpayer. In the case at bar, ICC is using the accrual method of accounting. Hence, under this method, an expense is recognized when it is incurred. Under a Revenue Audit Memorandum, when the method of accounting is accrual, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed in the succeeding year. The accrual of income and expense is permitted when the all-events test has been met. This test requires: 1) fixing of a right to income or liability to pay; and 2) the availability of the reasonable accurate determination of such income or liability. The test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy. From the nature of the claimed deductions and the span of time during which the firm was retained, ICC can be expected to have reasonably known the retainer fees charged by the firm. They cannot give as an excuse the delayed billing, since it could have inquired into the amount of their obligation and reasonably determine the amount. Isabela simply relied on the defense of delayed billing by the firm which under the circumstances, is not sufficient to exempt t from being charged with knowledge of the reasonable amount of the expenses for legal and auditing services. Having failed to discharge the burden of proving that the claimed expense deductions for the professional services were allowable deductions, they cannot be vaildy deducted from its gross income for the year. 3. Must be paid/incurred in carrying on the devt, mgt, etc, of trade/business/profession CIR v CTA & Smith Kline: Expenses of a multinational corporation directly related to the production of Philippinederived income can be deducted from gross income in the Philippines without need of apportionment, but overhead expenses of its parent company belong to a different category. Where an expense is clearly related to the production of Philippine derived income or Philippine operations like salaries, personnel, or rental of office buildings, that expense can be dedcuted from the gross income without resorting to apportionment. Overhead expenses incurred by the parent company in connection with finance administration and R&D, all of which directly benefit its branches alll over the world, cannot be definitely allocated or dentified with the operations of the Philippine branch. For 1971, the parent co spent 1M. Smith Kline can claim as its deductible share a ratable part of such expenses based upon the ratio of the local brachs gross income to the total gross income, worldwide, of the multinational corporation. Gutierrez v Collector: To be deductible, an expense must be: 1. Ordinary and necessary, 2. Paid or incurred within the taxable year, 3. Paid or incurred in carrying on a trade or business. Page 30

Taxation Law Reviewer

1. Transportation expenses which petitioner incurred to attend the funeral of his friends and the cost of admission tickets to operas - expenses relative to his personal and social activities rather than to his business of leasing real estate.Not deductible. 2. Procurement and installation of an iron door to - purely a personal expense. Personal, living, or family expenses are not deductible. 3. Cost of furniture given by the taxpayer as commission in furtherance of a business transaction - the expenses incurred in attending the National Convention of Filipino Businessmen, luncheon meeting and cruise to Corregidor of the Homeowners' Association were shown to have been made in the pursuit of his business. Commissions given in consideration for bringing about a profitable transaction are part of the cost of the business transaction and are deductible. 4. Membership and activities in connection therewith were solely to enhance his business -Gutierrez was an officer of the Junior Chamber of Commerce which sponsored the National Convention of Filipino Businessmen. He was also the president of the Homeowners' Association, an organization established by those engaged in the real estate trade. Having proved that his, the expenses incurred are deductible as ordinary and necessary business expenses. 5. Car expenses, salary of his driver and car depreciation 1/3 of the same was disallowed by the Commissioner on the ground that the taxpayer used his car and driver both for personal and business purposes. There is no clear showing, however, that the car was devoted more for the taxpayer's business than for his personal and business needs. According to the evidence, the taxpayer's car was utilized both for personal and business needs. It is reasonable to allow as deduction 1/2 of the driver's salary, car expenses and depreciation. 6. Those used to repair the taxpayer's rental apartments - did not increase the value of such apartments, or prolong their life. They merely kept the apartments in an ordinary operating condition. Hence, the expenses incurred are deductible as necessary expenditures for the maintenance of the taxpayer's business. 7. Litigation expenses - defrayed by Gutierrez to collect apartment rentals and to eject delinquent tenants are ordinary and necessary expenses in pursuing his business. It is routinary and necessary for one in the leasing business to collect rentals and to eject tenants who refuse to pay their accounts. Deductible. 8. Depreciation of Gutierrez' residence - not deductible. A taxpayer may deduct from gross income a reasonable allowance for deterioration of property arising out of its use or employment in business or trade. Gutierrez' residence was not used in his trade or business. 9. Deduction the fines and penalties which he paid for late payment of taxes not deductible. while Section 30 allows taxes to be deducted from gross income, it does not specifically allow fines and penalties to be so deducted. Deductions from gross income are matters of legislative grace; what is not expressly granted by Congress is withheld. Moreover, when acts are condemned, by law and their commission is made Paolo Miguel Javier

punishable by fines or forfeitures, to allow them to be deducted from the wrongdoer's gross income, reduces, and so in part defeats, the prescribed punishment. 10. Alms to an indigent family and various individuals, contributions to Lydia Yamson and G. Trinidad and a donation consisting of officers' jewels and aprons to Biakna-Bato Lodge No. 7 - not deductible from gross income inasmuch as their recipients have not been shown to be among those specified by law. Contributions are deductible when given to the Government of the Philippines, or any of its political subdivisions for exclusively public purposes, to domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, athletic, cultural or educational purposes, or for the rehabilitation of veterans, or to societies for the prevention of cruelty to children or animals, no part of the net income of which inures to the benefit of any private stockholder or individual. Real properties used in taxpayers business are ordinary assets. 4. It must be supported by adequate invoices or receipts Sec. 34 (A) (1) (b) Substantiation Requirements. - No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. Gancayco v Collector: Farming expenses, which are capital expenditures, are not deductible for income tax purposes. Representation expenses cannot be allowed as an income tax deduction in the absence of receipts, invoices, or vouchers supporting said expenses and in case the taxpayer cannot specify the items constituting said expenses. 5. It is not contrary to law, public policy or morals - Sec. 34 (A) (1) (c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income shall be allowed under Subsection (A) hereof for any payment made, directly or indirectly, to an official or employee of the national government, or to an official or employee of any local government unit, or to an official or employee of a government-owned or -controlled corporation, or to an official or employee or representative of a foreign government, or to a private corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback. 3M Phils v CIR although the tax code allows payments of royalty to be deducted from gross income as business expenses, it it CB Circ 393 that defines what royalty payments are proper. Hence, improper payments of royalty are not deductible as legitimate business expenses. Circulars issued by the central bank in the Page 31

Taxation Law Reviewer

exercise of its authority and which have been duly published in the OG have the force and effect of law and are binding on everybody. 6. The tax required to be withheld on the expense paid or payable was remitted to the BIR - (K) Additional Requirements for Deductibility of Certain Payments. Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section 58 and 81 of this Code. II. TYPES OF DEDUCTIONS 1. Itemized Deductions S34: a. Expenses, b. Interest, c. Taxes, d. Losses, e. Bad Debts, f. Depreciation, g. Depletion of Oil and Gass Wells and Mines, h. Charitable and Other Contributions, i. Research and Development, j. Pension Trusts 2. Optional Standard Deduction S34 standard deduction in an amount not exceeding ten percent (10%) of his gross income. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made 3. Special Deductions under NIRC and special laws (S37 & 38) a. Insurance Companies, b. Mutual Insurance Companies, c. Mutual Marine Insurance Companies, d. Assessment Insurance Companies, e. Losses from Wash Sales of Stock or Securities III. ITEMIZED DEDUCTIONS 1. Interest a. Requisites for deductibility S34(B)(1) b. Disallowed Interest on Tax Arbitrage S34(B)(1) c. Exceptions S34 (B)(2) d. Optional Treatment of Interest Expense S34(B)(3) Palanca v CIR: Interest paid on delinquent gift, estate and inheritance tax is deductible. While the distinction between taxes and debt is recognized, the variance in their legal concept does not extend to the interests paid on them. The interest on the donors tax is deductible and is applicable to interest paid on the estate and inheritance taxes. Although taxes already due are not the same as debts, they are however, obligations that may be considered as such. Paper Industries Co v CA, CIR: Interest payments on loans incurred by a taxpayer (whether BOI-registered or not) are allowed by the NIRC as deductions against the taxpayer's gross income.Thus, the general rule is that interest expenses are deductible Paolo Miguel Javier Taxation Law Reviewer

