Taxation

Kwin
Kwin
K w i n T r a n s c r i p t s

Page 1
July 20, 2010
Taxation
Pre-midterms - July 17 20%
Midterms 30%
Finals 30%
20% - class standing (orals,
unannounced quizzes)

Coverage:
I. Tax 1
1. General Principles
- You have studied this in constitution wherein you studied
the three powers of sovereignty.
1. Taxation
2. Eminent Domain
3. Police Power

2. Income Taxation
- By far is the largest chunk in bar
40% - Income taxation
60% - General principles
Estate taxation
Donors taxation
VAT
Local taxation
Real property taxation
Tariff and customs code
Remedies of government
So tax 1 is important because of income taxation.

II. Tax 2 (4 units)
1. Estate Taxation and Donors Taxation
2. VAT
3. Remedies in taxation
a. Remedies of government if cannot called
b. Remedies of taxpayer if harassed or if overpaid
erroneous taxes.

4. Local Government Code
- Local taxation is that which is imposed by city mayor
office, actually the Treasurers Office.
These are taxes imposed by the Local Government Units.

5. Real Property Taxation
- Used to be a national tax but is now delegated for
collection LGUs. So in every area wherein you have real
properties either in parcels of land, building, machineries,
then you will be subjected to real property taxes.

6. Tariff and Customs Code
- This is enforced by the Bureau of Customs

7. National Internal Revenue Code
- Covers the percentage taxes and documentary stamp
taxes
As of right now, these are not part of the BAR.

So for Tax 1, we will have General Principles today, and for
succeeding, we will have income taxation.

Book: De Leon Fundamentals of Income Taxation
- For general principles

National Internal Revenue Code
RA 8424, Jan 1, 1998 (effectively)
- Sometimes called 1997 tax code

Has NIRC been amended since then? Yes
a. 2005, RA 9337 amended parts of NIRC specifically VAT
and a portion of income taxation especially passive incomes.

b. In 2008, RA 9504 took effect on July 6, amending portion
of income taxation of individual taxpayers.

You are familiar with minimum wage right? Minimum wage
income earners are no longer subject to income tax.

So if your income is 267, your income will not be held by the
employer.

But if I were your employer and I pay you 268, will I subject
you to tax?
Yes, because you are no longer a minimum wage income
earner.

So I want you to have a copy of the tax code and at least 1
textbook and outline of the subject.

Discussions will be according to the outline.

Is the power of taxation an inherent power of the
government or does it depend on the law granting such
power?
If we take out the constitution, will it change the power of
the government to impose taxes on its people?
No. Because it is inherent in every sovereign.

You think the Philippines can survive without taxation?
Youre saying no state could survive without financial
stability? That puts in equal footing the Philippines and US
and for that matter developed countries and third world
countries?
Almost all states actually impose taxes and burdens among
people out of necessity.

I think there is only 1 state that does not and they solely exist
on
So as a rule, taxation is applicable to third world countries or
developed or developing countries.

Taxation

Kwin
Kwin
K w i n T r a n s c r i p t s

Page 2

US is taxing in people because in 1939 we followed the tax
code of US, s we did with our civil code from some other
countries.

So the tax code was patterned after the tax code of US on
1939.

It eventually evolved into our code and in 1997, we also had
the version of the 1977 rational internal revenue code,
amended in part in 1983 and now our current tax code is
National Internal Revenue Code of 1997 which is RA 8424.


What is taxation?
Taxation is the inherent power of every sovereign nation
Exercised through its legislative or law making body
Imposing burdens
Upon people, subjects or objects within its jurisdiction
For the purpose of raising revenue
To meet the legitimate needs of the government

So if you break it down,
It is an INHERENT POWER of sovereignty.

Who exercise the power?
The legislative body which is the congress composed by
senate and the house on the national scope.

And on the lower levels/local government units, who
comprises the legislative bodies?
The Sangguniang Panlalawigan for the province;
Sangguniang Panglunsod for the cityetc

So taxation is exercised the lawmaking body of every
sovereignty.

Against whom is the burden of taxes imposed?
Against subjects and objects

But are all subjects and objects covered by taxation?
Say for example, you went abroad as a nurse. You have
immigrant status in US. Will you be covered by Philippine
income taxation?
When you say subjects and objects within its jurisdiction, it
actually refers also to taxation observing territorial
boundaries.

The power of taxation extends to everyone within the
territorial jurisdiction.

Of course, that is a very general definition, later one you will
know who are actually covered by tax, who are liable, who
are not.


Then for the PURPOSE OF RAISING REVENUES TO MEET THE
NEDDS OF THE GOVERNMENT

As a rule, what kind of purpose may a government have in
order to raise revenues for taxation?
For public purpose

The power of taxation has 3 natures. What are there? (2 are
included in definition)
1. Legislative in nature
2. Inherent in sovereign
3. Subject to constitutional and inherent limitations

1. So you are saying that the power of taxation is legislative
in nature.
In the exercise of power of taxation, it is required that only
congress or local lawmaking bodies are the only ones
authorizes to impose taxes.

Wherein you say that it is legislative in nature

Can congress collect a tax without enacting a law, if the need
arises?
Probably you might be referring to the time when there is
no constitution but 1986-87, when congress cannot convene
but tax laws is civil in nature. They are not affected.

2. Inherent in sovereignty
We have earlier said that the power of taxation exists in every
government without need that the constitution will provide
and grant such power.
And even if the constitution is removed, amended, etc, the
power to tax is still inherent for survival of the government.

If we see a constitutional provision discussing about taxes,
what is tits purpose?
For limitations only
It is not the grant of power if you see the word tax in the
constitution but simply a constitutional provision to limit an
otherwise unlimited power of taxation.

3. Subject to constitutional and inherent limitation

What is the difference between the two?
Can you remember a limitation provided by the constitution
insofar as the power of taxation is concerned?
There are various, I think there are more than 12. Whether is
a direct limitation or indirect.

Example: Uniformity and Equity of Taxation




Taxation

Kwin
Kwin
K w i n T r a n s c r i p t s

Page 3

We say that the power of taxation has the following nature:
1. It is INHERENT IN EVERY SOVEREIGNTY such that there is
no need for a law or constitution to grant for the power.

For every sovereignty, taxation is inherent, notwithstanding
if you removed the constitution

2. There are CONSTITUTIONAL LIMITATIONS or INHERENT
LIMITATIONS
Otherwise the power of taxation can be abused because it is
supreme, plenary, unlimited in character.
So there are constitutional and inherent limitations like
constitution provides various constitutional limitations.

Ex: UNIFORMITY of taxation for those belonging in the same
class and

Inherent limitations of the power of taxation are those that
go with the power without a law.

Let us say that we repeal/ take out the constitution, will the
power of taxation be limitless because it is the constitution
with the taxation will have limitations?
Even if we take out the constitution, still the power of
taxation will not be without limitation.
There are still limitations which we call inherent limitations

Ex: that every law enacted to impose and collect taxes must
be for public purpose.

If it so happens that the purpose is for private or for the
benefit of few individuals or entities, then the tax law will be
declared unconstitutional.

3. It is LEGISLATIVE IN CHARACTER

Your classmate said that the tax can be collected even
without the tax law imposing such. Is that right?
The power of taxation is legislative in character.
So every burden imposed on the tax payer must be based on
the existing statute or tax law.

The power of taxation is statutory in nature without a law
imposing a particular tax, no collection can be made.

Otherwise you will be violating a very important limitation
provided in the constitution that there shall be no taking of
property without due process.

Due process involves:
Substantive due process, the existence of the law and of
course without the law, there will be no Procedural Due
Process


So it cannot happen that even in emergency cases,
collection can be made without law. There should always be
a law.

So at this point, you will really know the IMPORTANCE OF
TAXATION.

It somebody harasses you or extorts money saying this is your
taxes, if you know that there is a law then you will be paying.
But if you know that there is no law, then you can actually
legally refuse to pay.

We so not delve into state of emergency. What I meant is
that in cases wherein there is a need for money by the
government and the congress has not yet enacted a law, can
we impose the tax?
True that the president has been delegated the power in the
constitution to collect taxes in emergency cases, but is only
involves customs duties, which actually requires flexibility.

Because in customs cases, it involves different nations.

If we need to stop the importations of goods form foreign
country, all the president will have to do is the increase
taxes so that there will be no entry of goods.

If we wait forever for congress for how many monthshow
many pleadings to pass through

Thats why there is that special power in he constitutional
granted to the president. But that refers only to customs
cases.

But for national internal revenue cases, there is none.


Why should there be a law imposing tax?
The reason there is that it is burdensome. You cannot expect
the people to pay without being informed that there is such
a law requiring

Why is it that the taxation is inherent?
What it its BASIS?
The basis of taxation in NECESSITY;
the need of the government to serve the people and
the need of the government to protect its people.

But in order to address service and protection to its people,
it needs funds to run the government.
And funds come from taxes.




Taxation

Kwin
Kwin
K w i n T r a n s c r i p t s

Page 4

There are 3 major sources of money for the government in
order to run its business
1. Taxes
2. Borrowings from the world bank or other countries
3. Subsidies received form other countries

If we want to be independent, we should rely on our taxes.
We cannot borrow every time and we cannot expect to
receive subsidies from other governments always. They have
their own needs.

Which leads us wherein we say that if the basis of taxation
is necessity this leads us to the famous doctrine, the LIFE
BLOOD DOCTRINE.

What is LIFE BLOOD DOCTRINE?
The LIFE BLOOD DOCTRINE is that the power of taxation is
an inherent necessity of the government that without which
the government cannot run.

So in case of doubt, we say it is taxable because of the life
blood doctrine.

58.11
So just like in your legal ethics, wherein you dont have a fall
back answer, you always think of GMC Good Moral
Character.

In taxation, when you dont know if the person is taxable or
not, probably your answer will be Life Blood Doctrine
because the government needs taxes. But that is only a last
recourse. Dont answer this from 1 to 10. If only for support
for your first affirmative answer.

No government can exist without taxes, the selected
doctrine is illustrated in many situations.

Ex. If the government has assessed you your taxes and you
have a pending claim for refund of overpaid taxes, can you
offer to set off your payable against your collectible from the
government?
Can there be offsetting of taxes due from you against the
taxes due from the government?
This is a situation wherein you are assessed of taxes but you
have a claim for refund for pending claim of taxes year
before. Can you offer to just have it compensate against
each other?
There can be no offsetting of taxes payable in taxes already
paid before because of the life blood doctrine.

The reason being is that taxes is an obligation which exists
even before you can make a claim or refund.
So its your obligation. Your civil liability for the government.
It is independent from any advances you have made prior to
your tax liability.

And number 2, it is not a debt. Not being a debt, you have
no relationship with the government which we call creditor
debtor relationship.

You are actually a citizen of the government liable to pay
taxes. You are not indebted to the government for a debt. In
the same way is the government not indebted to you for the
overpaid taxes.

There is no creditor debtor relationship but simply a
relationship between the government and its constituents.

Therefore, taxes have to be paid regardless whether you
have a claim from the government.


Lets go to the THEORY OF TAXATION

We say that there is a SYMBOITIC RELATIONSHIP between the
government and its people.

Can you expound further on that?
When we say symbiotic relationship, one gives to another in
exchange for something. Its a relationship of give and take.

Taxation is similar because the government needs funds in
order to protect its people.

Thus the people need to support the government through
taxes and in turn the government gives the people
protection and support.


How does the government give support?
By the infrastructure, educational services Whether or not
you are actually benefiting out of it, since it is directed for
the common good, there are basic services rendered by the
government to its people that would be enough to say that
is the support given by the government to its people.

When you say Symbiotic Relationship, it is synonymous to
COMPENSATION THEORY one compensates the others
services or the BENEFITS RECEIVED THEORY.

These theories are actually the same.
Its the theory that supports why there is that power of the
government to tax its people.
There is the need and there is the support.

What is the main PURPOSE OF TAXATION?
TO RAISE REVENUE
Taxation

Kwin
Kwin
K w i n T r a n s c r i p t s

Page 5
As Ive said, to run a government, there is a need of
multibillion tax.

What department of the government is enforcing the tax
collection for the government?
BIR Bureau of Internal Revenue
BC Bureau of Customs
LGU Local Government Units Treasury Division in the
collection of local taxes and Real Property Taxes.


So we have 3 collecting bodies of the government
1. BIR for internal revenue taxes

What are internal revenue taxes?
These are taxes found in the nation internal revenue code.

2. The Bureau of Customs for customs duties and tariffs.

3. The local government units for local taxes and real
property taxes.


Majority of the taxes collected comes from BIR which is 70%
of the entire taxes.

How about the Department of Finance?
Is it collecting taxes, fees and surcharges?
No.

What is Department of Finance there for?

Who is the head of Department of Finance?
Secretary of Finance

Who is the head of BIR?
Commissioner of Internal Revenue

Who has a higher power?
Secretary of Finance

The BIR and Bureau of Customs are just agencies below the
Dept of Finance.

So if ever there is a ruling that you have questioned before
the BIR, it can be over turned by the Secretary of Finance
himself who can review the rulings of the commissioner.

The commissioner is very powerful insofar as BIR is
concerned.






If we have the primary purpose for taxation, we also have the
SECONDARY PURPOSE.

Another purpose of the power is taxation which is the NON-
REVENUE RAISING part of taxation is TO REGULATE.

What do you mean by TO REGULATE what?
Taxation can be used to regulate a certain business such as
cabarets, night clubs etc.

Are they taxable?
Amusement taxes are imposed for amusement places.
And amusement taxes mind you are higher. For example, in
the LGU, the amusement tax imposed is 30%.

In order to regulate businesses, taxation may imposed by
lowering it or highering the tax rates, etc.


Can taxation be used to close up the business?
Do you agree with what they say that taxation involves the
power to destroy?
Wherein a justice once said that the power of taxation
involves the power to destroy, it is not all encompassing.

Because its a legal and valid statement only if it is exercised
together with police power only.

You know police power for the general welfare of the
people
That is the purpose of destroying the business is simply the
power of taxation with revenue raising purpose, it is invalid.

So due process must at all times be exercised in the rising of
revenues under the power taxation.

And exception only will come in if police power is exercised.
Because police power is supreme than the power of
taxation.

Thats why when we say it involves the power to destroy,
the closing of business, it is valid only within police power is
exercised.
If solely taxation, it is not. Taxation is only to raise revenue
as a rule.

Ok. So we have identified 2 non-revenue raising powers:
1. The power to regulate
2. The power to promote general welfare
- Which is in fact the implementation of police power of
the state

What are the 2 other non-revenue raising power of the state?
3. Encourage economic growth
Taxation

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K w i n T r a n s c r i p t s

Page 6
4. To reduce social inequality
How do you inject taxation in order to encourage economic
growth?
One perfect example of encouraging economic growth is to
introduce or enact the tax law granting fiscal incentives to
investors when they put up business in the Philippines in
exchange for income tax holidays, no income taxes for
certain number of years after its initial operation

Notwithstanding that the government is giving up its right to
collect taxes for the first 4 or 6 years, the fact that it has
brought investment to the Philippines when it will also
encourage the hiring of Filipinos, the government is actually
encouraging economic growth.

Taxes may be collected in other areas because for every
business its not only income tax. There are other taxes that
can be collected out of that investment.


And finally, the fourth non-revenue raising objective of the
power of taxation is to REDUCE SOCIAL INEQUALITY.

How do you use taxation in order to reduce social inequality?
When you say reduce social inequality one perfect example
for this is wherein taxation is used in estate and donors
taxation.

Is the estate taxation the same as real property taxation?
Estate planning is one that you can do only for the rich.
There is nothing to plan if one does not have estate.

So wherein you say estate taxes, these are taxes imposed on
the privilege to transmit properties upon death.

And who are subject to estate taxes?
Not all of us will be liable for estate tax. Because estate tax is
only imposed on the amount left after the first net 200k.
So if your assets do not reach one million w/n you die, no
estate tax will be due. Because there is a standard deduction
for your gross estate.
So it is only a tax for the rich. And it is only imposed upon
transfer.
Supposedly its not even on activity, youre not even earning
income there.
But in order to collect money from those who can afford, it
is imposed on the privilege of transmitting the property
down to the heir.

How about inheritance tax?
You know what inheritance tax is?
It is the tax on the heir upon the privilege to receive
property.
But that tax has already been repealed.
That PD69 imposing inheritance tax and donors tax of one
receiving the gift because that is already double taxation of
the same transmittal of property.
One giving and one receiving.

So only the tax should be imposed on the one who can afford
the one giving or the one who died.

Anyway, that is a way where taxation is not one for raising
revenue but in a sense reducing social inequality but those
who can afford and those who cannot.

SCOPE OF TAXATION
At this point is unlimited, is plenary and supreme.
Very comprehensive indeed.

AFTER BREAK
A while ago, we say taxation is unlimited, supreme,
comprehensive, and plenary.
For such reason, there has been the identification of what are
these constitutional limitations and the inherent limitations
to such unlimited power.

Now, we say that the congress in a way who has the power to
legislate the tax law has an unlimited power to determining
the scope of the power to tax.

Number one is to DETERMINE THE PURPOSE OF THE TAX LAW
TO BE ENACTED.

Number two, WHAT SUBJECT MATTER or WHAT OBJECTS
WILL BE COVERED BY THE POWER TO TAX. It is for congress
to know as well.

Number three, WHAT AMOUNT OF TAX SHALL BE IMPOSED
or @ WHAT RATE SHALL THE TAX BE COLLECTED?

Number four, is THE DETERMINATION OF THE KIND OF TAX
TO BE COLLECTED.

Number five, is HOW IT WILL BE APPORTIONED W/ THE
DIFFERENT CLASSES OF SUBJECTS AND OBJECT MATTERS.

Number six, DETERMINATION OF THE SITUS OF TAXATION
belongs to congress.

And finally, number seven, belongs with the executive branch
of the government, its the MANNER AND MODE OF
ENFORCING AND COLLECTING TAXES.

Are all the three branches of the government somewhat
involved in the power of taxation? One way or the other?
We have all been mentioning legislative insofar as taxation is
concerned
It is legislative in character.
Taxation

Kwin
Kwin
K w i n T r a n s c r i p t s

Page 7
It is congress who will enact the law.

How about the two branches of the government?
Do they have participation in the overall effectiveness of the
government of the power to tax?
Congress is not involved in the manner and means of
enforcing tax collection and tax administration.

The legislative branch of the government is only up to the
point of enforcing tax law. But as to how the law will be
enforced as to the manner, means, and methods of
collecting/enforcing the taxes against the subject matter and
objects of taxation, it now exclusively belongs to the
executive branch wherein in this case, we have BIR and
Bureau of Customs and the LGU.

How about the judiciary?
We have mentioned a while ago that there are 6 items or
scope of the power to tax determined by congress with the
7
th
belongs to the executive branch enforcing the law.

Number one is the
DETERMINATION OF THE PURPOSE OF THE LAW

What again will be the purpose of the tax law to be enacted
by the congress?
Public purpose

When can you say that it is for public purpose?
The determination of the purpose of the tax law belongs
exclusively to the wisdom of congress.
Although we say, the determination of the constitutionality
of the tax law belongs to the judiciary, not the wisdom
behind the purpose of the law.
It belongs to congress.

Now if congress says that the purpose is for public purpose,
then it will be taken as it is. Public purpose.

Only when it would appear, there is question as to the
subjective/procedural due process of the enactment of the
law may judiciary interfere.

Only when there is question of constitutionality, thats
wherein the judiciary interferences.

But once the judiciary will say that the law is
unconstitutional, then it will be part of the law of the land.
Congress cannot do anything about the decision.

So its actually an equal task for all three branches of the
government to make taxation as effective as it should be.





In DETERMINING WHO ARE THE SUBJECTS AND OBJECTS OF
TAXATION are.
It still belongs to congress.

Can we expound on who are liable for taxes? Because we
know it is congress who determines who are liable for taxes.
Who are liable for taxes?
In determining who are liable for taxes, it is not only an
individual, and entity or a person.
Taxes can be directed against a person
Against a property or
Against inactivity
These are the three subject matters for taxation purposes.

We will discuss that later when we go to classification of
taxes.

As to DETERMINATION OF AMOUNT OR RATE OF TAX
It still belongs to congress.

Is a tax a rate or a fixed amount?
Both.

Its a rate. VAT is a rate. When VAT is imposed, it is not a
fixed amount that is collected. It is the rate of the value as
computed. At what rate is it? 12%

Taxes may be rates; taxes may be fixed amounts.

If you read through NIRC or any other tax law like LG, most
of the taxes imposed are rates.

Income taxes rates of corporations are in the flag rate of
30% on the net income earned.

Individual tax payers are liable for 5% to 32% income tax
rates on the income earned.

Ex: If you are an employee, even before you receive your
salary, your employer has already withheld the tax that is
due to the government.

If your salary is only minimum wage, youre not withheld of
tax, you are exempted.

If your salary is more than the minimum wage but is in the
lower bracket of income, you get to be held of the lower
rate of 5% to 10%.

If your income will now exceed of 500k, it is the highest level
of 30%.


Taxation

Kwin
Kwin
K w i n T r a n s c r i p t s

Page 8


What point of the tax code do we see tax imposed on a flat
rate?
If you see common carriers tax or jeepney utilities, its a
fixed amount depending on the capacity of the vehicle.

How about shipping vessels and aircrafts is there VAT
imposed or common carrier tax imposed?
Before the enactment of RA 9337, all common carriers were
imposed of the fixed rate of common carriers tax in the tax
code.

But in 2005, it was revised that common carriers by air and
by sea are already imputed of the fixed rate of 12% VAT.

There is a big difference.

Prior to VAT being imposed on an airline ticket, we were not
liable for taxes on ticket purchase. It is the shipping/airline
company that is paying for the carriers tax.

But now, we shoulder the burden at 12%.

So the burden was shifted on the consuming public but it
was not applied to common carriers by land which include
buses, jeepneys, and taxies.

Theyre still liable for common carriers tax and the riding
public is not liable to pay any tax upon embarkment of these
vehicles.

Why do you think they are not included?
Public utility vehicles by land involve the general public.
And VAT was directed to the consuming public who can
afford.

You remember that there was an issue of the 10% VAT being
increased to 12%. It was actually the reason why Recto was
not elected for senate because he was one of the
proponents of the VAT being increased to 12%.

But one of the arguments why they say VAT was really not
burdensome to the public is because Vat is only imposed on
those items which are more or less luxurious items, while
items which are in the original state are not imposed of VAT.

So you cannot expect the marginalized citizens to pay for
VAT.








Lets go to the KIND OF TAX COLLECTED.

What are the different taxes that you have encountered?
The legislative of the government can actually tax every
move that you make.

If you have illegal gambling games, is it taxable? What kind of
tax?
As to you, the winner, how do you call it?
Income

Illegal games winnings are subjects to income tax.
The definition of income tax is the tax of an income from
whatsoever source.
So having said that it may come from whatever source,
whether the source of your earnings is legal or illegal, it is
taxable as provided in the tax code.

For academic discussion, it is taxable. But in reality, will you
declare it?
No.
You wont declare it. Why would you want to be penalized?
Thats double jeopardy, being subjected to tax and being
prosecuted for double jeopardy.
So the only recourse left is for you not to report it.
Unless somebody tips off the government in lieu of an
informers reward.

If you want to report your employer for not paying the
correct amount of tax or for keeping two sets of books of
accounts, you get informers reward.
But of course, there are requirements for you to get hold of
the money.

And speaking of receipts early on,
What do you do with your receipts?
Do you know the Premyo sa Resibo of BIR?

What you simply text in the endorser, the OR number,
establishment, amount paid, etc and if it is chosen as a
winner, you get a maximum if 1 million.

Is it taxable?
No.

Its for congress also in their enactment of a law to
DETERMINE how the tax shall be APPORTIONED WITH THE
DIFFERENT CITIZENS OR APPORTIONMENT OF THE
DIFFERENT RATES TO BE APPLIED

For income taxation purpose involving individual s such as us
of the tax for the first peso we earn is 5%.
For every peso that you earn, 5% goes to the government.
Taxation

Kwin
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K w i n T r a n s c r i p t s

Page 9
Anything beyond 500k is 32%.

So the range starts from 5%, 10%, 15%, 25%... up to 32%

Can the BIR change the rates by issuing a regulation
themselves?
The task of BIR is simply to enforce what the law is all about.

Speaking of enforcement of the law and VAT, what about in
2007 of February when the president raised the VAT from
10% to 12%?
Is that not questionable?
Is it violating taxations legislative in nature such that
determining the rates belongs exclusively to congress?
RA9337 w/ amended in part RA8424, the tax code, already
provided the limited power of the president to raise the
value added tax rate from 10% to 12%.
So what the president did in raising the rate to 12% was not
beyond the boundaries allowed by law. The law already
provided the specific rate of 12%
Rate to be raised by president only upon compliance with
the Gross Domestic Property conditions.

Now in Feb 2007, conditions were met. The president only
did what was appropriate according to law.


When you say the law already provided for the procedural
requirements/parameters on which it will be enforced, then
there is actually no violated rule on the power to delegate.

The president only followed what the rule provided and the
law was valid. So there is nothing wrong with the president
raising is to 12%.



And then we said that it is within the scope of congress to
DETERMINE THE SITUS OF TAXATION.

Situs of Taxation is complicated.
Therefore, I have a topic for that next meeting after the
constitutional limitations.
It simply means, as a starter, the law provides the place of
taxation

What is the situs of taxation?
It is when the tax authorities have every legal right to
impose the tax.

So every item, every property, every person, and every
entity.. before answering a question whether it is taxable or
not, you have to answer the question of- where is the situs
of taxation?
Because if it does not belong here in the Philippines, then it is
not taxable. Situs of taxation will be discussed later.

Lets go on to the ASPECT OF TAXATION.

There are 2 major aspects of taxation which are the levying of
taxes and the administration of taxes.

What do you understand of LEVYING OF TAXES?
When you say taxation class, it is not the enactment of the
law wherein the power of taxation stops.

There are 2 major aspects.
First is the ENACTMENT OF THE LAW the levying of the
burden of taxes or the imposition of taxes through a law that
had been enacted by congress.

The seen aspect to perfect the power of taxation is to
administer the law itself.

And how do we administer the law?
Its passing the obligation from congress to the executive
branch in which there are collective agencies or bureaus in
charge of enforcing the law itself, who provide for the
modes, manners, and methods of enforcing the law.

If you have read towards the end of every law, there is an end
provision that says separate rules and regulations will be
enacted

Administration will belong to BIR and Dept of Finance.

Who makes the regulations for the tax collection of the
bureau?
It is the secretary of finance, not the commissioner.

There are three BASIC PRINCIPLES to make the tax system of
every country sound.
1. Fiscal Adequacy
2. Theoretical Justice
3. Administrative Feasibility

FISCAL ADEQUACY
When you say fiscal adequacy,
Fiscal is more on monetary,
Adequacy is the adequateness of the money available to
meet the needs of the public.

SOUND TAX SYSTEM
So when you say to make a sound tax system, there must be
an adequate finance, so that taxation must be so flexible to
be reduced, contracted or expanded in order to meet the
needs of the public.

So it must be contractible. It can be reduced or increased.
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Now, what if our budget for the entire fiscal year, congress
will convene and decide.. if the budget is 100billion and
collection if taxes is only 50billion.

Do we have a sound tax system?
So theres a 50% deficit. It makes the tax system unsound.

If the tax collection is double the budget, is the system
sound?
Would you say sound if its more than the expenses?
You know class, to make a sound tax system you dont look
at the equation where the government gains more than
what is expected.

If it so happen that the collection is way way more than the
expenses, its not a sound tax system.
It simply means that the government is under-delivering the
basic needs of the people.
So that makes the tax system as well unsound.

But we so not require the exactness of the amount of the
expenses and collection.
All we need is an approximate.

But more or less, the government is delivering according to
what has been collected.
If there is a big disparity whether its positive or not for the
ground, then there is an absence of fiscal adequacy and the
tax system is no sound.


THEORETICAL JUSTICE
Lets go to theoretical justice. Very difficult word
If you only take out the root word, theory so its only justice
in theory.

What do you mean by theoretical justice?
Were saying that the Philippines tax system must have
theoretical justice that the imposition of taxes must be
based on the affinity of every taxpayer to pay his taxes.

It is in compliance with the provision in the constitution
which says that we must evolve a progressive tax system
which is equivalent as well to the ability to pay principle in
which as your income increases, the tax should also increase
and those who have the ability to pay has higher burden of
shouldering the expenses for the general public.

But that is not applicable to all __________. Not all taxes are
escalating rates. Not all taxes are based on the ability to pay.

Some taxes are at a flat rate.
Ex. Income tax for corporations is at 30% whether or not it is
earning P1 in one year or 100B in one year.
For individuals, we have escalating rates.
Decedents who transmit his property or estate also has
escalating rates.
The owners who transmit properties during their life also
have escalating rates based on their ability to pay.

Talking about services rendered by the government, can you
refuse to pay the tax simply because you did not avail any of
the services rendered by the government?
No education services, no health services, you are not using
the roads nor flyover, youre living in the mountains.
Can you refuse to pay taxes?
No.


ADMINISTRATIVE FEASIBILITY

Lets go to administrative feasibility.
Perfect for all tax system.

What do you mean by administrative feasibility?
It simply means that every tax law should be capable of
being carried out in an efficient manner.

OW, it would be of no use if the tax law is so difficult to
impose against the people or the collect taxes from the
people.

Therefore, in order to have a sound tax system, we need have
fiscal adequacy wherein the collection of taxes approximates
the services given by the government.
There must be theoretical justice or equally in the imposition
of justice based in the ability to pay principle.
There must be administrative feasibility in running the tax
collection.

Now lets go through these three one by one.

If there is no fiscal adequacy because expenses are way lower
the collection, there is violation of fiscal adequacy rule.
Does that make the tax law invalid?
No. Even if there is no fiscal adequacy because there is no
meeting of budget collection and expenses of the
government, it odes not disturb the validity of the tax law.
The tax law remains valid.

What about administrative feasibility?
What will happen if it is not administratively feasible to
collect taxes?
But since tax collection is the life blood of the government,
the executive branch will exhaust all means to make
collection easier for them.
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Before you pay your taxes before BIR then it evolves to
authorizing banks; we call them authorized agent banks to
collect taxes in behalf of the government.

Now it has further evolved into E-collection wherein you can
file your tax returns through the internet and pay your taxes
on line.

Actually the government is doing everything to make it
administratively feasible.

In any case, even if there is no/if not easy to collect, that
does not make the tax nullified.

The government has to do is to redraft another regulation.


Lets go to the third, theoretical justice or equality.

If there is a violation of the principle, does that make the tax
law invalid?
There is that unwritten limitation in taxation, even in local
taxation that tax imposition must be just fair reasonable and
not oppressive.

It means that it has to follow ability to pay principle; taxes
must be proportionate to the income earned, to the ability
to pay, it must be equitable in character such that its
violation is already against the constitutional limitation that
there should not be undue taking of the property of the
taxpayer.

So if the tax law is oppressive in nature, violative of the
constitution, in this case, not only is the tax system unsound,
it makes the tax law invalid.

Before we leave taxation and focus on the rootword of
taxation which is taxes, let us distinguish the power of
taxation from the power of eminent domain and police
power.
1. As to what is the purpose of the power
2. As to who are affected
3. As to who are compensated by the power
4. As to amounts involved
5. As to authority who exercises
6. As to limitations

1. There are different purposes.
Taxation is to raise revenue.
Police power is to maintain general welfare of the public
public safety, public health, morals, etc.
Eminent domain is to use the private property for public
purposes.

2. Who are affected by these powers?
Who gets burdened by these powers?
If at any time, the police power and the power of taxation is
exercised by the government, the persons affected belong
to a class of individuals.
Its a group. You cannot impose tax on a certain person
alone.
That is a void tax law.
It will always be a class of individuals in the same situation.

With police power is directed usually on the class of
individuals for the common good.

Unlike the power of domain which is exercised every point in
time to more or less a few individuals or even simply
individual who is the property owner for which the
government is interested for public purpose.

3. As to whether or not the exercise of these powers results
to compensation, how do you distinguish the 3?

As we said earlier, in the imposition of taxes, the government
does not promise to benefit the persons paying the tax
because the proceeds of the tax law is used to benefit
everyone.

But in case one or more individuals are benefited especially, it
does not automatically make the law invalid so long as
general premise of the law is still the general public.

Ex: if it benefits the particular areas for real property
taxation.
If there is a specific area benefited by taxation, then the law
will not actually be invalidated.
The government will simply think of a way to tax differently
the persons benefited by the government using the power
of taxation.

For police power? Is there compensation?
It results to the promotion of general welfare, the
maintenance of a healthy living environment, etc.
No one is directly benefited by police power.

Does the government compensate for eminent domain?
Yes. FMV

4. Lets go to the forth distinction the ants involved
In taxation, is there amount involved?
So long as it follows both the constitutional and inherent
limitations, the amount is unlimited for taxes.

Can the government tax 50% income tax?
Yes. It depends on the status of the person.

Is there an amount involved in the exercise of police power?
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The exercise of police power does not grant an unlimited
power to collect fees and charges.

They are only allowed to collect fees for the cause of
regulating those that they are involved in.

Ex: for regulating the industry of tourism, etc, they collect the
license fees. For every LGU you belong to, and if you decide
to put up a business, you will be liable to pay not only taxes
but fess for business permits.

Nonpayment for business permits.
Every January 20 you are required to renew your business
permits before the LGU, together with the business taxes.

Is the business permit fee a regulatory or a revenue raising
activity?
Is it a license or is it a tax?
What is the difference between a license and a tax?
If you fail to pay the tax, can you be imprisoned? Yes.

The basic difference between license and a tax is the
purpose/s.
The tax is for revenue raising purpose.
The license is to recover the cost of regulation by the
government.

But nonpayment of either does not result to same thing

If you dont pay any taxes, it does not make your business
illegal. It simply means that you are delinquent in paying.
The government can enforce the means and methods of
collecting the tax either through a court case if levying your
real property or restraining your personal property.

On the other hand, if you fail to pay a license or permit fee,
it makes your business illegal because you dont have a
license to operate.

For police power, its move on cause of regulation that every
individual subjected to it is required to pay.

How about in eminent domain?
In eminent domain, it is the government that is paying just
compensation which is actually, which ever is lower than the
FMV of the property declared by the taxpayer and the FMV
by the local assessor.

5. What authority exercise the power of taxation, eminent
domain and police power

The power of taxation is exercised by the legislative body.
The power of eminent domain is exercised by the legislative
body of the government.

Can private persons exercise eminent domain?
As a rule, all the three powers are exercisable by the
government but the private entity can come n exercising the
power of eminent domain but only on in stances of
rendering public utility services.

Ex: telecommunications company, power company, etc

These are private companies which actually exercise eminent
domain, offer to purchase land for just compensation in
order to use it publicly.

They can justify that because public utility is for the public.

6. Lets go to the last distinction among the three.

Are all three powers subject to constitutional limitations?
Yes.

Taxes are enforced proportional contributions.
Can we make taxes as voluntary proportional contributions?
It we make it voluntary, would the people voluntarily pay the
taxes?
No one is expected to voluntarily pay their taxes.
Being enforced contributions, everyone who is within the
jurisdiction and covered by the tax is expected to raise an
amount, shoulder the burden and pay the government.

Its proportional.
What do you mean proportional?
The definition of taxes is that it is an enforced proportional
contribution, generally paid in money levied on persons,
properties, or activities by the state through the legislative
body for the purpose of raising revenue or for public
purpose to meet the needs of the public.

So its a long definition but if you break it down, dissect the
definition, you arrive at the attributes or elements of what
tax is all about.

1. It is an enforced contribution. Not voluntary in nature.
2. It is proportionate in character such that every tax law is
designed to capture the progressive system of taxation that
we only impose taxes to those who have the ability to pay
tax.
3. It is generally payable in money.

Can you offer to pay your carabao for the taxes on your
salary? Why not?
There is an exception to the rule that taxes are generally
payable in money.

First, why taxes should be payable in money is that the
government cannot afford to take time to convert your
property to cash.
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Its not liquid.
To run a government, they need cash.
Its as if money runs in the veins of the government to make
it flow.

So its generally payable in money because money is the
standard of measure as what you learned in negotiable
instruments... every thing may rise and fall in value but not
money.

Therefore, to make things work, we should pay money as
taxes in government.