against gross income and this certainly includes interest paid under loans incurred in connection with the carrying on of the business of the taxpayer.In the instant case, the CIR does not dispute that the interest payments were made by Picop on loans incurred in connection with the carrying on of the registered operations of Picop, i.e., the financing of the purchase of machinery and equipment actually used in the registered operations of Picop. Neither does the CIR deny that such interest payments were legally due and demandable under the terms of such loans, and in fact paid by Picop during the tax year 1977.The CIR has been unable to point to any provision of the 1977 Tax Code or any other Statute that requires the disallowance of the interest payments made by Picop.The provision of Revenue Regulations No. 2 as referring to so called "theoretical interest," that is to say, interest "calculated" or computed (and not incurred or paid) for the purpose of determining the "opportunity cost" of investing funds in a given business. Such "theoretical" or imputed interest does not arise from a legally demandable interest-bearing obligation incurred by the taxpayer who however wishes to find out, e.g., whether he would have been better off by lending out his funds and earning interest rather than investing such funds in his business. One thing that Section 79 quoted above makes clear is that interest which does constitute a charge arising under an interest-bearing obligation is an allowable deduction from gross income. Excerpt of the U.S. Income Tax Regulations: No deduction shall be allowed for amounts paid or accrued for such taxes and carrying charges as, under regulations prescribed by the Secretary or his delegate, are chargeable to capital account with respect to property, if the taxpayer elects, in accordance with such regulations, to treat such taxes or charges as so chargeable." At the same time, under the adjustment of basis provisions which have just been discussed, it is provided that adjustment shall be made for all "expenditures, receipts, losses, or other items" properly chargeable to a capital account, thus including taxes and carrying charges; however, an exception exists, in which event such adjustment to the capital account is not made, with respect to taxes and carrying charges which the taxpayer has not elected to capitalize but for which a deduction instead has been taken. Thus, such "carrying charges" may, at the election of the taxpayer, either be (a) capitalized in which case the cost basis of the capital assets, e.g., machinery and equipment, will be adjusted by adding the amount of such interest payments or alternatively, be (b) deducted from gross income of the taxpayer. Should the taxpayer elect to deduct the interest payments against its gross income, the taxpayer cannot at the same time capitalize the interest payments. In other words, the taxpayer is not entitled to both the Page 32

deduction from gross income and the adjusted (increased) basis for determining gain or loss and the allowable depreciation charge. The U.S. Internal Revenue Code does not prohibit the deduction of interest on a loan obtained for purchasing machinery and equipment against gross income, unless the taxpayer has also or previously capitalized the same interest payments and thereby adjusted the cost basis of such assets.our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and equipment. Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan. The 1977 Tax Code is simply silent on a taxpayer's right to elect one or the other tax treatment of such interest payments. Accordingly, the general rule that interest payments on a legally demandable loan are deductible from gross income must be applied.The CIR argues finally that to allow Picop to deduct its interest payments against its gross income would be to encourage fraudulent claims to double deductions from gross income. The Court is not persuaded. So far as the records of the instant cases show, Picop has not claimed to be entitled to double deduction of its 1977 interest payments. The CIR has neither alleged nor proved that Picop had previously adjusted its cost basis for the machinery and equipment purchased with the loan proceeds by capitalizing the interest payments here involved. The Court will not assume that the CIR would be unable or unwilling to disallow "a double deduction" should Picop, having deducted its interest cost from its gross income, also attempt subsequently to adjust upward the cost basis of the machinery and equipment purchased and claim, e.g., increased deductions for depreciation. We conclude that the CTA and the Court of Appeals did not err in allowing the deductions of Picop's 1977 interest payments on its loans for capital equipment against its gross income for 1977. 2. Taxes S34(C)(1) a. Limitation on Deductions in case of NRAETB S34(C)(2) CIR v Lednicky: An alien resident who derives income wholly from sources within the philippines may not deduct from gross income the income taxes he paid to his home country for the taxable year. An alien residents right to deduct from gross income the income taxes he paid to a foreign government is given only as an alternative to his right to claim a tax credit for such foreign income taxes, so that unless he has a right to claim such tax credit if he chooses, he is precluded from said deduction. An alien resident is not entitled to tax credit for foreign income taxes paid when his income is derived wholly from sources within the philippines. Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same entity. In this case, although Paolo Miguel Javier

the taxpayer would have to pay two taxes on the same income but the govt only receives the proceeds of one tax, there is no obnoxious double taxation. b. Foreign Tax Credits S34(C)(3)-(4) 3. Losses S34(D)(1) Marcelo Steel Co v Collector: The purpose of RA 35 is to encourage the establishment of new and necessary industries to promote the economic growth of the country. It is a form of subsidy granted to courageous entrepreneurs staking their capital in an unknown venture. However, RA 35 has confined the privilege of tax exemption only to new and necessary industries. It didnt intend to grant the tax exemption benefit to an entrepreneur engaged at the same time in a taxable or non-exempt industry and a new and necessary industry, by allowing him to deduct his gain or profits derived from the operation of the first from the losses incurred in the operation of the second. Unlike a new and necessary industry, a taxable or non-exempt industry is already a going concern, deriving profits from its operation, and deserving no subsidy from the govt. It is but fair that it be required to give the govt a share in its profits in the form of taxes. The fact that a corp is organized with a single capital that answers for all its financial obligations including those incurred in the tax exempt industries is of no moment. The intent of the law is to treat taxable or non-exempt industries as separate and distinct from new and necessary industries which are tax exempt for purposes of taxation. Plaridel Surety & Ins Co v CIR: Loss is deductible only in the taxable year it actually happens or is sustained. However, if the loss is compensable otherwise than by insurance thru the mortgages in pets favor though it had not exhausted all its remedies, to minimize its loss, then deduction for the loss suffered is postponed to a subsequent year, which, to be precise is that year in which it appears that no compensation at all can be had, or that there is a remaining or net loss, i.e. no full compensation. The rule is that loss deduction will be denied if there is a measurable right to compensation for the loss, with ultimate collection reasonably clear. So where there is reasonable ground for reimbursement, the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had. In other words, the taxpayer must first exhaust his remedies to recover or reduce his loss. Where the evidence on record reveals that petitioner had not exhausted its remedies, then it was too premature for petitioner to claim a loss deduction. Assuming that there was no reasonable expectation of recovery of the loss sustained, still no loss deduction can be had. The code requires a charge off as one of the conditions for loss deduction. However, petitioner, who had the burden of proof, failed to adduce evidence that there was a charge off. Page 33

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CIR v Priscilla Estate: The value of a demolished uninsured building is deductible from gross income where the removal, instead of being voluntary, was forced upon the taxpayer by the city authorities because the structure was a fire hazard. Since the demolished building was not compensated for by insurance or otherwise, its loss should be charged off as deduction from gross income. a. Ordinary Loss v Capital Loss i. Limitation on Capital Losses S34(D)(4)(a) ii. Securities becoming worthless S34(D)(4)(b) China Bank Co v CA, CIR, CTA: Among the deductible items allowed by the NIRC are bad debts and losses. An equity investment is a capital, not ordinary, asset of the investor, the sale/exchange of which results in either a capital gain or a capital loss. The gain or the loss is ordinary when ther property sold or exchanged is not a capital asset. Shares of stock would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of or an active trader for his own account in securities. In the hands, however, of another who holds the shares of stock by way of an investment, the shares to him would be capital assets. When the shares held by such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets. A capital gain or a capital loss normally requires the concurrence of to conditions for it to result: 1. There is a sale or exchange and 2. The thing sold or exchanged is a capital asset. When securities become worthless, there is strictly no sale or exhange but the law deems the loss to be a loss from the sale or exchange of capital assets. Capital losses are allowed to be deducted only to the extent of capital gains, i.e. gains derived from the sale or exchange of capital assets, and not from any other income of the taxpayer. In this case, First CBC Capital, the investee, is a subsidiary corp of pet bank whose shares in said investee corp are not intended for purchase or sale, but as an investment. Thus, any loss therefrom would be a capital loss, not an ordinary loss to the investor. The exclusionary clause found in s34d4a does not include all forms of securities, but specifically covers only bonds, debentures, notes, certs or other evids of indebtedness with interest coupons or in registered form. Equity holdings cannot come close to being within the purview of evidence of indebtedness, thus cannot be deductible as a bad debt. The shares of stock in question do not constitute a loan extended by it to its subsidiary or a debt subject to obligatory repayment, essential elements to constitute a bad debt, but a long term investment made by CBC. b. Wash Sales S34(D)(5) & S38 c. Wagering Losses S34(D)(6) Paolo Miguel Javier Taxation Law Reviewer