But there is an exception to the rule but I doubt that back pay
certificates are still available.
We have what we call as TAX CREDIT CERTIFICATES

What do you do if you have paid erroneous taxes?
If you have paid erroneous taxes or taxes in error, your
remedy is to ask for a refund.

But class, asking for a refund from the government is near
impossible.
The government does not give back to you an erroneously
paid tax in cash.
If they found out after examination that indeed you have
overpaid taxes erroneously, what they will offer you 99% at
a time is to give you a tax credit certificate.
1% wherein you will be given cash for overpaid taxes is when
you are about to close your business.
Because tax credit certificate given in lieu of cash for overpaid
erroneous tax can be used pay your other tax liabilities.

If youre closing you business, you have no use for your
certificates.

This is the time when youre saying that these certificates will
be used to pay the tax liabilities.
Therefore, you violated the GR that taxes are generally
payable in money.

You can use the certificate which is a one piece of paper to
pay for your tax liabilities.

As the relationship of the 3 powers to the constitution,
almost all of these powers are limited by the constitution.

To be exact, the power of taxation has many limitations by
the constitution. So the constitution is supreme.

As to eminent domain, it is as well limited by the constitution.
1. No undue taking of the property
Follow the rule.
Pay just compensation
2. The government cannot violate an existing contract that
a person has with another person.
You will know that the non impairment clause of the
constitution is supreme.

Whenever a government enters into a contract with an
individual for compensation, that contract cannot be
disturbed.
Not by taxation, not by eminent domain.
That contract can be invalidated by the exercise of police
power.












































Taxation

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June 26, 2010

What are taxes?
Taxes are enforced proportional contributions
generally payable in money
imposed on persons, properties or activities within the
jurisdiction
by the state
through its law making body
for the public purpose or needs of the public.

It may be a long definition but if you break it down you will
have the elements of the taxes.

First is, it is an enforced contribution.
These are actually burden imposed and exacted by the
government from the people, from the objects found within
its jurisdiction and from different exercises of activities of
professions.

So these cannot be deemed as voluntary.

It is proportional in nature.
Taxes are imposed by the government based on the ability of
that person to pay his taxes.
On the value if his property for instance, it proportionate.

Generally Payable in Money

In order to make taxation simple, taxes are generally payable
in money. So all settlements in your civil liability to pay
should be made in legal fender or the money circulating in
the Philippines.

This admits of one exception which is the payment of
government certificates.

Since the Landbank certificates that are mentioned in the
book, I think that is a previous case, so what we have right
now are certificates usually by the government in the forum
of TAX CREDIT CERFITICATES representing ones paid taxes
by the same taxpayer.

As an exception to the rule, these certificates can be used to
settle tax obligations of the same tax payer for his other tax
liabilities for which he is liable to the same issuing authority.

So when its a tax credit certificate issued by the BIR for
overpaid internal revenue taxes, then you can use the tax
credit certificates to offset other internal revenue taxes.

If it is used by Bureau of Customs, then you can only use it ti
pay the Bureau of Customs.

If it is issued the LGU, it can be used to pay your liability to
LGU but in the actual world, I dont think LGUs are issuing
tax certificates for overpaid taxes. All they do is offer these
payments as future offsetting the Real Property Taxes or
Local Business Tax paid.

It is very difficult to get refund or tax credit certificates from
the government.
It reaches even the SC.

Another characteristic of the taxes is that it is imposable on
persons, properties or the exercise of a right or privilege.

These are actually the subject matter of taxations

Discuss each.
Number 4 in characteristics of taxes are the same as number
in classification of taxes.

As to the subject matter as against what is such tax directed
against that, you only have three classification/types.
The subject matter could only be a person, property, or
activity.
One is what we cal personal tax.
The other is called property tax.
The third is excise tax.

The poll tax/cedula is an example of personal tax because tax
is collected against a person, regardless of his citizenship,
income and activity.

So long as a person is a resident of a particular place, he is
liable for cedula.

Of course.. an exception of cedula.
If you are a student without income, you are not liable for
cedula.
Also those non resident aliens who are in the Philippines for
not more than 3 months.

A corporation is still liable for cedula because it is a juridical
person.
It is liable for cedula every year except for the year that it is
incorporated.
We will discuss that further ince we reach local taxation.

But at this point, there is only one personal tax identified and
that is poll tax/cedula.
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It is imposed on the person regardless if what income he is
earning or property he is owning or his citizenship as long as
he is a resident.

We go to property tax

Ex: Real Property Tax (before Real Estate Tax)
Although we call it a property tax, it is directed against the
property, but it is the person owning it who is going to pay
the taxes.

Although the owner or user of real property is going to pay
the RPT, we dont consider that as a personal tax. It is a
property tax.

Such kind of tax follows the property wherever it goes.
that property is liable for taxes.

And we go to the third classification as to the subject matter
the excise taxes.

If you browse through the tax code, it starts with the
introduction with the BIR org. The first tax discussed is the
income tax, followed by the estate tax, donors tax, then
percentage tax, excise tax and doc stamp tax.

Excise tax found on the tax code is a very specific name for a
type of tax imposed on non-essential commodities or goods.

That which we substitutely call as sin taxes.
But if in this classification as to how we classify the different
subjects or objects of taxation is either a person, a property
or an activity/excise.

This is the more genera term of exise. It covers privilege
which are taxable, activities which are taxable, and the
exercise of profession or any type of activity.

You cannot actually interchange it.
Exise tax or sin taxes is very much different because it is a
particular tax.
With this one is simply a catch all on what is not a personal
tax and what is not a property tax.

Ex: income tax is an exise tax because it is not a property nor
a personal tax. It is a tax imposed on an activity that lets you
earn an income.

So any type of other taxes actually that you cannot classify as
personal or property are exise taxes.

Is estate tax an excise tax?
Yes. Because it is neither a property nor personal tax. What
is being taxed is the transmitted of the property from the
decedent down to the heir.

Estate tax is the tax on the privilege of transmitting the
property upon death. Donors tax is the tax on the giving of
gift during life time.

So these are taxes based on the activity of transferring
property with the property itself is subject to another type
of tax which is real property tax.

Real Property Tax is an annual tax imposed on your real
property.
It is not based on the transfer.

Whenever you transfer that property, not only are you liable
for real property tax yearly but you are liable for the transfer
if its made through donation, donors tax, if at death, estate
tax, if you sold it income tax or VAT and you pay local
transfer tax.

So for every transaction, dont expect paying one tax. It may
be one to maximum of 4.

Lets go to the 5
th
characteristic, LEVIED
BY THE STATE WHICH HAS JURISDICTION OVER THE SUBJECT
MATTER OF TAXATION.
This refers to situs of taxation

So for Filipino living abroad as an immigrant, are they liable
for Philippine tax here for their income abroad?
If they renting out their house here to someone else because
they are living abroad, is he liable for any form of tax in the
Philippines?
The property is till within the Philippine territory, therefore
it is liable for real property tax, because in situs of taxation,
you will learn later on follow where ever the property is
located.
Since the property is located in the Philippines, therefore the
property tax is due on the property.
At the same time, since the activity of renting it out is still
also within the Philippines, it is liable also for income tax.

What is not liable for income tax?
It is the income abroad.
He worked abroad therefore the activity was performed
abroad. It is not within jurisdiction of the Philippines.

This is one of the difficult part of income taxation;
determining whether a particular income, property or
activity is subject to tax or not.
We sill discuss more of that within me reach situs of
taxation.

We dont really have to discuss jurisdiction between Cebu
tax and Manila, because we are actually centralized insofar
as income taxation is concerned whether it be the revenue
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district of Cebu or Manila. Still it goes back to the central
government which we call for tax purposes, the BIR and
Dept of Finance.

Of course, the exercising authority for taxation, we have
learned that is the LAWMAKING BODY or CONGRESS or
sanggunian for the local levels.

And finally, the last characteristic of taxes, it is LEVIED FOR
PUBLIC PURPOSE

If a tax law benefits a particular person, will it make the law
invalid?
When you say public purpose, what comes to mind is that it
is for the common good of the people.
What we will have to look into to say if it is for public
purpose or not, does it violate the inherent limitations
imposed on the power of taxation
Is that you will have to know whether the general purpose
of the law is for public purpose.
If at any point, there is an incidental benefit granted to a
particular person or individual, so long as the general
purpose of the law is still for public purpose, it does not
make the law invalid.

But on the other hand, if what is incidental is only for the
benefit of the common good, with the major benefit is
directed to a particular group of individuals at enterprise,
that makes the law unconstitutional or invalid.

So you cannot expect at all times when you say for public
purpose that it is strictly public.

At what point in the enforcement of the law and the usage of
public funds derived from taxation, it may be directed
incidentally to some particular activities/enterprises or
individuals.

So to make a tax vaid:
It must have a public purpose;
It must be uniform as applied to all individuals situated in
the same circumstance.
Exercised within the jurisdiction of the taxing authority and;
the application, assessment or collection of the taxes must
be in accordance with the due process clause; and
it must never infringe any of the limitations whether
inherent or constitutional.

You cannot say without considering the limitations whether
the tax is valid or not.
At all time, you consult with the limitations whether it has
been violates or not.
And there are many various limitations. We identify 5
inherent limitations, more many constitutional limitations,
more that 12 whether it is directly mentioned in the
constitution or indirectly mentioned.



Now lets go to the CLASSIFICATION OF TAXES
We already discussed as to subject matter of taxation.
Lets go to classifying taxes ACCORDING TO THE BURDEN OF
TAXATION.

We have direct taxes or indirect taxes.
So youre talking of direct taxes as only one person while
individual taxes you have at least 2 persons.

The DIRECT tax is a tax demandable against a person who
actually shouldering the burden of tax.

While INDIRECT tax is a tax demandable froma person who
can shift the burden of taxes to another person.

Thats why its indirect or direct, because the one who is
liable for direct taxes cannot look into any other person to
whom he can pass on the liability.

An example of a direct tax would be estate taxes are not
the liability of the decedents, because when a person dies,
he loses his personality as far as taxation is concerned.
The heirs are also not liable for inheritance taxes.
The liability on the estate taxes falls upon the estate left by
the decedent.

When an estate or a set of properties are left by the decedent
that estate creates its own personality for taxation purposes.
That estate may even be liable for income taxes if the
property left earns income during the settlement period.

Example if its a set of apartment building which can be
rented out and earns income prior to distribution to the
heirs, that estate will be liable for income tax as long as it is
not yet distributed to the heirs.

What do you call a person who is liable for income tax under
the law?
For purpose of distinguishing a person who is liable fro
direct or indirect tax, we call that person a STATUTORY TAX
PAYER.

For statutory tax payers are the taxpayers on whom the BIR
or the tax authorities will collect the taxes from.

Whether we convene ourselves on direct taxes or indirect
taxes, even if there is an unpaid direct tax or indirect tax, it is
always the statutory tax payer who will be liable to the
government, because there is a need to identify who the
government will run after.
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So in the law, it is provided there that a person is liable for
that person is a statutory tax payer.



One who sells, barters, exchanges goods or properties is
liable for VAT. That one individual is the statutory tax payer.

In the first classification, the direct tax, the statutory tax
payer himself is the one burdened with paying the tax and
shoulders it.

So if B engages himself in a particular profession such as
practicing law, the statutory tax payer is the one liable for
the tax in the income earned.

But what about indirect taxes?
Is the statutory tax payer the one burdened to pay taxes.

VAT is an indirect tax.

Under the law, you have given the example income tax and
VAT.
Income tax is a direct tax because whoever earns income
under the law is liable to pay the tax directly to the
government.

Is the person, who we call a statutory tax payer found under
sec 27 and 24 of tour tax code, is he allowed to shift on the
income tax collectible by the government to another
person?
No.

What happens in income taxation as a direct tax?
Whenever a statutory tax payer sells goods or engages in the
protection, any income that he earns, he is liable for the tax
to the government directly.

But in indirect taxation, example VAT, sec 105 says that one
who sells, barters, or exchanges his properties or services to
another is liable for 12% VAT.

That statutory tax payer is that person who sells.
But VAT is an indirect tax because there is that shifting of
burden.
The seller of a VATABLE goods or services will shift on the
burden to another person.

Ex: You are a consumer; you purchase gasoline from the
station.
Whatever you paid for for the gasoline station, it is already
imputed of the 12% VAT.

What only the statutory tax payer does is to remit the 12%
collected from the consumer to the government.
This is a mere conduct between the government and the
consumer.


The consumer is not actually paying for taxes. What the
consumer did is simply consider the VAT as part of its cost
our purchase price.

But is in case that s statutory tax payer fails to pass on the
VAT to the consumer, who is liable to the government?
Still the statutory tax payer, because in all cases, the
government only runs after these persons.

Direct tax, no shifting of burden. While indirect taxes the
burden of taxes can be shifter to one person or as can be
shifted to one person or as many as 10 persons down the
line.

At this point, we classify taxes according to subject matter
and according to who bears the burden.

Let me insert to you a topic when the general rule is, taxes
are personal to every taxpayer, may it be personal tax,
property tax or excise tax.

What I mean to say is that, taxes are the personal liabilities of
whoever the owner of that property is, the user of the
property or the one who earns the income .

It cannot be shifted on especially if ____.
For example, corporation has a separate juridical personality.
In case the corporation fails to pay its taxes, can the
government run after the persons or stockholders owing the
corporation?
As a rule, no.

Estate, is the estate fails to pay the taxes, as a rule, can the
government collect from the heirs?
Because it is the personal liability of the estate.

There are certain exceptions of course life blood doctrine
again.
If the estate distributes the property to the heirs without
paying estate tax, who is liable for taxes?
Of course the heirs because theres no more estate to speak
of.

If the corporation dissolves without paying the taxes, who are
liable?
The stockholders because they received the property and
there is no more corporation to speak of.

Taxation

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So these are only exceptions to the rule. But generally, there
is always that 1 person against who in the government will
collect the tax.

Taxes can be classifies to DETERMINATION OF THE AMOUNT
specific or ad valorem

Excise taxes in more cases are specific taxes because they are
imposed on the number of cigarettes, tax, etc, bottles of
wines.

When we say specific taxes, its regardless of the value of
goods. Its based on the numbers, your standard of weight,
measurement, etc.

When we say ad valorem taxes, these are taxes imposed and
very much dependent on the value of the goods of
properties that is in issue.

Is Real Property Tax a specific tax or an ad valorem tax?
Real Property Taxes are ad valorem taxes because it is a tax
given at a fixed percentage. And it is imposed on the
property with different values.

It is a tax very dependent on the assessed value of real
properties.

You tax liability for your real property tax maybe low because
the value of your property may also be low.

There are many ad valorem taxes because what we have in
the tax code is more on rates rather than fixed amounts.

As for the PURPOSE, we have said that as for taxation, has the
major purpose of raising revenue for the general purpose
while the secondary purpose is for regulation purposes.

As for the SCOPE or AUTHORITY of who impose the tax, you
know that there is the BIR which is national in scope,
although the power is delegated to the different regions,
they are to make the tax collection efficient.

We have another imposing authority for taxes, which is the
municipal level or the LGUs.

Lets go to the classification of taxes according to rates or
GRADUATION.

We said before last meeting that it is congress who has the
exclusive power of determining the whether to impose a tax
based on the rate or a tax giving a fixed amount.

Now lets go to rates. What are the three classification of
taxes according to rates? Proportional, Progressive and
Regressive.

In progressive taxes, rates increases while your income
increases. Example would be the income taxes on individual
tax payers, found in sec24A of government tax code.

Income tax rates starts from 5% up to 32% from your first P1
income to more than 500,000.

If based on the ability to pay principle, the more income you
learn, the more taxes you should be liable for.

As you have said, the regressive taxes the rates increases as
your income decreases. There are no regressive taxes in the
Philippines. What we only have are progressive taxes
illustrated by income taxes applicable to individual
taxpayers.

Estate taxes are also progressive of 5% to 20%
Donors taxes are also progressive because of the value of
your donation increase, the tax rate increase from 2% to
15%.

As provided in the constitution, although it is not mandatory,
it is only a directive that the Philippines develop a
progressive system of taxation.

The constitution does not say do not develop a regressive
tax system.

Having progressive taxes and regressive taxes is not the same
as progressive system of taxation and regressive system of
taxation.
These are taxes lang.

But what about progressive system of taxation?
You will have a progressive system of taxation if we have
more direct taxes than indirect taxes.
You will have a regressive system of taxation if we have
more indirect taxes than direct taxes.

Does the constitution prohibit the institution of indirect
taxes?
No. VAT would have been declared as unconstitutional.

In ABACADA case, their recent case in the VAT, on the issue
on it being unconstitutional, SC upheld its validity.

What comes to mind if you say proportional?
For taxation purpose, proportional tax is a fixed rate of tax.
It is a fixed percentage applied into whatever value
property/income is concerned.

This is one (progressive), there is a movement of rates and
movement of income.

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In proportional tax, you have a flat rate of tax to the varying
movements of property, subjects or objects of taxation.

Ex: Real Property Tax. It is a proportional tax. For example in
Cebu City. A PRT is a 2% plus special education fund of 1%,
for a total of 3%.

Now theres a flat rate of 3%. Its applied on the real property
valued at P1 and on real property valued at 1billion. So it
remains fixed, whatever the value of the real property is.

Income tax is not a proportional tax for individuals. But it is a
proportional tax for the income of juridical persons because
it is 30% of income.

VAT is also a proportional tax. It is 12% whatever is the value
of the product/property/service being sold.

There are arguments that VAT is a regressive tax.
It is the argument that VAT should be declared
unconstitutional because it is a regressive tax that we
discussed before, because the burden of VAT increases as
the income decreases.

SC said that VAT is till constitutional because it is not a
regressive tax because the poor need not spend on
purchases which are not vatable. There are lots of items
which are not vat-able in nature available to low income
earners.

Ex: Items which are in its original state, agricultural or marine
products, those that you can purchase from the wet market.

Second, the condition does not prohibit indirect taxes, which
is value added tax.

Third, indirect taxes like sales taxes and VAT has long been in
the system of taxation in the Philippines which is not high
time for it to be declared unconstitutional.

What is LICENSE?
How are they the same and different from taxes?
As to the purpose, taxes are for revenue, license are for
regulation.
As to the amount that can be collected, taxes are unlimited,
license fees are limited to cover the amount or cost of the
regulation unless it is also used for revenue raising purposes.

What about toll fees?
Toll fees are demand of proprietorship. They are collections
made to recover the cost of the infrastructure of a
government or even a private project.

What the government does is actually give the project to a
private enterprise or foreign government because our
government cannot afford the development.

Let them collect the toll fee until everything is recovered.
And if A BOT agreement is entered into, after building and
operation is recovered, the property is transferred to the
government.

Not everyone is liable for the toll fees.
Once we study local government taxation, we will know that
portman deliver mails and armed forces of the Philippines is
exempted from paying toll fees. Also disabled persons.

Compromise Penalties
For tax purpose, will have what we call tax penalities
collected by the BIR in lieu of the criminal procreation for
the violation of the tax law.

Can a person be imposed for non-payment of taxes?
Yes.
Although the tax law is not penal in nature, it provides there
for penal sanctions including imprisonment and payment of
fine for violation of the tax law.
OW, no penalty, no one will be forced to pay the taxes.

In some cases, non filing of tax return would not equipped to
imprisonment but simply the payment of compromise
penalty.

Ex.if you had not filed your ITR on the belief that you are not
liable for income tax since you were operating at a lose.

If found out you will be liable not for surcharge because you
have no income tax liability, not for interest because there is
no basis for which to complete the interest. But for mere
non filing of return, its a violation already. You will be
offered and pay compromise penalty in lieu of criminal
procreation.

That is entirely different from taxes. Taxes are civil liabilities
from the violation of the tax law.

Compromise penalty is an offer from the government to
settle your violation.

Can you be forced to pay compromise penalty by the
government?
Compromise penalty cannot be enforced upon an individual.
Its only an offer coming form the government.
But if you fail to pay the compromise penalty, the only
recourse of the government is to proceed with the
procreation,

Special Assessment
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Special Assessment is some kind of real property tax, no the
basic type. But it is a special type of RPT which we
interchangeably call as the special levy,

It is a tax directed specifically on a parcel of land which has
been benefited by government project on improvement.

So in example given, if you have a parcel of land, then a
government road is constructed, making your parcel of land
accessible. It has been benefited a government
project/improvement.


That makes you land more sellable than before. It becomes
accessible to the public.

Therefore, as part of the power of taxation, LGU are
empowered to impose special assessment.

It is not a personal tax but a property tax directed against a
parcel of land itself and it is collected every time a project
benefits the property.

It is unlike a real property tax wherein you have a real
property and every Jan 1, you liability accrues as long as you
own that property.

But as for special levy only be liable if there is a public
improvement and you liability is not automatic.

There has to be a special ordinance imposing such liability
and due process must be given to the land owners for him to
be heard before an imposition can be made.

So its not a regular tax. Its not an imposition on a group of
people but only to a selected new whose property has been
benefited by the government project.

The government can actually collection much as 60% of the
cost of the project including the value of the parcel of land.

From whom will they collect?
They can collect from all those who have been benefited.
So if there are 20 parcels of land, thats 20 individuals will be
liable for special assessment or special levy.

Its not a personal liability unlike the tax. It is imposed on the
parcel of land unlike the tax which can be imposed not only
on property but also person or excise (activity, profession,
privileges).

DEBT
How so you distinguish debt from taxes?
Insofar as interest is concerned, is interest imposable on debt
and on tax?
Interest insofar as obligations are concerned are imposable
against the other party if it is still stipulated, as provided in
NCC: no interest shall be collected without being stipulated.

And insofar as taxation is concerned, as a rule you are only
required to pay your basic tax liability. Your interest can only
come in as a penalty even if it is not written because theres
no contract at all.

The enactment of the law is sufficient to enforce you to pay.

Interest comes in as a penalty for the taxes that are paid late,
taxes that are deficient, delinquent.

And insofar as prescriptive periods are concerned, tax law is a
special law. Therefore we follow whatever prescriptive
period that is provided in the tax code.

Ex. In the tax code, you are only given 3 years to make an
assessment.
But there are different period of prescription provided in the
NCC 6 years, 10 yrs.
Only when there is no provision of the tax code we look into
the provision in NCC.

Can taxes be subject of setoff?
Generally, no.

Can you offer the government your pending claim for refunds
against your pending tax liabilities?
Subsidy

What is a subsidy?
Is subsidy a revenue?
Yes.
Is revenue a tax?
Revenue is better that tax.
What comprises revenues?
Revenue is actually broader than taxes and subsidy, because
the revenue of the government comprises 3 major items,
the
1. Tax collection
2. Subsidy
3. Borrowing form the world bank

Subsidy is an aid from foreign government.

Internal Revenues are simply taxes found in internal revenue
code.
Those are the taxes collectible by BIR.
Customs Duties and Tariffs are collected by Bureau of
Customs

Customs Duties and Tariffs are interchangeable word or they
are synonymous.
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When you notarize, you observe tariff of rates on how much
to collect.

But for purpose of taxation, tariff is interchangeable used
with customs duties which may be special or regular
customs duties collectible from every importation coming
into the Philippines.

Going back to the subject if tax can subject to set off or
compensation, the GR is that it is not offsettable. It cannot
be offset by the government for the tax payer.

It cannot be compensated for by the liability of one against
the receivable of another.
Since there must be a creditor-debtor relationship

Do we have a creditor-debtor relationship but the
government and tax payer?
No. there was no contract.

Tax liabilities are enforced payments enforced by tax law.
Theres no D-C relationship and the collection of tax is a
necessity of the government.

Thats the reason why no offsetting is allowed. Whenever the
government has a collectible against the tax payer, the tax
payer cannot offer the pay his pending claim on refund of
taxes to the government.

Ex: If the tax payer filed to claim a VAT refund and he has a
pending assessment of deficient tax liabilities of 10m.

Can the tax payer say that they can compensate?
No. Your pending claim for refund is not yet proven.
Although the assessment is done the BIR could not easily
give up the bottle of not collecting the excess amount.

The only exception found is in the Domingo vs Gaslitos case
wherein the government allowed the offsetting for liability
in estate tax, and the unpaid liability for the government
services for the tax payer.

The basic requirement for offsetting if ever this is allowed in
the future is that both items of the government and the
taxpayer , it must be in an amount already bee liquidated
and demandable.

Meaning there is a fixed amount already demandable of one
by the other.
Pending claims for refund are not liquidated amounts.
Theyre not as yet demandable.
Theyre only applications for refund.

Assessments, are they demandable?
Yes.
But is it final?
Not as yet.
Unless SC or any lower court has made it final and executor
and the taxpayer did nothing to appeal the case.

So we require the liquidation and demandability of the
amount before offsetting the taxes and pending claims for
refunds.

Lets go to the limitations of the power to tax.
We have inherent limitations against the power of taxes and
the constitutional limitations.

If when the constitution is removed, therefore we can no
longer find any constitutional limitation against the power to
tax but it does not make the power to tax as without limit,
because we have inherent limitations of the power of
taxation.

What are the 5 inherent limitations?
1. For public purpose
2. Exemption of government agencies
3. International comity
4. Territorial jurisdiction
5. Non-delegation

1. For public purpose
If a tax law is enacted to benefit a particular industry, is it a
valid tax law?
SC has upheld as valid the tax law supporting the sugar
industry of the Philippines, because it will redound to the
benefit of the common good.
Its for the whole industry.

In another case, the congress enacted a law levying P1 for
every sack of fertilizers.

Finds will go to rehabilitate a fertilizer company which is a
private corporation.
Is the tax law valid?
No.

These said in the recent case that the law enacted by the
congress levying a tax or fee on every fertilizer produced in
order to rehabilitate the private fertilizer company is invalid
because the objective is to benefit the particular private
company.
Its not the total industry of the fertilizer.

Unlike the one supporting the sugar industry. Its the entire
sugar industry that was supported by the power of taxation
that is for the common good.

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What you have to look into is whether at the time of the
enactment of the law, the purpose intended by congress is
for public purpose.

It is not at the time of the implementation of the law wherein
public purpose would really matter for the validation or
invalidation of the law.

It at the point of enactment, it is already announced as public
purpose, then by all means.
Remember that the wisdom of determining whether its for
public purpose belongs exclusively to congress.


Congress determines the motive, the wisdom, behind every
law.

The necessity of the law that needs to be enacted.
At the time the taxes has been collected and it is supposed to
be implemented and the funds had been diverted to other
purposes, what is you remedy?
Tax payers suit.
Public money can only be spent for public purpose, the
legislative or legislature has the power to appropriate
revenues.

All you have to do is to look into the general purpose of the
law. Whenever theres incidental benefit, as long as its
incidental, it does not totally invalidate the law.

2. Exemption of Government Agencies
Why are they exempted?
So as a ruler, we say government is exempted from taxes
The local government units which are the political
subdivision in national government (municipalities and
barangays) are as well exempt from taxes.

What is the issue here is what about government agencies
and government-owned and controlled corporation?
Lets go to the first, Government agencies, are they totally
exempt from taxes?
The reason why the government is not keen on taxing
government agency performing governmental function is
that they will be taxing it sell.
The reason why its collecting from the people is collecting
of revenue.
If it takes itself its like transferring money from one pocket
to another.
Its superfluous, it makes it circuitry and increases the
avenue for corruption.

Whenever we remove money, thats that space when you
allow people to handle the funds. So as long as government
agencies are performing governmental functions, its
exempted from taxation.

All those performing proprietary functions, they are taxable.

How about GOCCs, are these exempt from taxes as well?
They are exempted?

3. International Comity

International comity is actually based on the sovereign
equality of all states. And we already know that every state
is immune from it.



If we require them to pay taxes and they do not pay, what
can we do about it?
Nothing

So if simply based on the sovereign equality of state in
immunity from suit in these states the we don not need to
impose taxes on these state or on dignitaries representing
such country or state.

Besides, every counsel or ambassador going out to represent
the Philippines is also not taxable abroad, whether they
bringing some things or not outside or inside the territory is
not subject to tax.

It has been part of customs, usage and tradition as well.

Going back to GOCC being exempted from tax
GOCC are just like any corporation that we can make as
private entities.
So as a rule GOCCs are taxed.
The same way that all other private corporations are taxed.

As she has mentioned,
Unless the charter creating the GOCC provides
otherwise/provides for exemption
We wont study every chapter of every GOCC

So we go by the GK that they are taxable
But since the tax code explicitly provides for exemption to
GOCCs
1. GSIS
2. SSS
3. PhilHealth
4. PCSO
They are the only for exempt as provided in the tax code.
If you look into PAGCOR, thats the old book, that provision
has been revised to remove PAGCPR out of the exemption
last 2005 RA9337.

So there are only four exempt provided under the tax code
plus all other exempt under their own charters.
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4 Territorial Jurisdiction

Ex: Mr A is a nonresident alien who visited the Philippines. He
was able to acquire a condo unit.
Is this allowed under the constitution?
Can non resident alien/foreigner acquire condominium units.

Yes, so long as the entire building still satisfies the 60-40
relationship with Filipino individuals and foreign individuals.
Thats what we call lateral condominium is also now allowed.



If the foreigner died, will the property left in the Philippines
be liable for property tax?
Yes, notwithstanding that the estate law provide that the
nonresident aliens will be taxable abroad.

There is that rate resident so long as their property is in the
Philippines, it is subject to estate tax here.

The reason there actually although the law does not provide
why we tax properties who is not a citizen of the Philippines
and not even a resident is that that property is receiving
some form of protection form the government.

It follows the simple rule that wherever property is located, it
will be subjected to tax by the taxing authority who has
jurisdiction over it.

Although the problem in tax law is that we follow the more
compensate situs of taxation.

Territorial Jurisdiction will be discussed more once we reach
situs of taxation.


5. Non Delegation

The reason why no delegation is not allowed is because
taxation is legislative in character, but there exceptions.

Going back to the president having the delegated power,
does it really make the president enact a law?
The constitution provides that congress may authorize the
president but by law.
It means to say that the constitution itself is not self
executor as to allow the president to enact a law involving
customs, duties, and tariff rates.

Congress needs to lay down standards and parameters which
the president has to follow.

Has that constitutional provision already been translated into
a law?
Yes.
OW if no law has been made by congress, the president
cannot exercise the flexible tariff clause of the constitution.

The tariff and customs code- wherein president has the
authority upon neda recommendation to adjust existing
protective tariff rates, set quotes, remove import and export
tariff bond.

This actually concerns only the customs duties and tariff.



Why is the president delegated of such power but only of
course, national security general welfare..etc?

Because drafting and enacting of law by congress would take
a long time.
While the president need not confirm with anyone.
Its for expediency, to protect the national economy.

Importations of foreign goods which are detrimental to the
local industry in the Philippines may be protected by the
president upon the issuing of the executive order raising
tariff rates.

Ex: theres a competition between different countries insofar
as a particular products is concerned, we acquire goods
made from China. And its entering the Philippines to the
detriment of the local industry.
For this local product to compete with those coming from
abroad that is priced 10% less, the government can increase
the customs duties.
If the president will wait, the product will be out of date.

Second exception to the non delegation rule LGUs
Is it self executing?
No.
The provision in the constitution granting autonomy to LGU
its own power to raise revenues, fees and charges is not self
executing. It also depends, just like the flexible tariff clause
on the existence of a law that has been enacted in congress.
That is why we have the LGC of 1991 which grants theLGUs
the power to raise its own revenues.

LGUs are mere creations of congress. If congress takes out
LGUs then we dont have LGUs. What will be left is a
centralized government.
Would that mean that the power to tax by LGUs are not
inherent?
Yes.
The power to tax is only inherent insofar as the national
government is concerned. But the LGUs are mere creatures
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of congress does not have that inherent power to tax nor
does it have the inherent power to grant exemption from
taxes.
Always it depends its existence on the law enacted by
congress.

That is why all LGU, when it tries to raise revenues thru an
ordinance, that ordinance must follow the bounds of the law
LGC.

Its as if therefore that it is the congress providing for the
guidelines and parameters of the ordinances. They are still
bound by the national government.


And the third exemption to the non delegation,
Administrative agencies.

At the end of every law, it provides for congress, saying that
the administrative agencies of the government will be
granting rules and regulations to implement and execute the
law.

Therefore as part of the three exceptions to the
nondelegation, in some form congress has delegated the
power to execute the law. Its not a full abdication of the
right but simply making everything efficient, let the
executive branch of the government collect the taxes.

It means that the third exception simply means that it is the
executive branch who has the power to grant rules and
revenue regulations.
And since we call revenue regulations as part of the law of
the land, it has somewhat said to be a delegated power.

Were done with the inherent limitations.
Lets go to constitutional limitations which directly involves
taxation or where you can see the word tax.

Since we have mentioned PROGRESSIVE SYSTEM OF
TAXATION, we might as well discuss it with UNIFORMITY
AND EQUITY OF TAXATION.

What do you mean by uniformity in taxation?
(draw schedule of individual taxpayers rate)
Those belonging in the same class shall be taxed at the same
rate.
Those belonging to the lowest bracket shall be taxed at 5%.
That is uniformity of taxation.
For every bracket that is uniformity of taxation.

How will you differentiate this with equity in taxation?
The taxation is equitable when the burden of tax is more on
those who are better to pay the tax. So the different rates
for every bracket shows equity in taxation. Tax rates
increases as their income increases as well.

Can those belonging to the 500k bracket say that this is
violative of the constitution because they are not taxed at
the same rate?
No.

When can the government really say that it does not violate
the constitution in making distinction (for every bracket of
income earner)? Why cant the government say that all
individuals will be subject to 32% tax in the same manner
that all corporations are subject to flat rate of 32% tax?
Theres substantial distinction.
Distinctions are allowed so long as distinctions are
substantial.
Progressive income of taxation, is it uniformity or equity of
taxation?
Equitability follows more the progressive system of taxation.
Not uniformity.

Uniformity is taxing those belonging to the same class with
the same rates. It does not necessarily follow ability to pay
principle. But nonetheless, its one of the constitutional
limitation that needs to be followed in drafting the tax law.

Lets go to the third constitutional limitation
EXEMPTION OF RELIGIOUS, CHARITABLE, EDUCATIONAL
ENTITIES, NONPROFIT CEMETERIES AND CHURCHES FROM
REAL PROPERTY TAXATION

What is that basic requirement to make the property exempt
from tax?
If it is actually, directly and exclusively used.

What again are the entities covered?
Charitable
Religious
Educational
Non profit associations

To what tax are they exempt?
Property tax.
Its very clear that they are not exempt from income tax.
They are only exempt from real property tax.

But would all their lands, buildings and improvement be
exempt from real property tax?
Only those actually, directly and exclusively used.

All real properties as a rule are subject to RPT.

You entered into a contract of lease with a religious
institution on your parcel of land. Will this be subject to RPT
now that it is in the hands of another entity?
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No. if it is actually, directly and exclusively used by them.
Like building a church.

Lets say that it is the educational institution that rented out
your land. The educational institution built a dormitory. Is
this subject to RPT?
No. Because it is actually, directly and exclusively used for
educational purposes.

If the educational institution is a profit institution, will this
property be taxed?
No.
The constitutional institution does not provide that it be a
non stock non profit.
All educational institution is exempt from RPT if ADE used.
NS-NP requirement is only in income tax exemption.
July 3, 2010

We were able to discuss the constitutional limitations.
The uniformity and equity of taxation,
Exemption of religious, charitable and educational institution.
So what about it?

Real Property Tax exemption
What do you mean by proprietary?
Say for an example on a parcel of land, there stands a church
and part of which is used as a parking space.
If there is a parking fee collected from the practitioners,
Would that portion of the land be subject to real property
tax?
The conditions under the constitutions are:
1. It must wither be religious, charible, educational
institution
2. Real property
3. Its use must be actually directly and exclusively used for
the purpose whether its charitable, religious, or educational
4. Exemption is need for real property taxes.

Which of those conditions is provided if a portion is used for
parking space but parking space is collected?
What do you mean exclusively used?
Would that mean for the sole purpose of religious,
charitable, and educational institution
Because what comes to mind is that it is the religious
activity.

But if its exclusively, its not solely but PRIMARY USED for
that purpose. IT ADMITS OF INCIDENTAL ACTIVITY.

So if its a religious institution, you will expect that there will
be a convent nearby.
It is incidental supporting the entire function of the religious
institution.
So therefore it is still exempt from RPT.

When it comes to parking spaces, yes it is still exempted
from RPT for making things efficient/effective for all
religious activities.