d. Abandonment Losses S34(D)(7) e. Net Operating Loss Carry Over (NOLCO) S34(D)(3) PICOP v CA: It is important to note at the outset that in our jurisdiction, the ordinary rule that is, the rule applicable in respect of corporations not registered with the BOI as a preferred pioneer enterprise is that net operating losses cannot be carried over. Under our Tax Code, both in 1977 and at present, losses may be deducted from gross income only if such losses were actually sustained in the same year that they are deducted or charged off.It is thus clear that under our law, and outside the special realm of BOI-registered enterprises, there is no such thing as a carry-over of net operating loss. To the contrary, losses must be deducted against current income in the taxable year when such losses were incurred. Moreover, such losses may be charged off only against income earned in the same taxable year when the losses were incurred. Thus it is that R.A. No. 5186 introduced the carry-over of net operating losses as a very special incentive to be granted only to registered pioneer enterprises and only with respect to their registered operations. The statutory purpose here may be seen to be the encouragement of the establishment and continued operation of pioneer industries by allowing the registered enterprise to accumulate its operating losses which may be expected during the early years of the enterprise and to permit the enterprise to offset such losses against income earned by it in later years after successful establishment and regular operations. To promote its economic development goals, the Republic foregoes or defers taxing the income of the pioneer enterprise until after that enterprise has recovered or offset its earlier losses. We consider that the statutory purpose can be served only if the accumulated operating losses are carried over and charged off against income subsequently earned and accumulated by the same enterprise engaged in the same registered operations. In the instant case, to allow the deduction claimed by Picop would be to permit one corporation or enterprise, Picop, to benefit from the operating losses accumulated by another corporation or enterprise, RPPM. RPPM far from benefiting from the tax incentive granted by the BOI statute, in fact gave up the struggle and went out of existence and its former stockholders joined the much larger group of Picop's stockholders. To grant Picop's claimed deduction would be to permit Picop to shelter its otherwise taxable income (an objective which Picop had from the very beginning) which had not been earned by the registered enterprise which had suffered the accumulated losses. In effect, to grant Picop's claimed deduction would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated operating losses. In granting the extraordinary privilege and incentive of a net operating loss carry-over to BOI-registered pioneer Page 34

enterprises, the legislature could not have intended to require the Republic to forego tax revenues in order to benefit a corporation which had run no risks and suffered no losses, but had merely purchased another's losses. The deduction claimed by Picop in the amount of P44,196,106.00 in its 1977 Income Tax Return must be disallowed. 4. Bad Debts a. Requisites for deductibility S34(E)(1) i. Transactions between related parties S36(B) in relation to S34(E)(1) ii. Recovery of bad debt previously written off 1. Tax Benefit Rule S34(E)(1) Collector v Goodrich: Claim for deduction of representation expenses, being based upon receipts issued not by the entities in which the alleged expenses had been incurred but by the officers of some other entity who allegedly paid them must be rejected. If the expenses had really been incurred, receipts would have been issued by the entities to which the payments had been made, and it would have been easy for the other entitiy or its officers to produce them. Those issued by said officers merely attest to their claim that they had incurred and paid said expenses and do not establish payment of said alleged espenses to the entities in which the same are said to have been incurred. The law permits the deduction of debts actually ascertained to be worthless within the taxable year to prevent arbitrary action by the taxpayer to unduly avoid tax liability. The requirement of ascertainment of worthlessness requires proof of 2 facts: 1. That the taxpayer did in fact ascertain the debt to be worthless in the year wor which the deduction was sought, and 2. That in doing so, he acted in good faith. Good faith on the part of the taxpayer is not enough, he must show also that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by him. In the case, Goodrich has not adequately made such showing. The payments made, after being characterized as bad debts, merely stresses the undue haste with which the same had been written off. Goodrich has not proven that said debts were worthless. There was no evidence that the debtors can not pay them. Phil Refining Co v CA: For debts to be considered as worthless and qualify as bad debts, making them deductible, the taxpayer should show that: 1. There is a valid and subsisting debt, 2. The debt must be actually ascertained to be worthless and uncollectible during the taxable year, 3. The debt must be charged off during the taxable year, and 4. The debt must arise from the business or trade of the taxpayer. Additionaly, before a debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future. There are steps outlined to be undertaken by the Paolo Miguel Javier Taxation Law Reviewer

taxpayer to prove that he exerted diligent efforts to collect the debts, 1. Sending of statement of accounts, 2. Sending of collection letters, 3. Giving the account to a lawyer for collection, 4. Filing a collection case in court. PRC didnt satisfy the requirements of worthlessness of a debt as to the disallowed bad debts. The only evidence given for its claimed deductions was the explanation or justification posited by it financial adviser or accountant which were not supported by any documentary evidence. 5. Depreciation S34(F)(1) a. Methods of Depreciation 1. Straight Line Method - provides for a uniform periodic diminution of the property. Formula: Cost Estimated Scrap Value Annual Depreciation = Estimated Useful Life 2. Declining Balance Method - provides decreasing charges by applying a constant percentage rate to a declining asset book value. The most popular rates are 1.5 times the straight-line rate often referred to as 150% declining balance and 2 times the straight line rate, often referred to as double-declining balance depreciation. Residual value is not used in the computations under this method; however, it is generally recognized that depreciation should not continue once the book value is equal to residual value. 3. Sum of the Years Digit Method - this method of decreasing charges is based on applying a decreasing rate of depreciation of a constant depreciable cost. The denominator of the rate fraction is equal to the sum of the digits in reverse order. For example if an asset had an estimated service life of 5 years, the denominator would be 15. In the first year, the rate fraction would be 5/15, second year 4/15 and so on. The rate fraction is multiplied by the depreciable cost (cost less salvage) to obtain each years charge to expense. b. Special Rules on Depreciation 1. Private Educational Institutions S34(A)(2) 2. Petroleum Operations S34(F)(4) 3. Mining Operations S34(F)(5) 4. For NRAETB or RFC S34(F)(6) Basilan Estate Inc v Commissioner: Whether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assets. Yes. The law allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated. The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not created by Page 35

implication but upon clear expression in the law. Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense. It commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement. The recovery, free of income tax, of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance. For then what the taxpayer would recover will be, not only the acquisition cost, but also some profit. Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance; the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation. US v Ludley: Distinction between depreciation and depletion. Depreciation is the wearing out or obsolescence of property such as buildings, machinery, etc., used in a trade or business. Such property is in the open, subject to inspection, and its useful life may be estimated with reasonable certainty. On the other hand, depletion is the exhaustion of a natural resource. The amount of the original deposit is hidden from sight and necessarily is unknown. The percentage of the whole which is withdrawn in any year is, therefore, a "guesstimate." In determining the existence and amount of profit realized from a sale of oil mining properties -land, leases, and equipment -- the cost of the property sold is the original cost to the taxpayer diminished by deductions for depreciation and depletion occurring between the dates of purchase and sale. The depreciation charge permitted as a deduction from the gross income in determining the taxable income of a business for any year represents the reduction, during the year, of the capital assets through wear and tear of the plant used.When a plant is disposed of after years of use, the thing then sold is not the whole thing originally acquired. The amount of the depreciation must be deducted from the original cost of the whole in order to determine the cost of that disposed of in the final sale of properties.This rule applies to mining as well as to mercantile business.The depletion charge permitted as a deduction from the gross income in determining the taxable income of mines for any year represents the reduction in the mineral contents of the reserves from which the product is taken. Because the quantity originally in the reserve is not actually known, the percentage of the whole withdrawn in any year, and hence the appropriate depletion charge, is necessarily a rough estimate. The amounts of depreciation and depletion to be deducted from cost to ascertain gain on a sale of oil properties are equal to the aggregates of depreciation and depletion which the taxpayer was entitled to deduct from gross income in his income tax Paolo Miguel Javier

returns for earlier years; but are not dependent on the amounts which he actually so claimed. 6. Depletion S34(G)(1) 7. Charitable & Other Contributions a. Limited Deductibility S34(H)(1) b. Deductible in Full S34(H)(2) Roxas v CTA: Representation expenses are deductible from gross income as expenditures incurred in carrying on a trade or business under the law provided the taxpayer proves that they are reasonable in amount, ordinary and necessary, and incurred in connection with his business. In the case at bar, the evidence does not show such link between the expenses and the business of petitioners. The contributions to the christmas funds of the pasay police firemen etc are not deductible because the christmas funds were not spent for public purposes but as christmas gifts to the families of the members of the said entities. Under sec 39 h a contribution to a govt entitiy is deductible when used exclusively for public purpose. Thus the disallowance must be sustained. On the other hand, the contribution to the manila police trust fund is an allowable deduction for said trust fund belongs to the manila police, a govt entity, intended to be used exclusively for its public functions. The contributions to the phil heral was not made to it but to a group of civic spirited citizens organized by the philh herald solely for charitable purposes. There is no question that the members of this group of citizens do not receive profits, for all the funds they raised were for manilas neediest families. Such a group of citizens may be classified as an association organized exclusively for charitable purposes mentioned in sec 30h of the tax code and deduction should thus be allowed. The cir correctly disallowed the contribution to our lady of fatima chapel at the FEU on the ground that the said university gives dividends to its stockholders. Contributions to our lady of fatima chapel which belongs to FEU are not deductible under sec 30h of the tax code because the net income of said university inures to the benefit of its stockholders. Its disallowance should be sustained. 8. Research and Development S34(I) 9. Contribution to Pension Trust S34(J) IV. OPTIONAL STANDARD DEDUCTION S34(L) RR 16-08: Effective July 2008, by virtue of a revenue regulation (RR No. 16-08), the taxpayers were allowed to adopt either the itemized deduction or the 40-percent OSD in determining the taxpayers taxable income. Under the said regulation, the taxpayers may use either method in preparing their quarterly ITRs, provided that in preparing the annual ITR, only one method shall be applied by the taxpayers covering its entire taxable year. Thus, the Page 36

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taxpayers, in preparing their quarterly ITRs, are allowed to shift from itemized deduction to OSD, and vice-versa, from quarter to quarter, within the same taxable year. V. PREMIUM PARMENTS ON HEALTH/HOSPITALIZATION INSURANCE S34(M) VI. ALLOWANCE FOR PERSONAL & ADDITIONAL EXEMPTION 1. Personal Exemption S35(A) For single individual or married individual judicially decreed as legally separated with no qualified dependents (20k) For Head of Family (25k) For each married individual (32k) In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption. 'head of family' means an unmarried or legally separated man or woman with one or both parents, or with one or more brothers or sisters, or with one or more legitimate, recognized natural or legally adopted children living with and dependent upon him for their chief support, where such brothers or sisters or children are not more than twenty-one (21) years of age, unmarried and not gainfully employed or where such children, brothers or sisters, regardless of age are incapable of self-support because of mental or physical defect. 2. Additional Exemption for Dependents S35(B) 8k for each dependent not exceeding 4. 3. Dependent - a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. 4. The additional exemption for dependent shall be claimed by only one of the spouses in the case of married individuals. 5. In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed. 6. Change of Status. - If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year.If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as if he died at the close of such year. If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the taxable year, the Paolo Miguel Javier

taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one (21) years old or became gainfully employed at the close of such year. 7. Personal Exemption Allowable to Nonresident Alien Individual. - A nonresident alien individual engaged in trade, business or in the exercise of a profession in the Philippines shall be entitled to a personal exemption in the amount equal to the exemptions allowed in the income tax law in the country of which he is a subject - or citizen, to citizens of the Philippines not residing in such country, not to exceed the amount fixed in this Section as exemption for citizens or resident of the Philippines: Provided, That said nonresident alien should file a true and accurate return of the total income received by him from all sources in the Philippines, as required by this Title. VII. Items Not Deductible General Rule: SEC. 36. Items not Deductible.(A) General Rule. - In computing net income, no deduction shall in any case be allowed in respect to (1) Personal, living or family expenses; (2) Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate; This Subsection shall not apply to intangible drilling and development costs incurred in petroleum operations which are deductible under Subsection (G) (1) of Section 34 of this Code. (3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or (4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy. Atlas Consolidated Mining Co v CIR: When a taxpayer claims a deduction, he must point to some specific provision in which that deduction is authorize and prove that he is entitled to the deduction which the law allows. The conditions for the test of deductibility: 1. Expense must be ordinary and necessary, 2. Paid or incurred within the taxable year, 3. Must be paid or incurred in carrying in a trade or business. Not only must he meet the business test, he must substantially prove by evidence or records the deductions claimed under law, otherwise disallowed. The mere allegation that an item of expense is ordinary and necessary does not justify its deduction. Assuming that the expenditure is ordinary and necessary in the operation of the business, the answer to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself, which depends on the extent and permanency of the work accomplished by the expenditure. The expenditure paid to pk macker as compensation for services carrying on the selling campaigh to sell atlas additional capital stock is not an ordinary expense. It is not deductible from atlas Page 37

Taxation Law Reviewer

gross income because expenses relating to 1. Recapitalization and reorganization of the corporation, 2 the cost of obtaining stock subscription, 3. Promotion expenses, and 4. Commission or fees paid for the sale of stock reorganization are capital expenditures. The burden of proof that the expenses incured are ordinary and necessary is on the taxpayer. The listing expenses are ordinary and necessary business expenses because the fee paid to the stock exchange was annual and recurring for the privilege of having its stock listed, as contrasted with a single payment made to the stock exchange, which is not deductible. Litigation expenses incurred in defense or protection of title are capital in nature and not deductible. Expenditures in defense of title of property constitute a part of the cost of the property and are not a deductible expense. 1. Losses from sales or exchanges of property between related parties S36(B) CHAPTER VI: PARTNERSHIP I. Taxation of General Partnership S22(B) does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government II. Taxation of General Professional Partnership S26: A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. CHAPTER VII: ESTATES & TRUSTS I. Application of Tax S60(A) II. Exception S60(B) III. Computation and Payment S60(C) 1. In general S60(C)(1) 2. Consolidation of income of two or more trusts S60(C)(2) 3. Taxable income S61 4. Exemption allowed to estates and trusts S62 5. Revocable trusts S63 6. Income for benefit of grantor S64(A) 7. Meaning of in the discretion of grantor S64(B) CHAPTER VIII: ACCOUNTING PERIODS AND METHODS OF ACCOUNTING I. Accounting Periods 1. Taxable year S22(P) a. Calendar Year b. Fiscal Year S22(Q) 2. General Rule on computation of taxable income S43 Paolo Miguel Javier

3. Period in which items of gross income included S44 4. Period in which Deductions and Credits taken S45 5. Change of Accounting Period S46 II. Accounting Methods 1. Cash receipts and disbursements method CIR v Isabela Cultural corp: Whether or not the expenses for professional and security services are deductible. No. One of the requisites for the deductibility of ordinary and necessary expenses is that it must have been paid or incurred during the taxable year. This requisite is dependent on the method of accounting of the taxpayer. In the case at bar, ICC is using the accrual method of accounting. Hence, under this method, an expense is recognized when it is incurred. Under a Revenue Audit Memorandum, when the method of accounting is accrual, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed in the succeeding year. The accrual of income and expense is permitted when the allevents test has been met. This test requires: 1) fixing of a right to income or liability to pay; and 2) the availability of the reasonable accurate determination of such income or liability. The test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy. From the nature of the claimed deductions and the span of time during which the firm was retained, ICC can be expected to have reasonably known the retainer fees charged by the firm. They cannot give as an excuse the delayed billing, since it could have inquired into the amount of their obligation and reasonably determine the amount. 2. Accrual Method Filipinas Synthetic Fiber Co v CA: The Supreme Court held that since Sec. 53, NIRC (now, Sec. 57 of 1997 NIRC) in relation to Sec. 54 (now Sec. 58) is silent as to when the duty to withhold arises, it is necessary to look into the nature of the accrual method of accounting, which was used by therein petitioner corporation. Inasmuch as under the accrual basis, income is reportable when all the events have occurred to fix taxpayers right to receive the income and the amounts can be determined with reasonable accuracy, hence, it is the right to receive income, and not the actual receipt thereof, that determines when the amount is includible in gross income. Thus, the duty of the withholding agent to withhold the corresponding tax arises at the time of such accrual. The withholding agent/corporation is then obliged to remit the tax to the Government since it already and properly belongs to the Government. If a withholding agent who is personally liable for income tax withheld at source fails to pay said withholding tax, an assessment for said deficiency withholding tax would, therefore, be legal and proper. 3. Long-Term Contracts S48 4. Sec. 44, Regulations No. 2. Long Term Contracts: Income from long term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and Page 38

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terms of the particular contract. As used herein, the term long term contracts means building, installation, or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns upon the following bases: (a) Gross income derived from such contracts may be reported upon the basis of percentage of completion. In such case there should accompany the return certificate of architects, or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of material and supplies period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year/s, the commissioner may permit or require an amended return. (b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice to so treat such income, provided such method clearly reflects the net income. If this method is adopted, there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies charged to the work under the contract but remaining on hand at the time of the completion. Where a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in keeping his books and such method clearly reflects the income, he will not be required to change to either of the methods above set forth. If a taxpayer desires to change his method of accounting in accordance with paragraphs a and b, a statement showing the composition of all items appearing upon his balance sheet and used in connection with the method of accounting formerly employed by him, should accompany his return.