Sometimes the collection of parking fees so long as its not
intended for profits, it is till considered as incidental to
religious activities, for parishioners.

But if its open for the public at all times even without
religious activities and still collect parking fess, then it will
now be liable for RPT.

So exclusively it not solely but primarily.



If a portion of San Carlos will be leased out to Mc Donalds,
will it be exempt from RPT even if its students who
patronize the establishment?
First of all, education institutions are granted RPT
exemption.

The exemption is not based on ownership by this institution
but based on the use of the institution for such purpose.

Now if a portion of that parcel of land is not utilized but not
any of these three institution and the purpose is not for any
of the three purposes then it will not be covered by the
exemption.

If it is happens that the parcel of land is part of the entire
title of that parcel of land, then that computation is RPT
would actually be prorate as to the extent of the use of the
property.


Lets go to the other exemption on the constitution from tax
1. Income tax
2. Property tax
3. Donors tax

All Revenues and assets of a non stock, non profit educational
institution, actually, directly and exclusively used for their
purpose are exempt from taxation.

You say revenues are exempted from taxation, you are
referring to income taxation. It also inclused VAT>

Are you paying VAT in your tuition fees?
Its a revenue of the school, but its not subject to
VAT/income tax.

Assets are exempt from RPT

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When you say assets from the provision of the constitution
vis a vis the assets in the exemption granted to religious,
charitable, educational institution, how similar or different
are they?
We do not need to say again that the real properties of the
school is exempted from RPT.
Why?
The previous provision of the constitution says it all.
That all real properties of educational institution whether
proprietary or non stick, non profit are exempted form tax.

When it says revenue and assets, it means to say all assets
not only real properties, it includes personal properties of
non-stock, non-profile educational institutions as being
exempt from taxes.


What is expanded by the tax code or NIRC is insofar as
income is concerned, because sec 30 of your tax code
provide that all income by an educational institution,
whether non-stick, non-profit or proprietary are taxable
from income tax if it is derived from a real or personal
property.
So that is somehow in conflict with the constitution.

The constitution is all in company to say that revenues of
non-stock, non-profit are exempted from income tax.

But the tax code provide that if an educational institution
derives income from a real property or personal property
regardless of when the proceeds will be used whether for
education purposes or not, it is subject to income taxation.

What is followed by BIR is of course is the tax code it is
lifeblood doctrine, because it has been reconciled to mean
that educational institution should only derive revenues
from educational activities such as tuition fees, educational
activities such as tuition fees, educational fees, library fees,
etc.

But the use of real/personal properties for lease for example,
if it rents out the space to Mc Donalds, thats income, thats
revenue to the school, but is it really part of the educational
activity of the school?
No.

Is it subject to income tax, the proceeds from the rent?
Yes.

So id MC Donalds is built in the land of USC, we say it is
subject to real property tax.
Why?
Because the parcel of land to which the property is located is
no directly, actually, and exclusively used for school
purposes, even if it caters to students of USC.
Subject to RPT.
To revenues of the school.

Whos deriving revenues here?
McDonalds is deriving revenues from the sale.
USC is during income from the leasing activities.

Is it subject to income tax on the part of the USC?
Constitution says that all revenues of non-stock, non-profit
educational institution are exempted from income tax.

Would it hold true to this example?
Going back to the constitution, although it is encompassing, it
does not mean that its an arbitrary grant of exemption.

What is exempted as revenues of the school is revenues
derived if it is actually, directly or exclusively.
So it does not mean use of the proceeds but it also means
that there is an income derived from educational activities.

Of course what you pay to the school is exempted from
income tax.

But what about income derived from Mc Donalds or other
income derived from the campus which is not operated by
the school itself?
If its not in line with educational activity primarily, or
incidentally, then it will not be exempted from income tax.

The constitution is a general provision.
It has been streamlined by the tax code so as to say sec30 it
enumerates entities which are non-profit entities like non-
profit cemeteries, business commerce, cooperatives.

The constitution provides for exemption
But towards the last paragraph of sec30
Its a very important provision.
It says there that notwithstanding, all income derived by
those enumerated exempt entities are subject to income
tax,
1. If the income was derived from real property
- Was the real property used?
Yes
- Was there income?
Yes
2. Income from the use of property
- If San Carlos leased out computer equipments etc, it will
be subject to income tax.
- If its incidental, if only students are using it, its
exempted.
3. All other activities conducted for profit.

These are 3 items not covered by exemption of income tax
under sec30.

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And the last phrase was regardless of how the proceeds will
be utilized.
Whether for educational purposes or not

So even if USC would say that proceeds of thses rentals would
be used to further educational purposes, it will not covered
by the exemption.
Still subject to income tax.
You have to separate the educational activities of this school
primarily and incidentally
And those that are not totally related to school activities.

So how do you make USC exempt from the proceeds of the
use of this property?
Is there any exemption? Can you think of other ways?
If its the school itself thats operating the canteen and it is
located within the campus, it is exempted.

If it is operated within the school, but not operated by USC, it
is not exempted.

Basta, there are 2 requirements:
1. Operated by the school itself;
2. Within the campus;
(3) incidental to the educational purpose.

What I was trying to say early on,
Can San Carlos escape the payment of income taxes here?
As a rule, no.

But is you derive another plan, if you dont enter into a lease
contract, theres no rent.
Theres no income from the use of personal or real property.

So no income from lease to speak of, theres no tax to pay.

But if you require that establishment to simply donate
instead of paying rents.
Subject to income tax?
No, not an income tax
Subject to donors tax?
No, it is not the donor.

Simple rather of tax avoidance

Granting of loans to teachers is exempted sometimes border
line

Just like in schools asking for exemptions on the interest
earning from bank deposits.

Supposedly, if you look into it, the school will invest their
funds. It will earn interest.

Is interest income from bank deposits subject to tax?
Ordinarily, yes.

Non stock, non profit schools sought for an exemption under
the constitution asking for exemption from the 20% final
with holding tax on the condition that they will use the
proceeds for educational purposes.

Opinion was issued by dept of finance.
Conditions:
1. They were able to submit FS (financial statements)
2. On the condition that they will use it for educational
purposes.
3. A statement on how the proceeds were used

Its justified, because what else will the school do with its
funds?
It does not violate also the last provision of sec30.

Its not income from use of personal property.
Its not income from use of real property.
Its not an activity to earn profit.

Investing is not an activity.

What the constitution provides is exemption from income tax
1. Real property tax
2. Customs duties and
3. Donors tax

Were done with income tax and real property tax of
education institutions.

Customs duties
What about customs duties?
Why would the school be granted exemption from customs
duties?
Scholl equipments, school buses used for school purpose.
If it is directly for educational purpose then the school is not
liable for customs duties
And donors taxes

If the school donates its properties, it will not be liable for
donors taxes.

How about schools that are not non stock non profit on
proprietary educational institution?

What are proprietary educational institution?
For profit UC
Proprietary educational institutions are taxable? Yes, income
tax.
The difference is in income tax
All schools are exempt form RPT as long as its used ADE.

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But if it is a proprietary educational institution, it is not
exempted from income tax, even on the tuition fees that
they earn.

The constitution, although they would like to promote that,
There is a provision actually that congress can grant
exemption to schools other than non-stock, non-profit.

Have they been granted by congress?
The tax code of sec27B on domestic corporations,
Proprietary educational institutions are partially exempted
from income tax.

Of course, its not the exact line that you will read in the
book.
Because the book says,
Proprietary education institutions are subject to 10% tax on
the income derived from education activities.

Why did I say between the normal rate of 30% imposed on all
corporations and entities is not applicable to proprietary
educational institutions.
They are exempted form income tax partly.

Corporations class are defined to include partnerships and
other entities whether for profit or not.

Di ba there are only 3 types of organizations for business
1. Corporation
2. Partnership
3. Sale proprietorship


So when you say corporations insofar as tax code is
concerned, its the first 2.

It includes non stock, non profit cemeteries, corporations
under sec7 of tax code are subject to 30%.

Non stock non profit is subject to 10
Proprietary educ inst is subject 10%

So if you look at it, non stock non profit is totally exempted
form 30%

PEI is exempted partially up to 20% because it is liable only of
10%

So the easiest way get rick is to build a school.
This partial exemption; do you really have to prove that you
as a school?
What registration do you need?
What accreditation from what agencies?
DECS, CHED etc.

You cannot simply make an educational institution and seek
or claim for exemption.
You have to be formally registered as an educational
institution.

Just like YMCA, which they are a applying for exemption from
income tax because theyre offering classes.
But SC said its not a registered school but a mere foundation,
etc. therefore no exemption, not even 190% can be granted
to it.

UC, even if subjected to 10%, they are subjected as well to
the predominant test:
The income from other activities must not exceed more than
50% of their total income.

But thats easy to regulate activities.

Ok were done with the four constitutional limitations,
The last two are the two most important provisions.

Concurrence of the majority of the congress with regards the
tax exemption
When you say congress, it consists of both houses, voting
separately.

Does that rule hold true with regards granting tax amnesty?
The difference between tax exemption and tax amnesty is:
Exemption is simply a grant of immunity to a class of persons
or corporations situated within the same class to a tax that
they would have been otherwise been liable to.

So it look forward
You would have been subject to the tax had it not been for
the law granting you an exemption.

On the other hand, amnesty is the intentional overlooking of
the state to collect a tax or penalty otherwise collectible
from the tax payer.

It means to say that its looking backwards.

A tax payer who has violated a tax law, not paying correctly
the amount that they would have been liable.

Its a pardon.
Because of this tax amnesty law, you do not need to pay this
or that.

In tax amnesty, someone is a violator.
In tax exemption, no one has violated a law.
But bottom line, there is no collection of taxes to a certain
extend.

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Since tax exemption law and tax amnesty law has the same
effect to the state; no money going to the coffles of the
state.
They will follow the same rule.

Every time a tax exemption or tax amnesty is granted, it will
need the majority vote of both the house and the senate
voting separately.

All others: amnesty, exemption, remission, condonation etc..
If it involves money not being collected by the government,
it follows the strict majority rules.

The last tax amnesty granted by amnesty was about three
years ago. BIR cannot grant it because a law is necessary.

What BIR can provide is only a regulation implementing the
amnesty law.

The first thing the comes to mind when theres amnesty is
youre forgiven.
But the last tax amnesty law was not like that.
What it totally forgives to violators was the nonpayment of
penalties.

But to certain extent, the have to pay the basic tax that tey
have not paid, or a certain percentage of their income that
the government will determine.

But once youve been given an amnesty,
Youve applied for it and granted.
Youre forgiven of your pact violations

But what is negative about tax amnesty law being enacted, it
only encourage violations.

Its unfair.

But according to SC it does not violate because thers
substantial distinction to those granted amnesty for
violations and to those who have duty fully paid their taxes
before.

Because the issue there was that those who have paid for
year 2004 and those who have not paid and granted tax
amnesty, they are different classes.

SC says there is no duty on the part of the government to
recon those who have actually and correctly paid the taxes.
The reason is to meet the budget of the government.
The government at that point in time needed money.

One of the ways they have identified is to grant amnesty for
part violations because their hands were ___ increasing the
tax rates and enacting another tax.

Another constitutional limitation is that:
Revenue bill must originate from the House of
Representatives
So does that mean to say that the tax law is always
authorized by congressmen?
No
Notice that the BILL must start from the lower house, it
doesnt matter whether it will be passed into law.

Anyway the senate may prepare a substitute bill in
anticipation of what the lower house will submit or pass.
So its for formality lang that it must originate from the
lower house.
But is can be totally overhauled by the senate.

When we say direct constitutional limitations, these are
limitations provided by the constitution which directly
points to the constitution.

Non imprisonment for nonpayment of poll taxes
So you do not simply (not) pay poll taxes if you do not like.
Nonpayment of poll taxes will not resort to imprisonment.
What is the penalty that you will get if you do not pay your
poll tax?
The payment of penalties, surcharges and interest.

You will only be penalized for imprisonment once you cross
the ____ ____ between violation of a civil penalty down to
violation of criminal liability like falsification, estafa etc..

Another limitation is non-impairment of jurisdiction of SC in
tax cases.

What does the constitution provide insofar as the power of
congress to withhold from the courts their jurisdiction?
What court is the congress restricted form withholding or
granting jurisdiction?
SC.

The constitution provides that congress can
change/grant/revise/revoke any jurisdiction insofar as
courts are concerned, except the SC.

The SC jurisdiction is fixed.
Congress cannot change it.
Sc is the final arbiter insofar as tax cases are concerned.
It can review, revise, modify or change (decisive regarding
tax cases).

It can declare the constitutionality or unconstitutionality, of
a tax law.

As to other courts, its ok.
Congress can change it.
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In fact the CTA jurisdiction has been expanded by congress
not so long ago.

In 2004, RA9282, congress expanded the jurisdiction of CTA
and in fact elevated its statue to a collegiate court, equal not
to CP.

Before, decisive of CTA will go to the CA.
Now after the CTS decides, it will go directly to SC.
Why?
Because CTA is composed of justice who are experts of tax
cases.

Constitutional limitations direct are those which directly
points to taxation.

We also have discussed two others.
Remember we have discussed that the president has on the
flexible tariff clause, that the president has the power to
increase, revise existing tariff rates.
Its another constitutional limitation.

As the constitution provision which grants the LGUs the
power to raise sourced of revenues, fees and charges.

Lets go to indirect limitations:
Non deprivation of due process of law
But before a person can question that there is a violation of
the due process clause,
What must be satisfy?
What aspects of the law must be satisfied?
It must satisfy SUBSTANTIVE DUE PROCESS. That the
provisions of the law must not contradict another provisions
of the another law or the constitution.

Another aspect is the PROCEDURAL DUE PROCESS. Its fair
and reasonable methods in the enforcement of the law
itself.

First, there must be compliance of substantive due process
that it is an accordance with the constitution or the law.

Second, it must satisfy procedural due process that there
must be fair and reasonable methods of collecting and
levying the taxes.

That is why if the taxpayer becomes delinquent in paying
taxes and the government through the BIR levied on the
property of the taxpayer.
What procedure must be satisfies, by the government before
the property is disposed of to satisfy the delinquent taxes?
It is easy to determine whether tax law has satisfied
substantive due process.
All we have to look at the law and compare it to the
constitution.
It is contradicted or consistent.

But insofar as collecting the taxes itself it must be fair and
reasonable. No arbitrary, no oppressiveness on how the law
will be enforced.

In our example, if and when the taxpayers become
delinquent and it comes to a point wherein properties will
be levied, of course properties are levied to answer for the
taxes and penalties

How will the government dispose it?
Through a public auction.

But procedural due process requires that disposing an item or
real property in public auction will require a personal notice
to the taxpayer owning the property.
If no personal notice is given, even if there was publication,
the sale would be void.
No personal notice to the real property owner, even if all the
formalities have been complied with is taking without due
process.

EQUAL PROTECTION CLAUSE
How about equal protection clause?
I think we have discussed this in line with one of the direct
limitation.
It is uniformity in taxation.
We said before that congress is allowed to classify subject
matters; persons, property, or transactions. And these
distinctionswill not totally violate uniformity clause or equal
protection clause as provided by the constitution.

But what are the four requirements to make a valid
classification?
1.The distinction must be substantial.
2.Distinction must follow the purpose of the law.
3.
4.

In one case, SC said that an ordinance which has been
enacted which seems to apply only to one person is still
valid if that person is the only who qualifies under the law.

So as long as the ordinance will apply to the persons who
will fall in the same situation as well.
So it doesnt matter if there is only one person taxable now.
So long as that law is not restrictive and it will apply to other
persons similarly situated in the future as well.

Classifications is allowed.

Equal protection clause will be violated if the distinction are
not substantial or distinctions are made even though not
necessary.
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Or it can also be violated when no distinction is made when
classification is required.

And everything falls within the ambit or scope of power in the
enactment of the law.


Other limitation is NON IMPAIREMENT OF CONTRACT
A and B have a contract and there is a law passed by the
congress increasing tax that is applicable to the contract
between A and B. Can the government impair the contract
by increasing the tax rate? Is that a violation already of the
constitution?
If at the point that A and B entered into the contract the tax
rate is 5%, and new law is enacted to raise tax rate to 15%, is
there impairment of contract already?
First thing that you will know is that this prohibition in the
constitution that no contract will be impaired by subsequent
law; is that the contract that we are talking about, as far as
taxation is concerned is the contract entered into by the
government and private person, entity and the person.

Number two, the contract between the contract between
the government and the taxpayer is a contract granting
exemption or any favor to the taxpayer.

The tax contract granting exemption is not the exemption
that you will see in a law.

Diba when you see a law granting exemption from tax
Ex. Schools that are not non profit are liable for 10%, so that
means to say that they are granted exemption of 20%.
If that 20% is taken out by the government, that is allowed.
That is because UC is not into a private contract with the
government.

This provision will apply if there is a private contract
between them; not by a generic law or generic statute
applicable to anyone.

And the contract granting exemption; it must be onerous as
well.
Government must have received something in return for
granting exemptions in order for the limitations to apply.

Any subsequent law taking away the exemption will be
violative of the constitutional limitation.
No law shall be passed taking away the exemption granted
to a specified person by the government in a contract,
because it will impair the contract.

What is impairment?
When rights and obligations of both parties are changed
without acquiescence or agreement.

So if the exemption from tax is taken out by the law, it will
violative of the limitation.
Because as we said before when we tried to distinguish the
three powers of the government, the power of taxation is
not supreme over the non impairment prohibition.

What is beyond the non impairment clause is police power
because its for general welfare, common good, and for
purposes of regulation.
1.19.52

So power of tax cannot prevail. No new law can withhold
exemption unless it is an agreement between parties.

Does this apply to as well to franchises granted by the
government to the taxpayer?
No. franchises are specifically provided by the constitution
as withdrawable privilege. It may be taken at any time by
the government.
After break.

Net limitation, have NONIMPAIRMENT OF RELIGIOUS
FREEDOM
The separation of church and state provides that there should
be no infringement of religious freedom.
No law respecting religious establishment, no law
prohibiting the establishment of any religion.

What is not allowed to be taxed insofar as religion is
concerned or any of its activities, items, material, etc.?
How about the distribution of bibles, are these subject to
tax?
There must be free exercise of religion including free
exercise of religious activity without being hampered by
unnecessary taxes, permits and license fees.
The distribution for free of religious bibles and articles are as
well exempt from taxes.
You cannot demand that permits and license fees will have
to be paid prior to the distribution of these religious items.