c. Venue of Filing of ITR S51(B) d. Time of Filing ITR S51(C) e. Payment of income tax S56(A) f. Installment Payment S56(B) 2. Capital Gains Returns a. For sale or exchange of shares of stock not traded in a local stock exchange S51(C)(2)(a) b. For sale of real property S51(C)(2)(b) II. Corporations 1. Income Tax Return S52(A) a. Quarterly Corporate Income Tax Return S75 b. Final Adjustment Return S76 i. Place of filing S77(A) ii. Time of Filing S77(B) iii. Time of Payment S77(C) 2. Capital Gains Tax Return a. For sale or exchange of shares of stock not traded in a local stock exchange S52(D) III. Estates and Trusts IV. General Professional Partnerships CHAPTER X: WITHHOLDING TAXES I. Concept of Withholding Tax CIR v Solidbank Co: In a withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed. The payor, a separate entity, acts as no more than an agent of the government for the collection of tax in order to ensure its payment. This amount that is used to settle the tax liability is sourced from the proceeds constitutive of the tax base. These proceeds are either actual or constructive. Both parties agree that there is no actual receipt by the bank. What needs to be determined is if there is constructive receipt. Since the payee is the real taxpayer, the rule on constructive receipt can be rationalized. The Court applied provisions of the Civil Code on actual and constructive possession. Article 531 of the Civil Code clearly provides that the acquisition of the right of possession is through the proper acts and legal formalities established. The withholding process is one such act. There may not be actual receipt of the income withheld; however, as provided for in Article 532, possession by any person without any power shall be considered as acquired when ratified by the person in whose name the act of possession is executed. In our withholding tax system, possession is acquired by the payor as the withholding agent of the government, because the taxpayer ratifies the very act of possession for the government. There is thus constructive receipt. The processes of bookkeeping and accounting for interest on deposits and yield on deposit substitutes that are subjected to FWT are tantamount to delivery, receipt or remittance. Besides, Solidbank admits that its income is subjected to a tax burden immediately upon receipt, although it claims that it derives no pecuniary benefit or advantage through the withholding process. There being constructive receipt, part of which is withheld, that income is included as part of the tax base on which the gross receipts tax is imposed. II. Types of Withholding Tax 1. Withholding on Wages Page 39

5. Installment Basis S49 6. Sec. 51. Regulations No. 2: When income is to be Reported Gains, profits, and income are to be included in the
gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, and money or property is reconciled on a judgment therefor in a later year, income is realized in that year, assuming that the money or property would have been income in the earliest year if then received. This is true of a recovery for patent infringement, Bad debts or accounts charged off subsequent to march 1, 1913, because of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when amounts were charged off.

CHAPTER IX: RETURNS AND PAYMENT OF TAX I. Individuals 1. Income Tax Return a. Who are required to file an ITR S51(A)(1) i. Married individuals S51(D) ii. Income of minor children S51(E) iii. Individuals deriving purely compensation income iv. Professionals and Self-employed individuals 1. In general S74(A) 2. Quarterly S74(B) b. Who are not required to file an ITR S51(A)(2) Paolo Miguel Javier

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a. Requirement for withholding S79(A) b. Tax paid by recipient S79(B) c. Refunds or credits S79(C) d. Year-end Adjustment S79(H) e. Liability for tax S80 2. Withholding Tax at Source a. Final Withholding Taxes S57(A) Rizal Commercial Banking Corporation v CIR: The purpose of the withholding tax system is three-fold: (1) to provide the taxpayer with a convenient way of paying his tax liability; (2) to ensure the collection of tax, and (3) to improve the government's cashflow. Under the withholding tax system, the payor is the taxpayer upon whom the tax is imposed, while the withholding agent simply acts as an agent or a collector of the government to ensure the collection of taxes. It is indisputable that the withholding agent is merely a tax collector and not a taxpayer. In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer - he is the person subject to tax imposed by law; and the payee is the taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer, because the income tax is still imposed on and due from the latter. The agent is not liable for the tax as no wealth flowed into him - he earned no income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguished from its duty to pay tax since the government's cause of action against the withholding agent is not for the collection of income tax, but for the enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is imposed on the withholding agent and not upon the taxpayer. Based on the foregoing, the liability of the withholding agent is independent from that of the taxpayer. The former cannot be made liable for the tax due because it is the latter who earned the income subject to withholding tax. The withholding agent is liable only insofar as he failed to perform his duty to withhold the tax and remit the same to the government. The liability for the tax, however, remains with the taxpayer because the gain was realized and received by him. While the payor-borrower can be held accountable for its negligence in performing its duty to withhold the amount of tax due on the transaction, RCBC, as the taxpayer and the one which earned income on the transaction, remains liable for the payment of tax as the taxpayer shares the responsibility of making certain that the tax is properly withheld by the withholding agent, so as to avoid any penalty that may arise from the non-payment of the withholding tax due. RCBC cannot evade its liability for FCDU Onshore Tax by shifting the blame on the payor-borrower as the Paolo Miguel Javier

withholding agent. As such, it is liable for payment of deficiency onshore tax on interest income derived from foreign currency loans. b. Creditable Withholding Taxes or Expanded Withholding Tax S57(B) Chamber of Real Estate and Builders Associations Inc v Romulo: The withholding tax system is a procedure through which taxes (including income taxes) are collected.Under Section 57 of RA 8424, the types of income subject to withholding tax are divided into three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax at source and (c) tax-free covenant bonds. We have long recognized that the method of withholding tax at source is a procedure of collecting income tax which is sanctioned by our tax laws.The withholding tax system was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to improve the governments cash flow.This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies.Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any person, national or juridical, residing in the Philippines. Such authority is derived from Section 57(B).The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed on the income payable and the tax is creditable against the income tax liability of the taxpayer for the taxable year. 57(A): A final tax can be imposed on certain kinds of income and enumerates these as passive income. The BIR defines passive income by stating what it is not: if the income is generated in the active pursuit and performance of the corporations primary purposes, the same is not passive income. It is income generated by the taxpayers assets. These assets can be in the form of real properties that return rental income, shares of stock in a corporation that earn dividends or interest income received from savings. 57(B): the Secretary can require a CWT on income payable to natural or juridical persons, residing in the Philippines. There is no requirement that this income be passive income. If that were the intent of Congress, it could have easily said so. Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to CWT. The former covers the kinds of passive income enumerated therein and the latter encompasses any income other than those listed in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in the same way. the assailed provisions of RR 2Page 40

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98, as amended, do not modify or deviate from the text of Section 57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It has been held that, where a statute does not require any particular procedure to be followed by an administrative agency, the agency may adopt any reasonable method to carry out its functions. Similarly, considering that the law uses the general term income, the Secretary and CIR may specify the kinds of income the rules will apply to based on what is feasible. In addition, administrative rules and regulations ordinarily deserve to be given weight and respect by the courts in view of the rulemaking authority given to those who formulate them and their specific expertise in their respective fields. 3. Withholding Vat S114(C) 4. Fringe Benefits Tax S33 III. Returns and Payments 1. Quarterly Returns and Payments of Tax Withheld S58(A) 2. Certificate of Tax Withheld S58(B) 3. Annual Information Return (Alpha List) S58(B) 4. Income of Recipient S58(D) TAX II ESTATE TAX

the premiums were paid partly with paraphernal and partly conjugal funds, the proceeds are likewise in like proportion paraphernal in part and conjugal in part. That the proceeds of a life-insurance policy payable to the insured's estate as the beneficiary, if delivered to the testamentary administrator of the former as part of the assets of said estate under probate administration, are subject to the inheritance tax according to the law on the matter, if they belong to the assured exclusively, and it is immaterial that the insured was domiciled in these Islands or outside. Capital of The Surviving Spouse Collector v Fisher In determining the net taxable estate of a deceased british subject, for purposes of the estate and inheritance taxes, where said deceased was married to another british citizen in manila, the conjugal share of the surviving wife should be deducted inasmuch as they are presumed to have adopted the system of conjugal partnership in the absence of an antenuptial agreement. For purposes of the estate and inheritance taxes, the assessed value of real estate is considered as the fair market value only when evidence to the contrary has not been submitted. If there is such contrary evidence, the assessed value will not be considered the fair market value. No deduction from the estate of a nonresident alien is allowed unless the value of his gross estate not situated in the phils is tated in the return. This is intended to enable the revenue officer to determine how much of the debt may be deducted. The deduction is allowed only to the extent of that portion of the debt which is equivalent to the proportion that the phil estate bears to the total estate wherever situated. If no statement of the estate situated outside the phils is attached to the return, then no part of the debt may be deducted from the decedents estate. Judicial Expenses CIR v CA and Pajonar Attys Fees: Under American Jurisprudence, expenses incurred in the EJ Settlement of the estate should be allowed as deduction from the gross estate. There is not requirement of formal administration. It is sufficient that the expense be a NECESSARY contribution toward the settlement to the case. Attys fees in order to be deductible from the gross estate must be essential and related to the settlement of estate. In this case, the attys fees paid for guardianship proceeding was necessary for the distribution of the property of the late Pedro Pajonar to his rightful heirs. Thus, it was deductible. Necessary expenses of administration are such expenses as are entailed for the preservation and productivity of the estate and for its management for the purposes of liquidation, payment of debts and distribution of the residue among the persons entitled. Notarial Fees: Although tax code specifies judicial expenses of the testamentary or intestate proceedings, there is no reason why expenses incurred in the administration and settlement of an estate in EJ proceedings should not be allowed. However, deduction is limited to such administration expenses as are actually and necessarily incurred in the collection of the assets of the estate, payment of debts, and Page 41

Transfers in contemplation of death Vidal de Roces v. Posadas Sec. 1540 of the Administrative Code clearly refers to those donation inter vivos that take effect immediately or during the lifetime of the donor, but made in consideration of the death of the decedent. Those donations not made in contemplation of the decedent's death are not included as it would be equivalent to imposing a direct tax on property and not on its transmission. The phrase 'all gifts' as held in Tuason v. Posadas refers to gifts inter vivos as they are considered as advances in anticipation of inheritance since they are made in consideration of death. Dison v. Posadas Inheritance tax is imposed upon the gift inter vivos that plaintiff received from his father as this was really an advancement upon the inheritance to which he would be entitled upon the death of the latter. Sec. 1540 of the Administrative Code did not tax gifts per se but only those which are made to those who shall prove to be heirs, devisees, legatees and donees mortis causa of the donor. The term 'heirs' include those given the status of heirs irrespective of the quantity of property they may receive as such. Proceeds of Life Insurance BPI vs. Posadas The proceeds of a life-insurance policy payable to the insured's estate, on which the premiums were paid by the conjugal partnership, constitute community property, and belong onehalf to the husband and the other half to the wife, exclusively. If Paolo Miguel Javier

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distribution of the remainder among those entitled thereto. Such expenses may include executors or administrators fees, attys fees, court fees and charges, appraisers fees, clerk hire, costs of preserving and distributing the estate and storing or maintaining it, brokerage fees or commissions for selling or disposing of the estate. It is clear that the EJ settlement was for the purpose of payment of taxes and the distribution of the estate to the heirs. The execution of EJ settlement necessitated the notarization of the same. Thus the 60k for notarial fee for the EJ Settlement should be allowed as a deduction from the gross estate. Judicial expenses are expenses for administration. Administration expenses are deductible from the gross estate. Expenses must be essential to the proper settlement of the estate. Claims Against The Estate Dizon v CIR Claims existing at time of death should be allowed as deductions to the gross estate. First, there is no law, nor any legislative intent in our tax laws, which disregards the date-ofdeath valuation principle and particularly provides that postdeath developments must be considered in determining the net value of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being construed strictissimi juris against the government. Any doubt on whether a person, article or activity is taxable is generally resolved against taxation. Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term "claims" required to be presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death. Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions. Valuation Lorenzo v Posadas When does the inheritance tax accrue and when must it be satisfied? UPON DEATH. Should the inheritance tax be computed on the basis of the value of the estate at the time of the testator's death, or on its value ten years later? AT THE TIME OF DEATH. In determining the net value of the estate subject to tax, is it proper to deduct the compensation due to trustees? NO. A trustee, no doubt, is entitled to receive a fair compensation for his services. However, it does not follow that the compensation due him may lawfully be deducted in arriving at the net value of the estate subject to tax. First, There is no statute requiring trustees' commissions to be deducted in determining the net value of the estate subject to inheritance tax. Second, though a testamentary trust has been created, the testator intended that the duties of his executors and trustees should be separated. Notice of Death Paolo Miguel Javier

ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL vs. CIR The assessment was served not even on an heir or the estate but on a completely disinterested party. This improper service was clearly not binding on the petitioner. The most crucial point to be remembered is that PhilTust had absolutely no legal relationship with the deceased or to her Estate. There was therefore no assessment served on the estate as to the alleged underpayment of tax. Absent this assessment, no proceeding could be initiated in court for collection of said tax; therefore, it could not have become final, executory and incontestable. Respondents claim for collection filed with the court only on November 22, 1984 was barred for having been made beyond the five-year prescriptive period set by law. Liability for Payment of Tax CIR v. PINEDA the Government has two ways of collecting the tax in question. One, by going after all the heirs and collecting from each one of them the amount of the tax proportionate to the inheritance received; and second, is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due. This second remedy is the very avenue the Government took in this case to collect the tax. The Bureau of Internal Revenue should be given, in instances like the case at bar, the necessary discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code above quoted, because taxes are the lifeblood of government and their prompt and certain availability is an imperious need. Inhibitions, Responsibilities, Obligations in the Enforcement of Estate Tax Pastor v CTA Neither has the estate tax been paid on the estate of PASTOR, SR. Payment therefore of the legacy to QUEMADA would collide with the provision of the National Internal Revenue Code requiring payment of estate tax before delivery to any beneficiary of his distributive share of the estate Polido v CA Even assuming that the court will issue an Order restraining defendant from claiming the bank account, the plaintiff still cannot withdraw any amount thereof, because it is a part of the ESTATE of Jacinto Polido, and as provided for by laws before the bank allows any withdrawal, the plaintiff has to follow certain procedures required by other laws governing estate settlement, that is, - (a) Payment of Estate Tax, if any; (b) BIR Tax Clearance; (c) Present a duly published Extrajudicial Partition executed by the heirs adjudicating said amount to such heir, unless a competent Court issues an Order allowing the plaintiff to withdraw [from] said account. If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account unless the Commissioner had certified that the taxes imposed thereon by this Title have been paid; Provided, however, That the administrator of the estate or any one (1) of the heirs of the Page 42

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decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000) without the said certification. For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors. DONORS TAX Transfer for Inadequate Consideration CIR v Goodrich Phils CIR insists that Goodrich committed falsity when it sold the property for a price less than the FMV. HOWEVER, this fact alone did not constitute a false return. A false return contains wrong information due to mistake, carelessness or ignorance. It is possible that real property may be sold for less than adequate consideration for a bona fide business purpose. In the present case, Goodrich was compelled to sell the property even at a price less than its market value, because it would have lost all ownership rights over it upon the expiration of the parity amendment. It was only attempting to MINIMIZE ITS LOSSES. At the same time, it was able to lease the property for 25 years, renewable for another 25. This can be regarded as another consideration on the price. The fact that the sale transaction may have partly resulted in a donation does NOT change the fact that private respondent already reported its income for 1974 by filing an income tax return. Repudiation of Inheritance: Tax Consequence BIR Ruling no. 455-93 Accretion takes place in case of repudiation among heirs of the same degree because there is no right of representation. The co-heirs are co-owners of the inheritance, for which reason there is always a right of accretion among them. However, if the renunciation by an heir is made in favor of one or more heirs but not all the others, the act of renunciation is in effect an act of disposition inasmuch as the act of disposition and the benefits are not enjoyed by everybody but by one or more heirs. Since the renunciation by mrs asuncion of th properties she inherent in favor of her first born grandchildren who are not her co-heirs but are heirs of a different degree, and were made out of pure liberality, she shall be subject to donors tax. Neither did availment of tax amnesties relieve her of her donors tax liability on the donation considering that the former do not include tax liabilities arising from the disposition or transfer of property by reason of death or donation. VALUE ADDED TAX Nature, Characteristics and Purpose of VAT Tolentino v Sec of Finance No. The phrase originate exclusively refers to the revenue bill and not to the revenue law. It is sufficient that the House of Representatives initiated the passage of the bill which may undergo extensive changes in the Senate. Abakada v Ermita VAT - A tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or properties and services. Being an indirect tax on expenditure, the seller of goods or services may pass on the amount of tax paid to the buyer, with the seller acting merely as a tax collector. The Paolo Miguel Javier

burden of VAT is intended to fall on the immediate buyers and ultimately, the end-consumers. Direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in, without transferring the burden to someone else. Examples are individual and corporate income taxes, transfer taxes, and residence taxes. The Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it simply provides is that Congress shall "evolve a progressive system of taxation." In the course of business v Isolated transaction v incidental to the main line of business CIR v. CA and Commonwealth Management and Services Corporation CIR avers that to "engage in business" and to "engage in the sale of services" are two different things. The services rendered by COMASERCO to Philamlife and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on the value added by the performance of the service. It is immaterial whether profit is derived from rendering the service. Any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who imports goods shall be subject to the VAT imposed in Sections 100 to 102 of this Code." Even a non-stock, non-profit, organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an economic activity, regardless of whether or not the entity is profit-oriented. It is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT. CIR v. Magsaysay Lines Any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT. The term "carrying on business" does not mean the performance of a single disconnected act, but means conducting, prosecuting and continuing business by performing progressively all the acts normally incident thereof. Thus, it connotes REGULARITY of activity. In the instant case, the sale was an isolated transaction. 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. The normal VAT-registered activity of NDC is leasing personal property. Thus, the sale of the vessels was not in the ordinary course of trade or business of NDC so it should not be subject to VAT. Meaning of Sale or Exchange of Services CIR v SM Primeholdings Inc Page 43