What is the exemption there? Can the government collect
taxes out of the distribution of these bibles?
The government can demand the payment of permit fees in
some cases, the payment of VAT on the distribution, when
they are distributed for commercial purpose.
These are already distribution sectors not made in course of
religious activities. You purchase from them.
So it goes without saying that being an establishment
already not relative to an on going religious activities, it can
already be imposed of permits and license fees for its
operation.
Thats for regulation purposes. And taxes can already be
imposed from the sale of these items. Income tax from the
income,

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VAT from sale. What is exempt from VAT in tax code is the
sale of textbooks and bibles.
So bibles are exempt from VAT but not from income tax if
sold commercially.

Religious articles and other articles other than printed
materials are also subject to income tax from sale,
commercially. And it is also liable for VAT because it is not
exempt under the law.

So you will see the difference.
If the distribution is to promote an on going religious activity,
it cannot be taxed and you cannot be made to pay license
fees
But if its already an establishment, then the general rule the
distribution centers are taxed will have to be applied.



Another limitation related to religious freedom is that,
There should be no public funds that will be appropriated for
public purpose. So the government is not expected to give
aids and grants to religious institution.
It will promote that religion to the detriment of other
religion.

The government can enter into a contract with the religious
institution so long as the contract is at arms length with
other parties.

When you say arms length, it must be entered into by the
government, and is under the same terms and conditions
had it been entered into by another party or a non religious
institution.
It should be co equal with other institutions.

But there is an exception to the rule that public funds may be
given to a person who represents a certain religion.
What is the exception?
1. armed forces
2. government orphanages
3. leprosarium
4. penal institution/death chamber
The government can appropriate public funds for the
priests, ministers and pastors performing services in these
four institutions.

Why can the government appropriate public funds for the
priest performing services in these institutions?
What is the purpose of the government of giving of the funds
to these individuals?
It is in then form of salaries or compensation for the service
rendered.
This is without regard to what type of religion.
These institutions need priests, pastors and ministers to
perform the service. And if the government will hire them
then the government needs to compensate them for the
services they performed.
So the government can appropriate public funds for these
purposes.

If it is a salary or compensation that goes to the individual, is
this subject to income tax on the part of the priest, ministers
or pastors? Or totally do we go for separation of church and
state where the state cannot tax these institutions?
Yes.
Income is defined generally as a flow of funds to you.
And under the tax code, income subject to income tax is any
income which flows into the hands of the taxpayer from
whatever source.
So even if the source is from the government for the reason
of religious activity, but then its an income, salary and
compensation to the taxpayer, it is still subject to income
tax.
So tax note that these priests, ministers and pastors are
subject to income tax.

But lets go to the church.
If we have a parish priest assigned to a parish and he receives
money for administering the entire parish, is that subject to
income tax? Is that different from salaries received?
Whenever it is received so long as it is income, salary or
compensation for any type of service, it will be subject to
income tax.

So priests are not exempt from taxation.

And when pope john paul the second was visiting the
country, there was no violation of this provision, the billions
spent was not for religious activity. He was a head of state
when he came here.


NON INFRINGMENT OF FREEDOM OF THE PRESS.
No tax shall be imposed or no license shall be implemented
from a person who makes a report.
No one can be subjected to tax for making news reports,
interviewing, etc.
Its freedom of the press, freedom of speech for individuals.
So we cannot expect that anytime a person interviews
another, he shall be liable to pay permits or license.

No tax shall be impose.
Except that taxation is normally applicable to the income of
that individual.
And if the news is already transformed into printed material,
then it will be subject to tax similar to other printed
material.

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Any income from the sale of newspapers or magazines will
be subject to income tax on the income of the
establishments producing these printed materials.

Last is the POWER OF THE PRESIDENT TO VETO ANY
PARTICULAR ITEM
That is self explanatory


Lets go to SITUS OF TAXATION
What is situs of taxation?
The place of taxation. It is a place where the subject matter
has situs or the place that the state can rightfully levy or
impose the tax.

It is where a subject matter (person, property, excise) are
taxed.
Wherever these three subjects as a rule are located, as a
rule, they have situs.

And every state or taxing jurisdiction can only rightfully levy
the tax in the place where the subject matter has a situs.
Its not right to say where the right is located.
Because that rule is applicable only to property.

How about a person? Can you say he is taxable where he is
located? What about transactions?
There are various factors to consider before we can say that
that subject matter has a situs in the Philippines, therefore
we have the jurisdiction to tax the subject matter.

Situs of taxation is necessary and must be answered every
time you are asked whether or not subject matter is taxable
in the Philippines or not.

And situs in the Philippines is not strictly limited to one
factor. It is very comprehensive.
Number one, you have to know to know what type of tax are
we talking about?
What is the nature of tax to be imposed?
What is the subject matter?
Is he citizen in the Philippines or not?
Does he have residence in the Philippines?
Where is it located?
What is the source of income if it is the excise tax type?

Some items or subject matter have multiple situs, situs in the
Philippines and outside. And both or all countries are
claiming taxation to one and the same subject matter.
Why do you think there is duplicity of taxes? Why is there
multiple situs for each subject matter?

Let us go for each subject matter.
First, person.
What is the situs of a person?
What factors would you consider?
Insofar as person as a subject matter is concerned, since
have identified only one personal tax, which is the poll tax;
The factor for situs of taxation is only one.
All we need to consider is his residence, regardless of his
income, and activities.

Lets go to property.
That is where you have to be careful. You have to know if it is
real, tangible or intangible.

Real property; where the property is located, regardless of
who the owner is, his residency and citizenship.
It cannot be moved. Its imobalized.

If it is a real property located in the Philippines and the owner
is a non resident individual, it is still subject to tax in the
Philippines as long as it dos not violate constitution of
ownership. parcels of land cannot be owned by original
citizens.
Condominium units are real property still but it can be owed
foreign individuals so long as the entire condo follows the
60-40 rule
This also applies to lateral rule which have been registered.

2.01.25
Nonetheless, its the location of the property in the
Philippines that gives the taxing authorities to levy the taxes.
Its regardless of ownership.

Lets go to tangible personal property where the property is
located.
So if the vehicle is found in the Philippines, is it subject to
property tax? Motor vehicle is found in the Philippines,
owner is a non resident individual. He came to the
Philippines and bought it. After one month, he went back. Is
that subject to property tax?
No.

What is property tax?
It is tax on real properties. We dont have property tax on
personal properties.

So its taxability will have to fall on the third category of
subject of taxes which is excise tax.
If the vehicle is sold in the Philippines, then it is taxable.
But is it subject to property tax or not? When I say property,
it means that it is tax on real property.
Therefore it is not subject to property tax, even if it it
located in the Philippines.

Is it subject to estate tax if the owner is a non resident foreign
individual who died abroad?
Yes. Because estate tax is not a property tax and all
properties located in the Philippines, whoever the decedent
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is will be subject to property tax, notwithstanding his
residency or citizenship.

But then again, the difference is that estate tax is not a
property tax. It is a tax on the privilege of transmitting
property upon death.

Full complete situs of taxation in income tax is found in sec 42
of tax code. Still this is a primer on situs.

How about the situs of an intangible property, whaere is the
situs of taxation?
The domicile of the owner.

Why?
The general answer why personal intangible properties
follows the owner is because intangible properties do not
have physical form. Therefore it follows wherever the owner
is as a rule.

What are intangible properties?
These are properties that cannot be seen nor touched.

Ex. If you have a corporation, you make a 48 storey building.
And since there are 48 of you, you each own equivalent
number of shares.
Can you say that the ownership is tangible because you have
assigned 1 floor for each owner?
Its not tangible.
Its inchoate. Your ownership is not reflected in the building.
The building is owned by the corporation which is a separate
and distinct entity.
So your ownership in the building is intangible. Although you
have your ownership of stock in certificates to prove that
you have an ownership of the corporation, its not tangible.

If it so happens that your asset or subject matter that the
government is interested in taxing is an intangible personal
property, you say that it follows the domicile.

So if you have an ownership of 10% in PLDT but you reside as
an immigrant abroad or you acquired new citizenship in
another country, will you subject to income tax the
dividends coming out of your ownership in the corporation?
Yes.
Its the benefit received by the corporation.
Its your income in dividends.

So as an exception it is taxable.

The general rule is that, intangible personal properties in the
absence of its physical location, the situs of taxation follows
wherever the owner is domiciled.
So if you look at the rule, your first answer would have to be
that he is not to be taxed because the owner is not
domiciled in the Philippines.

But class, there are exceptions to the DOMICILIARY THEORY.
Whenever there is still some protection and benefit or
privity of relationship between the Philippine government
and the intangible property where we can claim that were
giving benefit and protection to that property, the
Philippines will still have the authority to impose and levy
taxes.

In this example, what is producing the income?
It is the corporation that is operational in the Philippines.

The government is giving protection and benefit to the
corporation.
Without benefit and protection, it may not function properly
resulting to zero income.



Therefore, since were giving protection and benefit to a
domestic corporation, we can rightfully impose tax on the
income produced by these domestic corporation.

So the exception of to the rule of DOMICILIARY THEOTY OF
INTANGIBLE PERSONAL PROPERTY
1. if protection and benefit is identified.
2. when the law expressly states that the Philippines has
jurisdiction over such intangible property.

This is regardless even if the owner is an alien from the start.
It doesnt matter because what were talking about is the
benefit and protection.

Why do we not follow the other rules where citizenship or
residency is not necessary?
Because this is not a subject property nor a subject person.
What subject are we talking about?
It falls under excise and excise is very much into other
factors of situs if taxation which can be: protection, source
of income, and etc.

The income of PLDT is taxable to 30% income tax. Lets say
that its income and expenses are 100b and 80b respectively.
Taxable income is 20b. 30% of 20b foes to the government.
Only 14b is the net. This will be the one that goes to the
coffers of PLDT, and may be distributed as income wich will
be subject to 10% final withholding tax.
Will this tantamount to double taxation?
It will not because the 30% is imposed on PLDT, which is a
separate juridical personality. The 10% is imposed on the
individual owners.

Taxation

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What if I change the PLDT to ATnT a foreign corporation and
you have interest in the foreign corporation. Youre
expecting to receive 100m in dividends. Will that 100m be
subject to Philippine income tax? The corporation is situated
in US and you are a non resident of the Philippines, is it
taxed?
There is no tax in the Philippines because your domicile is
abroad. Protection and benefit is zero because it is located
abroad.

But if and when it is a corporation operating at least 85% in
the Philippines. Meaning its worldwide operation equation,
85% of its operation is located in the Philippines despite of
its being a foreign corporation. Since majority of its
operation is in the Philippines, it will acquire its benefit, then
it will be considered taxable in the Philippines.
Why?
Because of protection and benefit.




If you are exercising you profession abroad as a doctor. You
are a Filipino. Will your income be taxable?
No.

Why?
Because it is an exercise of profession and the situs of an
exercise of profession is where the service is rendered and
where the profession is engaged in.
Since its abroad, then she is not subject to taxationon that
income.

But if she left here in the Philippines an apartment which is
rented out to a tenant, is the rent income from the use of
the house subject to income tax?
Yes. Because the source of income is in the Philippines. The
transaction of leasing is in the Philippines, its subject to
Philippine income tax.

For example, youre a Filipino resident of the Philippines.
Youre an entertainer. You went abroad and you performed
shows for 2 months. You earned 2m. You came back and for
the rest of the 8 months, you did nothing. Is the income
subject to income tax?
She is subject to Philippine income tax because she
maintains her residence in the Philippines and a citizen
thereof. She just went abroad to do the show.
So she received entire benefit and protection from the
government.
Therefore all her income for the entire year is subject to tax.

What you have to remember is that you have to do the
process of exclusion.
Its not a personal tax, its not a property tax.
Its an excise tax.
You will have to run through the other factors.
Is she a resident or a citizen of the country for the entire
year?
If yes, then the income will be taxable wherever it is
earned.

If you are an immigrant abroad, you will lose your residency
in the Philippines. But you are still a citizen.
There is a substantial distinction whether you are a resident
citizen and a non resident citizen.

If youre a resident citizen, all your income even if you went
abroad will be taxable in the Philippines.

If youre a nonresident citizen, only your income in the
Philippines will be subject to Philippine tax. Because for the
most part of the year, you are expected to earn income
abroad.
But it you have sources of income in the Philippines, since
the activity is receiving protection and benefit from the
government, it will be subject to Philippine income tax.

Why is there MULTIPLICITY OF SITUS for one and the same
subject matter?
Its because sometimes there is variance in the concept of
what domicile is and interpretation of the different taxing
states of what or how intangible properties will be taxed.

So if US will say,
Ex. Co. A in Philippines obtained a loan in Co. B US. You
obtained a loan with the principal income.
Co. B is earning income. Co. A is incurring expense.
If there is income, then our government will be interest if it
is subject to income tax.
Will this be subject to income tax?
First, it is an excise. So you have to follow all the factors.
Second, it is an intangible property (receivable) of Co. B.
Therefore, it follows the domiciliary theory.
So can we really say that it is taxed only abroad?
NO. because we have our own concept of benefit and
protection as well.
There are many factors to consider which may point to both
states taxing one and the same income.
Since the government would say that we are extending
protection to Co. A, allowing it to dutifully pay the interest
to Co. B. OW, if we dont allow benefits and protection to
Co. A it may not be able to pay the interest to Co.B. That is
why this interest is taxable by Co A and taxable by Co. B;
multiplicity of the situs of the same income.

This is taxable because we follow the rule: wherever the
domicile of the debtor is.

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When multiplicity of situs arises, how is it addressed in the
Philippines? What are the remedies of multiplicity of situs?
When there arises multiplicity if situs, there are at least 4
remedies to address the issue
1. tax exemption granted by our Philippine government
2. Philippine tax treaties or bilateral tax treaties with other
countries.
So far I think we have 51. The latest is with China.
In these treaty, there is a provision there that says
whenever there is a non resident foreign corporation
earning income in the Philippines during the year, so
long as it does not have any permanent establishment
in the Philippines; that income earned by the non
resident foreign corporation will not be subject to
Philippine income tax. It will be subject to their own
jurisdiction.
At least there is no double taxation on their income.
Why? We are giving up our right to tax if it is an isolated
transaction in the Philippines, and naturally because
non resident foreign corporation is a domestic
corporation in his own country. It will probably be
taxable there.

3. Extend tax deductions and tax credits.
If we look into sec 34 as a deduction. Numbers 3 and 4
tax credits and tax deductions pertains to foreign taxes
abroad.
If a domestic corporation in the Philippines ventures
into an isolated transaction abroad and earns abroad, if
it will be taxed there because we have no existing
bilateral transaction with the country, what ever tax you
paid abroad can be deducted as an expense here as tax
deduction. Or he has the option to treat it as tax credit,
deductible against the Philippine income tax.
What is more favorable of course is that he uses it as tax
credit.
Why?
Because the entire foreign tax paid is offsetted against
the Philippine tax.
While if you utilize it as an expense lang, it is only 70%
taxable.
But at least there is some form of cushioning the effects
of double taxation.

Double taxation is taxing twice the same property, with the
same rate, same type of income, by the same taxing
authority, during the same taxable year and for the same
purpose.

But we have two types of double taxation.
What are these?
Direct double taxation and indirect double taxation.

What is direct double taxation?
Direct double taxation is taxing twice the same property,
with the same rate, same type of income, by the same
taxing authority, during the same taxable year and for the
same purpose.
Literally everything is the same with the two taxes.

With indirect double taxation, simply remove one of the
factors there.

Does the constitution prohibit double taxation?
No. But it does not encourage.
So far it says minimize double taxation.
OW we would be violating the constitutional limitations of
equal protection clause and due process clause.
You will be deprived of your property.


Now lets go to this parcel of land.
Parcel of land that you own; you sell it and under sec24d of
your tax code, it provides there that any sale, barter or
exchange of real property located in the Philippines,
classifies as a capital asset, not used for business is subject
to 6% capital gains tax on the FMV or GSP whichever is
higher.
Who imposes the 6% capital gains tax?
The national government or BIR

But the LGU is imposing of 1%, or in some urbanized places,
of 1% local transfer tax on FMV or GSP on the same
property, during the same year, on the same transaction, for
the same purpose.

You will see its taxing twice. But is it the direct double
taxation?
No. although everything is the same;
Same purpose=transfer of property
Same period
Same transaction
Its just that one is imposed by the national government thru
BIR and the other is imposed by LGU.

Remember that if you sell the property, you will be subjected
to 6% and 1.5% documentary stamp tax,
And he will have to settle with LGU for of 1% local transfer
tax, plus the real property tax which is unpaid, before it is
registered with the register of deeds upon payment of
registration fees.
It is only indirect double taxation.

There are 6 MODES OF ESCAPING TAXATION.
Only one is illegal.
What are the 6 forms of escape from taxation?
1.
2.
3.
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4.
5.
6.
We will discuss last tax exemption so that it will relate with
the next topic.

Tax evasion.
We have a program in BIR called RATE-Run After Tax Evaders.
What is tax evasion?
Its the employment of false and fraudulent means or ways
to avoid or to lessen the payment of taxes.

Since tax evasion is a heavy charge; you cannot be charge
with tax evasion without proving that there is fraud in it, the
government before it can say that there is tax evasion has to
satisfy answering the three stages or three factors.

What are the three elements or factors of tax evasion?
1. to avoid paying the tax totally or lessen the tax that you
will have to pay.
2. the state of mind must be evil
Your intent to defraud government from the right taxes
3. the course of action is taken by not paying the taxes, not
filing the return, or paying only a portion


July 10, 2010

So what is equality to pay?
It is the equal protection clause.
It is different from equity if taxation.

Ok lets finish the general principles.

I think were done with tax evasion.

Lets go to TAX AVOIDANCE.
What is tax avoidance?
Is it allowed under our law?
Isnt a tax evasion as well a tax planning that is conceived in
the mind of the taxpayer to minimize or totally avoid tax
liability? Do you agree that that has the same objective?
Can there be tax avoidance without minimizing the tax?
There is a problem illustrated in your book about crossing
bridges. One is with payment of toll fees, one is free. If you
cross the bridge that does not collect toll fee, you dont pay
anything. Isnt that not minimizing but totally avoiding the
payment of toll fees, taxes or charges?