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The enumeration of services subject to VAT under Sec. 108 of the NIRC is not exhaustive. It is up to the court to determine if showing of films and motion pictures fall under the phrase similar services of Sec. 108 by ascertaining the intent of the legislature. Based on various amendments to the VAT coverage, none pertain to cinema/theater operators or proprietors. In fact, the activity of showing films and motion pictures has always been considered as a form of entertainment subject to amusement tax. At present, only lessors or distributors of cinematographic films are subject to VAT, while persons subject to amusement tax are exempt from the coverage of VAT. It is therefore clear that the legislature never intended to subject this kind of activity to VAT. To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or proprietors, who would be paying an additional 10% VAT on top of the 30% amusement tax imposed by Sec. 140 of the Local Govt. Code, or a total of 40% tax. Considering that there is no provision of law imposing VAT on the gross receipts of cinema/theater operators or proprietors derived from admission tickets, RMC No. 28-2001 which imposes VAT on the gross receipts from admission to cinema houses is therefore invalid. Diaz & Timbol v Sec of Finance The law imposes VAT on all kinds of services rendered in the Philippinesfor a fee, including those specified in the list. The enumeration of affected services is not exclusive.[7][11] By qualifying services with the words all kinds, Congress has given the term services an all-encompassing meaning. The listing of specific services are intended to illustrate how pervasive and broad is the VATs reach rather than establish concrete limits to its application. Thus, every activity that can be imagined as a form of service rendered for a fee should be deemed included unless some provision of law especially excludes it. Tollway operators are covered by vat because they render services for a fee. Essentially, tollway operators construct, maintain, and operate expressways, also called tollways, at the operators expense. When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latters use of the tollway facilities over which the operator enjoys private proprietary rights. And not only do tollway operators come under the broad term all kinds of services, they also come under the specific class described in Section 108 as all other franchise grantees who are subject to VAT. Toll fees are not a tax, they are not collected by BIR, do not go to govt coffers. Exempt v Zero Rated Sales CIR v Cebu Toyo Corporation Respondent is not exempt from vat and it correctly registered itself as a vat taxpayer. It is engaged in taxable rather than exempt transactions. Taxable transactions are those transactions which are subject to VAT either at the rate of 10% or 0%. In taxable transactions, the seller shall be entitled to tax credit for the VAT paid on purchases and leases of goods, properties or services. Paolo Miguel Javier

An exemption means that the sale of goods, properties or services and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. Thus, a VAT-registered purchaser of goods, properties or services that are VAT-exempt, is not entitled to any input tax on such purchases despite the issuance of a VAT invoice or receipt. Having determined that respondent is engaged in taxable transactions subject to VAT, let us then proceed to determine whether it is subject to 10% or zero (0%) rate of VAT. Generally, sale of goods and supply of services performed in the Philippines are taxable at the rate of 10%. However, export sales, or sales outside the Philippines, shall be subject to value-added tax at 0% if made by a VAT-registered person. Under the value-added tax system, a zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchase of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund. the purpose of applying a zero percent (0%) rate on a taxable transaction is to exempt the transaction completely from VAT previously collected on inputs. It is thus the only true way to ensure that goods are provided free of VAT. While the zero rating and the exemption are computationally the same, they actually differ in several aspects, to wit: (a) A zero-rated sale is a taxable transaction but does not result in an output tax while an exempted transaction is not subject to the output tax; (b) The input VAT on the purchases of a VAT-registered person with 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. (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. Respondent is engaged in the export business and is registered as a VAT taxpayer per Certificate of Registration of the BIR and is subject to VAT as it availed of the income tax holiday. Perforce, respondent is subject to VAT at 0% rate and is entitled to a refund or credit of the unutilized input taxes. Toshiba v CIR There is a basic distinction in the VAT-exemption of a person and the VAT-exemption of a transaction: An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status VAT-exempt or not of the party to the transaction. An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from VAT. Based on the Cross Border Doctrine, PEZA-registered enterprises, such as Toshiba, are VAT-exempt and no VAT can be passed on to them. PEZAregistered enterprise, which would necessarily be located Page 44

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within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as amended, which imposes the five percent (5%) preferential tax rate on gross income of PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which establishes the fiction that ECOZONES are foreign territory. The Philippine VAT system adheres to the Cross Border Doctrine, according to which, 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. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT; while, those destined for use or consumption within the Philippines shall be imposed with ten percent (10%) VAT. A VAT-registered seller of goods and/or services who made zero-rated sales can claim tax credit or refund of the input VAT paid on its purchases of goods, properties, or services relative to such zero-rated sales. Medical, Dental, Hospital and Veterinary Services Hermano v CIR Sale of drugs or pharmaceutical items to in patients is part of the term hospital services covered by the exemption from VAT because the maintanance and operation of the same is a necessary and essential service or facility rendered by any hospital for its patients. Before a taxpayer may claim that its sale of drugs is classified as hospital services, establish requisites: 1. The taxpayer operates a hospital, 2. The hospital has a pharmacy or drugstore, 3. The sale of druges claimed to be exempt from vat was made by said hospital drugstor or pharmacy to in-patients of the hospital. Commissioner v Phil Health Care Providers Inc An exempt transaction is one involving goods or services which, by their nature are specifically listed in and expressly exempted from VAT without regard to the tax status of the party in the transaction. Taxpayers engaged in the performance of medical, dental, hospital, and veterinary services are exempt from VAT. As respondent does not actually provide medical and/or hospital services, but merely arranges for the same, its services are not VAT-exempt. As "the term health maintenance organization did not as yet have any particular significance for tax purposes," respondent's failure "to include a term that has yet to acquire its present definition and significance cannot be equated with bad faith." Transitional Input Tax Fort Bonifacio Dev Corp v CIR The FBDC is allowed to credit its transitional input tax on the sale. In the OLD NIRC, only goods where covered by the VAT. Real properties were only included by an amendment of RA 7716. But when it was amended, there was no differential treatment in transitional input tax for goods or real properties. In addition, the definition of Real Property is being primarily used for sale to customers or held for lease in the ordinary course of business. Thus, the real property is treated the same way as goods. The issuance of RR 7-95 was erroneous. There is no logic to limit the provision only to improvements. The very idea runs counter to what the tax credit seeks to Paolo Miguel Javier

accomplish. As GOODS in the business sense, refers to the product that the VAT-registered person offers for sale the public, real estate dealers treat real properties as their goods. The purpose behind the transitional input tax credit is not confined to the transition from sales to VAT. As proof, Congress has reenacted the transitional input tax both in the OLD NIRC and the NEW NIRC. The transitional aspect of the transitional input tax pertains to the event that the taxpayer starts to become VAT-registered. As being covered by the VAT does not merely take place by operation of law, it requires the act of a person to be covered by VAT. For example, A person can be liable for VAT if he decides to start a business. Thus, transitional tax input credit is available, whether under the OLD NIRC or NEW NIRC, to a newly-VAT registered person. The transitional input tax is available, regardless whether the purchase of the goods, materials and supplies in the beginning inventory was subjected to VAT or not. To limit its availability to goods subjected to VAT, would be absurd. Because some goods acquired are not subject to VAT, but still liable for tax like capital gains tax, donors tax and estate tax. It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies. During that period of transition from non-VAT to VAT status, the transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning, the VAT-registered taxpayer is obliged to remit a significant portion of the income it derived from its sales as output VAT. The transitional input tax credit mitigates this initial diminution of the taxpayers income by affording the opportunity to offset the losses incurred through the remittance of the output VAT at a stage when the person is yet unable to credit input VAT payments. Although the CIR has the power to redefine the concept of goods, it pertains to more technical matters. It cannot go as far as to amend the provision, as it include goods and real property in the course of business. Thus, in case of conflict between a statute and an administrative order, the statute shall prevail. Refunds or Tax Credit of Input Tax Commissioner of Internal Revenue v. Mirant Pagbilao Corporation Creditable input VAT is an indirect tax which can be shifted or passed on to the buyer, transferee, or lessee of the goods, properties, or services of the taxpayer. The fact that the subsequent sale or transaction involves a wholly-tax exempt client, resulting in a zero-rated or effectively zero-rated transaction, does NOT, standing alone, deprive the taxpayer of its right to a refund for any unutilized creditable input VAT, albeit the erroneous, illegal, or wrongful payment angle does not enter the equation. History of VAT. The law that originally imposed the VAT in the country, as well as the subsequent amendments of that law, has been drawn from the tax credit method (practiced in Europe). If at the end of a taxable quarter the output taxes charged by a seller are EQUAL to the input taxes passed on by the suppliers, no payment is required. HOWEVER, when output taxes EXCEED input taxes, the excess has to be paid. On the Page 45