Tax avoidance involves minimization of taxes as well as total
avoidance of taxes.

Both tax evasion and tax avoidance have same objective,
minimizing or totally not paying the tax.

But if you look at the letter of the law, evasion is actually
violating what the law provides and violating the intent if
the lawmakers.
In tax avoidance, what it violates is not the letter of the law
but the intent of congress.

The intent of congress is to tax. But since the law is not so
clear, someone may avoid from paying tax.

Let me illustrate to you how to avoid tax.
You know what a subsidiary company is. It is a company of
more than 50% of the profit. It is a subsidiary of a non
resident foreign corporation in US.
This is the non resident home office.
This is the Philippine branch.
You know the relationship between office and branch?
They are the same entity.

We follow the same entity concept that the Philippine
branch is actually an extension of principal office of US.

Any remittance of profit from branch to home office is
subject to 15% branch profit remittance tax.
This is to answer to the 15% tax on dividends for every
dividend declaration made by a subsidiary to a parent
company.
The relationship between a home office and a principal is
that the branch does not declare dividends to principal
office but it remits profits.

Those companies that is not the principal office will be given
dividends subject to 15% tax.

In order to balance the two types the two types of
companies here, both are subject tp15% but different
names. One is on profits, and one is on dividends.

How do you avoid tax if you are a branch, the code provides
that if there is remittance of profit to principal office, it will
be subject to 15% remittance tax UNLESS YOU ARE LOCATED
WITHIN AN ECONOMIC ZONE.

So if you are a Philippine branch, establish your business in
an economic zone.

Are you tax evading?
NO. Thats tax avoidance.
But that is against lifeblood doctrine because you are in the
same situation as phil branch outside and phil branch inside
the zone.

But to such extent, if you can look into the letter of the law so
that you can avoid taxes, its still legal. That is where tax
lawyers come in.

Taxation

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Lets go to shifting.
What is Shifting?
Can there be shifting if the tax at issue is a direct tax?

There are three stages of shifting:
1. the impact of taxation,
-the point at which the tax is imposed against the
taxpayer
2. the shifting process,
-the burden is shifted to another person
3. incidence of taxation
-the final resting stage where the burden is finally passed
on to the other person

And it can only happen in indirect taxes, never direct taxes.

Because when its all about direct taxes, the impact of
taxation and the incidence of taxation falls into one and the
same person, which is th STATUTORY TAX PAYER, the one
that the tax code who is liable to remit the taxes to the
government.



There are three kinds of shifting:
1. Forward shifting
2. Backward shifting
3. Onward shifting

What is forward shifting?
Forward shifting is simply shifting the burden of tax from the
factors of production, down to the next stage; factors of
distribution from wholesale or retail.

Onward shifting is a series of throwing the burden of taxes to
the next person.

Forward and onward is just the same.

But when you say backward shifting, the process comes first
with the consumer demanding that the retailer reduce the
price of the product that he is proposing to purchase to the
extent of the tax that should have been passed on.

This is the normal flow. Its always the forward shifting

But if the consumer has the edge of negotiating, he can
demand that no tax will be passed on from this source down
to him, or from the retailer down to the consumer.

Its simply the opposite. From the factors of distribution to
the factors of production.

Which of the three kinds of shifting is more or less similar to
capitalization?
Backward shifting?

What is capitalization?

First we discuss evasion, you can escape payment of taxes
although illegally.
Next is avoidance, you can avoid payment of taxes legally.

In shifting, the escape of taxation is that you shift the burden
of the tax that should have been imposed on you. Still the
government collects, but it is from some other person.

In capitalization, it is still in the form of of escaoe from
taxation. Its a backward shifting in a sense that a consumer
demands a reduction in the purchase price to the extent of
the capitalized future taxes that the consumer is expected to
pay in relation to the purchased product.
So the consumer can negotiate it.

An example in you book is the real property being sold. And
since the value of the parcel of land is is not so minimal as to
neglect the taxes, what you actually do as a purchaser is to
negotiate the best possible price from the seller

So if you expect that you will be paying real property taxes in
the future, you try as much as possible to reduce the selling
price offered by the seller to the extent of the taxes that you
will have to pay for this kind of property. Because it is
continuous payment of taxes year after year.

So its backward shifting.

It is the consumer who is demanding of a reduction In price
to the extent of capitalized future taxes that the purchaser is
expected to pay in relation to the product he is buying.



Whats transformation?
When you want to avoid the loss of customers because of
higher prices, you absorb the tax that you should have
passed on to your customer, but with the hope of recovering
the lost portion by producing more units at a lower cost.

You will recover the lost profits out of the additional
products that you will be producing at a lower cost.

Its lower in a sense because there are fixed operating
expenses that we incur month to month. It doesnt change
regardless of the production output.

Taxation

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So if you fully utilize you production, and the fixed cost
remains the same, you will have to produce more products
at a lesser cost and sell it at a lesser price.



Exemption.
What is exemption?
Tax exemption is the grant of immunity granted to
corporation or persons or classes of persons or corporations
to profit tax which otherwise would have been generally
imposed to them.

What is the nature if tax exemption?
It implies a waiver on the part of the government.

Lets go back to the tax exemption being generally
irrevocable.
Can you say that the government can simply revoke a tax
exemption law that has been passed without the
concurrence of the tax payer?
Would it not violate the non impairment clause of the
constitution?





The number 1 nature of tax exemption is that it is personal
privilege granted to those persons or corporations who has
been considered as covered by the exemption.

Is it transferrable?
Ex. A corporation has been granted income tax exemption for
6 years as being new investment in the Philippines.
It earned income for the first six years. So it is declaring
dividends to its SH.
Can the stockholders/owners claim exemption from tax
from on the dividends from the corporation?
No.

The only exception when tax exemption is transferrable is
when the law itself provides for its transferability.
But if the law is silent, there could be no transfer of
exemption because it has to be strictly contrued against the
taxpayer and in favor of the lifeblood doctrine.

So we have tax exemption being a personal privilege,
generally revocable, unless it is founded on a contract that is
reattributed by the government to the taxpayer, protected
by the non impairment clause; it is a waiver actually on the
part of the government to collect taxes.

But mind you, the waiver of the government to collect the
taxes that should have been due had the exemption not
been granted has grounds on which to support the waiver of
the collection, and is not discriminatory because the grant of
exemption requires also a classification that is substantial.
Otherwise we will be violating the equal protection clause of
the constitution.

What is the rationale of granting tax exemption?
The basis or reason for tax exemption is to secure public
interest or public benefit that is sufficient to offset the
monetary loss that is entailed in the granting of monetary
tax exemption.

There are three grounds for granting tax exemption.
Is equity a ground for granting tax exemption?
1. contract
2. public policy
3. reciprocity - foreign treaties

Is public policy not the same as equity?
When you say equity for a ground for tax exemption;
remember in Manila when in typhoon Ondoy, many
businesses experienced losses.






Can you claim exemption on the ground of equity? The basis
on since you have been affected by the calamity then you
should be granted exemption, thats one of the ground for
tax exemption?
So are you saying exemption cannot be presumed?
What about exemption from implication?

So lets go back to the basic rule that exemption is purely
statutory.
Without the law granting the tax exemption, there is no
exemption that you can claim

There are two things that you have to consider in exemption:
1. you have to point out the law specifically granting the
exemption
2. you have to prove and pass all the conditions necessary for
you to be covered in the exemption.
That is where all documentary evidences are to be
submitted for support of your exemption because expetion
is strictly construed against the tax payer.

So those victims of ondoy, based on the grounds of justice
and equity cannot get exemption.
Probably on local taxes they can, because LGC states that an
LGU can grant exemption for 1 year, the year succeeding
after the calamity took place, in the municipality or city.

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But under the national internal revenue code, there is no
similar provision.

They can seek for exemption, but it has to be based on an
ordinance which is equivalent to a law also and the
ordinance must be enacted first.

The grounds for tax exemption, we have three grounds.
What are these?
We said that before a tax exemption can be availed of, you
have to point out the law granting the exemption.
Of these three grounds, do you think that these three
grounds are supported by a law granting a tax exemption?

Lets go to contract first.
What is the basis on which the tax payer can claim
exemption?
The contract itself.
The charter of the corporation.
The word itself is contract. Thats a legal document.

Second is public policy.
How can a public policy be a ground for tax exemption and
not violate the rule that tax exemption must be supported
by a law? Is there a law that must be enacted before you can
use public policy as a ground for tax exemption?
Yes.

What is pubic policy as a ground for tax exemption?

Public policy is more on the encouragement of new industries
or new investments in the Philippines
So this is a public policy ground as a basis for exemption but
it is pot an announcement or pronouncement by congress.
So its not enough to say that in order to promote industry
or new investment, there will be a tax exemption granted.

There should be a law granting the exemption.

So what happened in the economic zone? In order to
promote new industries, a special law was enacted, RA 7916
granting all exemption from their taxes except that they will
pay 5% tax in leiu of all taxes (30%, 12% vat, local business
taxes).
So that is based on public policy but there is still a law
supporting the exemption.

And third one is reciprocity
If we want to avoid international double taxation in various
states, we enter into international tax treaties and treaties
form part of the law of the land.

The power to impose tax is inherent in congress?
Yes.
The power to impose tax is inherent in congress. Without
the law granting them the power, congress can still enact
the law.

But the congress have the inherent power as well to grant tax
exemption?
Yes. Since congress has the inherent power to impose taxes,
they also have the inherent power to grant tax exemption or
to classify those who will be covered in the tax exemtion.

How about local government units? Do they have the
inherent power to grant tax exemption?
No.
They do not have the power to grant tax exemption because
their power to tax is a delegated power.
If they can grant tax exemption, it is only within the bounds
of the power granted to them to impose taxes.

Ex.
A local government unit is empowered by congress to raise
its own source of revenue and in the local government code,
these LGUs can impose local business taxes. They can only
grant exemption only within the confines of the delegated
power.

Because if they can grant local business tax, they can also
grant exemption on the grounds provided by LGC.


Theres no inherent power to tax , and no inherent power to
grant tax exemption by LGUs.

Can the LGU further delegate its power to grant exemption?
There is no further delegation allowed in the level of the
LGU.



After break.

What are the different types of tax exemption?
1. according to creation:
a. express
b. implied

What is express tax exemption?
When the law expressly provides for tax exemption, that is
express tax exemption?

Do we have exemption by implication?
Tax exemption is purely statutory. Without the law granting
it, there could be no tax exemption.

So if you classify, it is actually, express tax exemption and
exemption by omission.
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When you say express tax exemption, let me give you an
example in the constitution; religious, charitable and
educational institution are exempt from RPT on all RP ADE
used for such purpose.

The opposite of expressed is an exemption by omission. If the
law provides for a tax imposition by enumerating all those
whoa are taxable, it means to say that those who are not
covered by the tax imposition are exempt by omission, not
by implication.

Its not correct to say its by implication because its going
against the rule that exemption must be based on a law or a
statute.

Its actually for comparison purposes. Those who are not
included in the enumeration are exempt from taxation.


2. as to the scope/extent
a. total
b. partial

What do you mean by total exemption and partial
exemption?



Total exemption may be total exemption from taxes or it can
be exemption totally from one tax.

Because there can be partial exemption from all taxes and
partial exemption from one and the same tax.

Let me give you an example.
Proprietary educational institution are partially exempt
because they are given tax at 10% so they are partially
exempt from the 20% of the corporate rate.

Partial exemption may also mean to say that you are exempt
from income tax for the 6 years that you are operating but
you have to pay all other taxes.

Which goes to say that a particular corporation or person
may be exempt from all taxes.

If you say all taxes, does it mean to include indirect taxes?
Ex.
USC is a non stock non profit institution. It appears in the
constitution that they are exempt from all taxes. Also in the
tax code, it exempt from VAT from tuition. But is it exempt
from VAT that is shifted to it by its suppliers? The seller of air
con, SM is liable to VAT statutorily. Can USC refuse to pay
the 12% passed on VAT? Does the exemption from all taxes
include VAT from purchases?

Another Ex.
Can USC also refuse to pay withheld salaries from its
employees, claiming total exemption from taxes?

USC is still liable.
USC is exempt from all taxes.
It is claiming from exemption from paying the passed on VAT
of the air con sold by SM and from remitting the taxes on
the employees salary.

Exemption from all taxes do not include all taxes. The
shifting on of VAT by SM is not a tax of USC but it forms part
of its purchases from SM. It does not become a tax liability
that it has to remit BIR.

So when we say exempt from all taxes, you exempt to those
taxes that he is directly liable for in lis income or property.

The VAT on air con is a direct liability of SM which has been
shifted on. You cannot take out from BIR the 12% that SM is
liable for which SM can pass on to all its buyers.
Unless you have another special exemption that is granted
by congress.

USC is liable on VAT on all its purchases because all VAT
forms part simply of its costs and expenses.

Secondly, USC cannot say that it is exempt from payment of
withholding tax. The tax at issue is not a tax if USC but a tax
of its employees.

The role of USC is simply to act as a withholding agent to
withhold permit and to remit to the government.

So again, total exemption is exempt from taxes directly
related to the income of USC or property.


3. as to object
a. personal
b. impersonal

Thats self explanatory.


I think we have already mentioned what are the exemptions
available under the constitution.

One of which is the PRT exemption of the religious, charitable
and educational institution.

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In tax code, we have Sec 30; this is a ling list if exemption
from income tax.

1.17.56 - kwin

Sec 109 is also a long list of those who are exempt VAT.

And third is special laws like special exemption for six years if
you are a new investor.


Can there be simultaneous existence of total and partial
exemption in one and the same tax?
Yes.

Lets go to how income tax is construed.
What is the general rule?
What are the exemptions?

Tax exemption statutes, if the law provides for liberal
construction, then it should be liberally construed in favor of
the tax payer.
Foster homes, foundations, educational institutions, their
assets or real properties, any tax exemption granted is
construed in favor of the taxpayer.

Are there exceptions to the general rule that tax exemptions
should be strictly construed against the taxpayer?
If the tax provision expressly provides so.


If its a government agency remember inherent
limitations? That government agency is exempt from
taxation?

1.20.57 kwin
Therefore in construing tax exemption granted to agencies,
it is construed liberally in favor of the government agencies.
Because theyre generally exempt.

How about government properties?
True or false. Government properties are exempt from
taxation whether use is in proprietary in character or not.
Ok, exemption from real property tax on government
properties will be liberally construed in favor of the
exemption of the government.

The rule is that governmental properties whether held in its
governmental character or in its proprietary character is
exempt.
It is not in accordance with the general rule because if you
remember real property taxation is more on the actual use
of the property.
But once the owner of the property is the government, we
disregard the actual use criteria. Its ownership.

When you analyze all the exemption on real property taxes,
it is more on BECAUSE OF ITS USE.
But there is one which is an exemption BECAUSE OF ITS
OWNERSHIP,and it is government ownership.
So whether it is held in its governmental capacity, it will be
exempt.

That is different from the one we have discussed before
government agencies earning income from proprietary
activities. That is taxable na. That is in fact engaging in
activities that is not ministerial, not governmental, but is an
active participation by the government in profitable
activities. Therefore, its not exempt.

As for property, it will not matter on what character it is
held.

So these are four items.
Probably we can add five;
Senior citizens should be granted liberal construction of tax
exemption statutes.
They have a class of their own.








So the five exemptions of the rule wherein tax exemption
should be strictly construed against the taxpayer:
1. if the law provides for its liberal construction,
2. it pertains to real property tax exemption of religious,
charitable and educational institution,
3. it pertains to income of governmental agencies
-you have to determine ministerial from proprietary
4. it is government properties
-it is totally exempt from tax in favor of the government
5. senior citizens act



Lets now go to tax amnesty, tax refund, tax remission.
How are they construed?

What is tax amnesty?
It is a grant of pardon or intentional overlooking by the state
of its right to collect taxes and/or penalties for violations of
tax provision.
So its similar to exemption in the sense that no money goes
to the government.
Although it is a waiver on the part of the government to
collect penalties on violations of tax laws.
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What is tax remission?
Its a waiver still on the part of the government to collect the
taxes.

Claim for refund, we have discussed that during our first few
meetings that the government is constrained to part of its
money or certificate in order to address the overpayment
made by the taxpayer by the government.

So these will lessen the funds of the government.
Therefore all of these are construed strictly against the
taxpayer.



Let us go to the nature of tax laws.
What is the nature of tax laws?
Why is it not political in nature?
If we are occupied by a foreign government, still the tax laws
would be the of the occupied territory and not the
occupying enemy.

Theres no connection with President Aquino now with
GMAs rule. The tax laws will be the same.

Why is it not penal in nature?
The imprisonment as a penalty on the violation of tax laws
would not make the tax laws penal in nature. But simply
they are there in order to compel the tax payer to comply
with tax provisions. Like timely payment of taxes.

So what about ex post facto law prohibition. Does it apply to
taxation?
No. Its not applicable because tax laws are not penal in
nature.
It applies to criminal laws.

We will discuss more on retroactive and prospective
application a little later.

And of course tax laws are civil in nature.
Because its a civil obligation that the tax payer has to the
government to address the needs of the government.


And how do you construe tax laws?
We follow the rule that taxation is statutory. Without the
law, no tax should be imposed.

Let us say that there is a tax law that has been imposed. How
do you construe it? In favor of the tax payer? In favor of the
government?
Generally in favor of the government.

If it is so clear as to provide no area of explanation but to
impose taxes, it should be construed in favor of the
government.
If the letter of the law is so clear as to direct the imposition
of the taxes, it should be construed in favor of the
government.

If there is ambiguity in the tax law, it will be construed in
favor of the taxpayer.

So class, number one, know whether there is a tax law.
If there is no tax law, no taxation.
If there is a tax law, check whether it is clear as to its
content, and clear as to its wordings.
If it is clear, then you construe it in favor of the taxing power
of the state, in favor of the government against the
taxpayer.
However if ambiguities exists or there are doubts as to its
construction., you go to the rule that it should be construed
in for of the taxpayer because taxation is statutory in nature.

Without the clear law, tax should not be imposed. Otherwise
we will be violating the due process clause of the
constitution undue taking of the property.

Now that is insofar as taxation is concerned. We have already
discussed how to construe tax exemption (the opposite).




How do you apply tax laws?
Tax laws should be applied prospectively.