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other hand, if the input taxes EXCEED the output taxes, the excess shall be CARRIED OVER TO THE succeeding quarter/s. Should the input taxes result from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods, any EXCESS over the output taxes shall be refunded to the taxpayer / credited against other internal revenue taxes. Zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output tax, but can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers. BIR and other tax agencies have a duty to treat claims for refunds and tax credits with proper attention and urgency. Had RDO No. 60 and, later, the BIR proper acted, instead of sitting, on MPC's underlying application for effective zero rating, the matter of addressing MPC's right, or lack of it, to tax credit or refund could have plausibly been addressed at their level and perchance freed the taxpayer and the government from the rigors of a tedious litigation. The official receipt proves payment by MPC of its creditable input VAT relative to its purchases from Mitsubishi. BIR is precluded from requiring additional evidence to prove that input tax had indeed paid or, in fine, that the taxpayer is indeed entitled to a tax refund or credit for input VAT, we agree with the CA's above disposition. As the Court distinctly notes, the law considers a duly-executed VAT invoice or OR referred to in the above provision as sufficient evidence to support a claim for input tax credit. CIR v Aichi Whether or not the claim for refund was filed within the prescribed period: Yes, the two-year period should be reckoned from the close of the taxable quarter when the sales were made. As between the Civil Code and the Administrative Code of 1987, it is the latter that must prevail being the more recent law, following the legal maxim, Lex posteriori derogat priori. The CIR has 120 days, from the date of the submission of the complete documents within which to grant or deny the claim for refund/credit of input vat. In case of full or partial denial by the CIR, the taxpayers recourse is to file an appeal before the CTA within 30 days from receipt of the decision of the CIR. However, if after the 120-day period the CIR fails to act on the application for tax refund/credit, the remedy of the taxpayer is to appeal the inaction of the CIR to CTA within 30 days. A taxpayer is entitled to a refund either by authority of a statute expressly granting such right, privilege, or incentive in his favor, or under the principle of solutio indebiti requiring the return of taxes erroneously or illegally collected. In both cases, a taxpayer must prove not only his entitlement to a refund but also his compliance with the procedural due process. The phrase within two (2) years x x x apply for the issuance of a tax credit certificate or refund under Subsection (A) of Section 112 of the NIRC refers to applications for refund/credit filed with the CIR and not to appeals made to the CTA. Information in the VAT invoice or Official Receipt Panasonic v CIR Paolo Miguel Javier

The VAT is a tax on consumption, an indirect tax that the provider of goods or services may pass on to his customers. Under the VAT method of taxation, which is invoice-based, an entity can subtract from the VAT charged on its sales or outputs the VAT it paid on its purchases, inputs and imports. For example, when a seller charges VAT on its sale, it issues an invoice to the buyer, indicating the amount of VAT he charged. For his part, if the buyer is also a seller subjected to the payment of VAT on his sales, he can use the invoice issued to him by his supplier to get a reduction of his own VAT liability. The difference in tax shown on invoices passed and invoices received is the tax paid to the government. In case the tax on invoices received exceeds that on invoices passed, a tax refund may be claimed. Under the 1997 NIRC, if at the end of a taxable quarter the seller charges output taxes equal to the input taxes that his suppliers passed on to him, no payment is required of him. It is when his output taxes exceed his input taxes that he has to pay the excess to the BIR. If the input taxes exceed the output taxes, however, the excess payment shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer. Zero-rated transactions generally refer to the export sale of goods and services. The tax rate in this case is set at zero. When applied to the tax base or the selling price of the goods or services sold, such zero rate results in no tax chargeable against the foreign buyer or customer. But, although the seller in such transactions charges no output tax, he can claim a refund of the VAT that his suppliers charged him. The seller thus enjoys automatic zero rating, which allows him to recover the input taxes he paid relating to the export sales, making him internationally competitive. For the effective zero rating of such transactions, however, the taxpayer has to be VAT-registered and must comply with invoicing requirements. The taxpayers failure to comply with invoicing requirements will result in the disallowance of his claim for refund. If the claim for refund/TCC is based on the existence of zerorated sales by the taxpayer but it fails to comply with the invoicing requirements in the issuance of sales invoices (e.g., failure to indicate the TIN), its claim for tax credit/refund of VAT on its purchases shall be denied considering that the invoice it is issuing to its customers does not depict its being a VATregistered taxpayer whose sales are classified as zero-rated sales. Nonetheless, this treatment is without prejudice to the right of the taxpayer to charge the input taxes to the appropriate expense account or asset account subject to depreciation, whichever is applicable. Moreover, the case shall be referred by the processing office to the concerned BIR office for verification of other tax liabilities of the taxpayer. The appearance of the word "zero-rated" on the face of invoices covering zero-rated sales prevents buyers from falsely claiming input VAT from their purchases when no VAT was actually paid. If, absent such word, a successful claim for input VAT is made, the government would be refunding money it did not collect. the printing of the word "zero-rated" on the invoice Page 46

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helps segregate sales that are subject to 10% (now 12%) VAT from those sales that are zero-rated. Microsoft v CIR A tax credit or refund, like tax exemption, is strictly construed against the taxpayer. The taxpayer claiming the tax credit or refund has the burden of proving that he is entitled to the refund or credit, in this case VAT input tax, by submitting evidence that he has complied with the requirements laid down in the tax code and the BIR's revenue regulations under which such privilege of credit or refund is accorded. The invoicing requirements for a VAT-registered taxpayer as provided in the NIRC and revenue regulations are clear. A VAT-registered taxpayer is required to comply with all the VAT invoicing requirements to be able to file a claim for input taxes on domestic purchases for goods or services attributable to zero-rated sales. A "VAT invoice" is an invoice that meets the requirements of Section 4.108-1 of RR 7-95. Contrary to Microsoft's claim, RR 7-95 expressly states that "[A]ll purchases covered by invoices other than a VAT invoice shall not give rise to any input tax." Microsoft's invoice, lacking the word "zero-rated," is not a "VAT invoice," and thus cannot give rise to any input tax. The printing of the word "zero-rated" is required to be placed on VAT invoices or receipts covering zero-rated sales in order to be entitled to claim for tax credit or refund. the appearance of the word "zero-rated" on the face of invoices covering zerorated sales prevents buyers from falsely claiming input VAT from their purchases when no VAT is actually paid. Absent such word, the government may be refunding taxes it did not collect. Microsoft's receipts did not indicate the word "zero-rated" on its official receipts. Microsoft failed to comply with the invoicing requirements of the NIRC and its implementing revenue regulation to claim a tax credit or refund of VAT input tax. DOCUMENTARY STAMP TAXES CIR v Construction Resources of Asia Inc For the aforestated tax to attach, the certificates of stocks only needto be issued but not delivered. The documentary stamp tax is imposed on every original issue of a certificate of stock (the document evidencing ownership of shares of stock in the corporation), and that a documentary stamp tax is in the nature of an excise tax because it is levied upon the privilege, the opportunity and the facility of issuing certificates of stock. It being a levy on the original issue of a certificate of stock, the documentary stamp tax under this provision of the law may be levied only once, that is upon the original issue of the certificate. When is the certificate of stock deemed "issued" for the purpose of imposing the documentary stamp tax? Court adopted ruling of Phil. Consolidated Coconut Industries v CIR. The delivery of the certificates of stocks to the private respondent's stockholders whether actual or constructive, is not essential for the documentary and science stamps taxes to attach. What is taxed is the privilege of issuing shares of Paolo Miguel Javier

stockand, therefore, the taxes accrue at the time the shares are issued. Respondent did not dispute or question the assessment on documentary and science stamps taxes. It only requested for a reinvestigation with regard to the assessment of the interests and surcharges on its foreign loan and the surcharges and penalties. It never disputed the amount of the documentary and science stamps taxes assessment but only asked that it be given more time to be able to pay them after it had formally transferred in its favor the contributed capital of its stockholders. All presumptions are in favor of the correctness of tax assessments, and when such assessments are assailed, the burden of proof is upon the complaining party. Phil. Consolidated Coconut Industries v CIR For the purpose of imposition of documentary stamp tax, shall the certificate of stock be considered as "issued" even if held on mandatory deposit by the Securities and Exchange Commission? Ordinarily, when a corporation issues a certificate of stock (representing the ownership of stocks in the corporation to fully paid subscription) the certificate of stock can be utilized for the exercise of the attributes of ownership over the stocks mentioned on its face.The stocks can be alienated; the dividends or fruits derived there from can be enjoyed, and they can be conveyed, pledged or encumbered.The certificate as issued by the corporation, irrespective of whetheror not it is in the actual or constructive possession of the stockholder,is considered issued because it is with value and hence the documentary stamp tax must be paid. The Government stands to lose nothing in imposing the documentary stamp tax only on those stock certificates duly issued, or wherein thestockholders can freely exercise the attributes of ownership and with value at the time they are originally issued. As regards those certificates of stocks temporarily subject to suspensive conditions they shall be liable for said tax only when released from said conditions, for then and only then shall they truly acquire any practical value fortheir owners.

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