If the law is silent as to whether it is prospective or
retroactive, why do we usually apply it prospectively?
Why cant we apply it retroactively without the law saying
such?
Prior to existence of the law, there must be knowledge by
the taxpayer that he will be liable for such activity or
property or person.

What is the exception to the rule that the law should be
applied retrospectively?
If the law provides for its retroactive application.

If the law provides for its retroactive application, does it
mean to say that in all cases we should follow retroactive
application? Meaning all the provisions of the law will be
applied retroactively regardless?


What are mandatory and directory provisions of tax laws and
what are the effects if these are violated?
If they fail to follow the directory provisions of the tax laws,
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The officers who did not follow will only be subjected to
administrative penalties.
Diba, BIR is the agency enforcing the tax laws. Within the
confines of the bureau, the commissioner usually issues
circulars, memorandum orders for its officers too follow.
Non compliance of these internal orders would not
invalidate that law to which subscribes and prescribed but
would only subject the noncompliant officers to
administrative penalties.

But if the theres failure to follow the mandatory provisions
of the law, this will invalidate the law.

What are revenue regulations?


We were discussing about prospective application of the law.
A law should be applied prospectively, otherwise it will
violate the due process clause. But it can be applied
retroactively if the law so provides.
Is it an absolute rule?
No. notwithstanding that the law provides for its retroactive
application, if its effect will be unjust and oppressive to the
taxpayer, it will still be applied prospectively.

Talking about retroactive application, so long as it is not
unjust and oppressive to the tax payer
What about the exception to the rule
The rule that we have established now is that it is
prospective.
It becomes retroactive if there is a law which provides for its
retroactive application.
Its prospective if its unjust and oppressive.

The same holds true with the rulings and opinions held by the
BIR. Its application is also prospective.
And usually the rulings do not provide for its retroactive
application.
What are the exceptions where the rulings can be provided
retroactively?

Lets distinguish rulings and opinions from revenue
regulations.
As to who issues:
OR: tax officials (commissioner) because it is the
commissioner who has the power to issue rulings and
opinions, although almost all the powers of the
commissioner can be delegated to his subordinates. And his
subordinates will consist of deputy commissioner and
deputy commissioner. They can sign in behalf of
commissioner.

Can the secretary of finance revoke the opinion of the
commissioner?
Yes.

RR: secretary of finance

What is the role of the commissioner?
If you have seen a revenue regulation, towards the end
you will see two signatures, the secretary of finances
and the commissioners who actually recommends the
provisions of the revenue regulation.
The commissioner can never issue by themselves a
revenue regulation.

While rulings and opinions are issued by the
commissioner of the bureau or his alternate egos, his
deputies and assistants; the only exception to the rule
wherein the commissioner cannot delegate the signing or
an opinion or ruling is if
1. the ruling is a RULING OF FIRST IMPRESSION. Meaning
it is the first time that the issue is being tackled.
2. it is to revoke, revise or modify an existing ruling that
has beenissued prior.

So these are two non-deligable powers of the
commissioner. The other is the
(3) power to recommend the issuance of a regulation.

There are only 4 or 5 non delegable powers os the
commissioner. We will learn that later.

So you now know who issues revenue regulations and
opinions and rulings.

What are revenue regulations?
Who issues it?
What are its contents?
What are its purposes?

As to contents:
RR: They intend to clarify and explain the law enacted by
congress.
They are the more general interpretations of the law for its
proper execution, enforcement and implementation.

OR: they are the less general interpretations of the law
because they pertain to issuea that has been brought up by
taxpayer for some clarification.
Its an issue by a particular taxpayer which is actually
happening to the taxpayer.
There can be no hypothetical question that will be anwered
by the opinion or ruling.
So less general interpretation of the law.

And the secretary of finance being the head of the
department of finance can always revoke, revise, modify the
decision issued by BIR who is his agent.

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How do you make a revenue regulation valid and effective?
As with all other regulations, it should never be in conflict of
the law or the constitution which it seeks to interpret.

Were done with the nature of tax laws,
how do we construe it,
the mandatory part of the tax laws,
revenue regulations, opinions and rulings, and

Whether or not the commissioner or the secretary of finance
can overturn or reverse preceding issuances of its
predecessor.
Of course, yes. Every new secretary of finance or
commissioner is not bound by the interpretation made by
its predecessor. So long as he sees that the interpretation of
the previous officials are not in accordance with the law, he
can actually reverse, revise or modify.

And in modification or personal revocation, the question of
whether it should be applied prospectively or retroactively
comes in.
If it turns out that the exemption granted long before by a
commissioner has no longer an application now because a
few years before, a law has been enacted lifting the
application, then it is but proper for the new commissioner
or secretary of finance to issue an opinion reversing the
ruling that has been issued before.

But the question is, will that reversal be applied retroactively?
No. it will not be applied retroactively.
So long as the exemption that has been issued before were
in accordance with the law then prevailing diba I said, only
subsequently after the exemption was a law enacted lifting
the exemption therefore that exemption granted way way
before should still hold true. You cannot demand that he pay
taxes for the years before.

Ex. 1997 opinion issued confirming the tax exemption. In
2008, the exemption was lifted. In 2010, the taxpayer
continued availing if the exemption. In 2010, a new
commissioner reversed the opinion saying that it is already
taxable.
Will this opinion have retroactive application?
No.

Will the taxpayer be liable for 2008, onwards?
Yes. It is but proper for the taxpayer to be liable from the
time the exemption was lifted.

Why can we have retroactive application at this point?
Because the facts used in 1997 no longer hold true in 2008.
Because the basis is 1997 is no longer the same basis in
2008.
So retroactive application can only up to this extent.
The taxpayer can be held liable from this point onwards until
1997.

The only exemption to the rule where there can be
retroactive application is when there is:
1. bad faith
2. there is material misstatement by the taxpayer
3. if the facts subsequently gathered are not the same as the
facts in which the ruling or opinion was based

Anyway, before we end this one, I want to show you how
prospective and retroactive application applies actually.

RA 9504 which took effect July 6, 2008. This is about the
minimum wage. It exempts minimum wage earners from
tax.
For those working, at the end of the year you will be granted
an exemption of your salary for 50k whether you are single,
head of the family or married. And for every child that you
have, you will be exempted, to the extent of 4 children
whether legitimate, illegitimate, or adopted.
So the government is actually thinking that for the entire
year, this amount, except for you salary will cover you
personal and living expenses.

Prior to this law, a single can claim an exemption of 20k,
head of the family, 25k and married individual, 32k and 8k
for every child.

Walay problema this year because you will get full
exemption.

What happened in 2008 was that the law itself did not
provide for retroactive application.

What I mean is thatif this took effect midyear in 2008, what
exemption would you use?
Is it 20k of 50k?
How will you construe that?
If you go for: exemption is strictly construed against the
taxpayer, then you will use 20k.
But since the provision of the law does not provide for
retroactive application, it provides for prospective.

So for jan jul 5 you use 20k.
Its good that it took effect mid year.
Because you only get 10k+25k=35k is you exemption for
2008.
If you are the head of the family, you get 12.5k+25
If you are married, you get 16k+25k
If you have a child, you have 4k+12.5k

So this is what took place in 2008.
Just because there is no provision or retroactive application,
we cannot use the 50k for the entire year.
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Had there been a provision that it will retroactively apply
from jan 1, 2008, then we will use 50k and 25k.

So this is an example of retroactive and prospective
application.



All revenue regulations, rulings, opinions, judicial decisions by
lower courts, CTA, SC forms part of the laws of the land.

You have different sources of tax laws:
The constitution, the laws by the president, congress, etc,

Even those issued by the administrative department and
executive branch of the government so long as it pertains to
taxation and it is within the confines of the law which it
seeks to execute; it is part of the law of the land.

Judicial decisions

Tax treaties. under the constitution, we follow the
doctrine of incorporation.







July 7, 2010

What is income?
In its general definition, income is any wealth that flows into
the hands of the taxpayer other than the mere return to
capital.

It means to say that it encompasses everything that flows
into your hand, into you pocket. It is not only with reference
to the money that you earn.

Of course it has a more a specific definition, which is the
amount of money coming in to you which is a return for
services you have rendered, profession that you have
exercised and activity that you have performed.

But then again, because of the lifeblood doctrine, we see
everything that is coming into a taxpayer as an income.

But whether it is taxable or not, that is another story.

Ex.
Its for performance of a service.

It is already settled that income coming from illegal activities
is considered an income and we have come to say that it is
taxable.

How about an award for moral damages and other types of
damages? Can they be considered as an income?
So if you are illegally dismissed from work and you are
awarded damages, is it considered income and are you
required to declare it as part of income at the end of the
year?
So if you are illegally dismissed you are looking for back
wages and damages. Are back wages taxable?
So back wages are at all times subject to income tax.
It is an income because it is something you receive.
It is taxable because it is in leiu of the salary that you could
have earned if you continued working.

But how about the damages that you have been awarded for
having been illegally dismissed.
You say that it is an income, but is it taxable?

Breach of promise to marry. You were awarded not only
moral damages but also actual damages.
Are the two damages subject to income?
Why? What is income tax?
So is being awarded moral damages a trade, business or
profession?
Is it still subject to income tax?
Moral damages is income but it is not taxable.


Sec 32b of the tax code provides for a list of exclusions of
income.
It simply means that these are types of income or inflows to
you that is not subject to income tax.

But then again, are all types of damages included in this
inclusion? Would these include moral damages for the
reason of breach of promise to marry, alienation or illegal
dismissal causes?

Damages awarded for reason or to compensate for its
sickness or physical injury are not considered income subject
to income tax.

But if it is award for damages for illegal dismissal or breach of
promise to marry, these are types of income that are subject
to income tax.
In fact in recent rulings by SC; a moral and exemplary
damages award is included in the taxable income of the
taxpayer.

So since we said that exclusions are just like exemptions or
anything that does not amount to collection of taxes by the
government, it shall be strictly construed.
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And we maintain that as a general rule, unless the BIR or SC
allows you the exemption, this does not part of exemption.
So you consider damages from illegal dismissal as taxable.

Haw about actual damages in any kinds of cases?
So actual damages are never considered as taxable income,
whether in a physical injury case, sickness or simply illegal
dismissal or breach of promise to marry.

Why?
Because it is to compensate you for the loss that you have
incurred.

But in some cases if and when the court has awarded you
damages more than what you actually lost, or spent for, or
incurred,
The difference would understandably be subjected to tax.

Of course if you dont declare, it wont be covered by
income tax.

How about stock dividend? What do you understand about
it?
if and when you invest in a corporation, meaning you co-
own a corporation. You have an interest in it.
What you get out of it is a dividend.

It may be in different form.
Say for example you are given cash dividend.
Cash is given to you in a yearly basis as an owner of a
profitable business.
Is cash dividend an income?
Yes.

Is the stock dividend an income on the part of the stock
holders?
This class forms a corporation.
Assets-liabilities=net worth

What is income tax?
Income tax is simply a tax on the income you have earned.
But it may also be an increase in the net value of the person
or the net worth of the person.

Let me explain to you what your net worth is.
Your assets right now less you utang is your net value.
You may be negative now or positive.
In the same way that a corporation has a net worth also.

If the 48 of you contributes 1m each. On the first day of
incorporating the business, you get 48m as net worth.
After 10 years of business, you increase your assets to 110m,
and you have liabilities of 10m. Net worth is 100m
Over time, did the corporation gain income?
From the 48m to 100m, meaning the corporation earned
income of 52m

If you as owners decide to distribute your income of 52m. like
if you would like to distribute 48m, you get 1m each as
dividends. This is what you call as tax dividends. Is this
subject to tax?
Yes.

But if you dont want to distribute the income in order not to
affect the operations of the company, you can retain the 1m
but declare instead of cash dividends, stock dividends of 1m
each.
What is your ownership of the corporation individually?
From 1m for each person, you are given another 1m
ownership in stock.

Is this an income on your part?
As a general rule, no.

Why not?
Because the corporation did not give this to you. It just
assigned to you additional 1m interest in the corporation .
Therefore, it is inchoate.
Unless and until you receive it in cash or in property, it is
never considered income.
I think you have read along the outline that income to be
taxable must be received or realized.

So stock dividends are not income and not subject to income
tax.
But if it is given in cash, it is income, it is taxable.
The exception she has given earlier is something else.
If and when you will distort the ownership we shall not discuss this right
now.

What is capital?
Is it taxable?
A capital is not taxable.

But would all income have capital as source?
No. In some cases you can derive income without putting up
capital
Ex. If you found treasure in your backyard.

So capital is different from income. It is only income that is
subject to tax.


What is gross income?
What do you mean income from whatever source?
It means that it refers to income regardless of whether the
source is legal or illegal
Its simply saying that whatever you get, it is part of the
gross income unless it forms part of the exclusions that is
mentioned in sec 32a.
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So what do you think are the purposes of income taxation?
The biggest purpose is to raise the revenue and meet the
expenses of the government.

Another purpose is to mitigate the inequalities of
distribution of wealth.
Together with estate taxation, donors taxes and individual
taxes, which are scheduler in rates, it is used to mitigate th
evils of the inequalities in the distribution of income by
providing a progressive system of taxation in taxing those
who are better to pay the taxes.

And the other purpose is to set the effects of regressive
taxes or consumer or sales taxes.

What systems of income taxation does the Philippines follow?
What do you mean schedular system of taxation and global
system of taxation?
The Philippine tax system follows both

For schedular income tax system, time and again, I have
given you the example.
The schedular rates for individual tax payers, we have the
first bracket level of 5% tax until it reaches the last bracket
of more than 500k.

It simply means that the phil tax system views differently
based on the kind or category of income that a taxpayer has.

So there is categorizing or classification of income.
But if its global, it views indifferently the income of the
taxpayer.
Regardless of whether the taxpayer is earning this or that
much, there is a fixed taxation for that type of taxpayer.

And in income tax itself, we follow both global and
schedular.
Schedular for income tax payers.
Global for income tax payers.

Corporate tax payers are taxed at 30% tax rates regardless
of whether it is earning between the bracket of P1 or P100k
to those earning millions or billions. Theres no difference.
Its a flat rate.



We have two kinds of income tax methods.
1. gross income taxation
2. net income taxation

What is gross income taxation?
Whats the difference between gross and net?
When you say gross income taxation, it does not allow of
any expenses and deductions.
While net income taxation allows of deductions and
expenses.

Which is simpler to compute?
Which is more beneficial to the government?
What is the disadvantage of gross income taxation?
Insofar as gross income of taxation, its advantages to the
government is that:
1. it is simpler to compute
- you dont think of any deductions or expense allowed
2. it will provide larger or higher revenues of the
government
- for the simple reason that the tax rate is directed
against the gross income of the taxpayer.

However its disadvantage of employing the gross income tax
method is:
1. it is inequitable and oppressive to the taxpayer
- remember that when you are in a business you are
expected to incur expenses. And these are directly related
and necessary to the business. So you should be allowed to
claim for expenses.
2. taxpayers are not encouraged to earn more or they will
be employing tax evasion methods.


Net income taxation is taxing the net taxable income after the
taxpayer is allowed to claim allowable deductions and
expenses related to the income that has been generated.
So if you venture into a photocopying business, what are the
expenses that you will incur?
Paper, ink, electricity, sales person, transportation, etc.

If you are not allowed to claim these expenses, surely your
prices will rise up in order to cover the taxes.
But since we are allowed to make deductions, these are more
equitable to the taxpayers/ businessmen.

What is the disadvantage to the government if we apply net
income taxation?
1. lesser revenues for the government
2. avenue for tax evasion and fraud insofar as taxpayer is
concerned in claiming the expenses.
-at some point, taxpayers would overdeclare or
overclaim expenses to declare that they are operating a loss.
Resulting to no tax collections.

Nonetheless what income tax system does the Philippines
follow?
In more cases than not, for income taxation, we follow the
net income tax system.

Taxation

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There are only few types of taxpayers who are not allowed to
claim deductions.
1. non resident foreign corporations
-for the simple reason that they are not engaged in trade
or business in the Philippines.
-any isolated transactions that they entered in to are
taxed at gross or the total collection.
2. nonresident alien not engaged in trade or business
-For example, usher came to Philippines for a one night
concert, will he be taxed net or gross?
Because he is a non resident alien not engaged in trade
or business, he is not even registered in the Philippine
tax authorities, it means to say that whatever is earned,
it is totally taxed at gross.
So if he is awarded 10m for concert, he will be taxed with
25%.
He will only receive 7.5m.



Nonetheless, our present income taxation under the tax code
that you are studying now is very comprehensive.
It does not follow strictly the domiciliary theory, nor the
nationality nor residency.
It takes into consideration various factors, thats why the
Philippine taxation is comprehensive isofar as situs is
concerned.





What are the basic features of individual income taxation?

First, it follows a schedular tax system.
Individual tax payers are taxed using the schedular rates of
5% to 32%. And it is progressive because the higher your
income is, the higher your tax rate.

What about sole proprietorships?
Diba we have identified three types of businesses;
corporations, partnerships and sole proprietorships.
If you say that individual tax payers are taxed using the
schedular rates, would sole proprietorship be taxed using
the 5-32% schedular rate? Or the 30% global rate applicable
to corporations?
Usually, if you are an individual, the usual income that you
are expected to earn is income from employment and
income from exercise of profession. What if I will make a
sole proprietorship business, would my taxability from 5 to
10% change to 30% just because I ventured into trading
business?
Sole proprietorships are identified not separately from the
owner itself.
Therefore even if you venture from that type of business,
your taxability would remain the same.
Your sole proprietorship business will be merged from your
other income as an individual, whether from compensation
of the service that you rendered. It will be subject still to the
same rates of 5-32%.

You only need to remember that when it is an individual
earning an income, do not deviate from the schedular rate
of 5-32% regardless of what type of income he is earning.
Whether it is employment from business, trade or
profession. Always progressive.


Another feature of individual tax earner.

Features c and d uses both the two tax methods. One is gross
income tax method and the other, net income tax method.
And we have said that in gross, no deductions are allowed
and when its net, deductions are allowed.
Are both applicable to the tax payers?
Yes.

In case of pure compensation income earner.
What is a pure compensation income earner?
If you are an individual whose income is derived solely from
employment whether it is one or more employers, your
taxation is gross and modified in a sense.

Why is it modified?
Why is it gross?
It is gross because you are not allowed to claim expenses.
Even if you have transportation cost in going to your work, it
is not part of the deductions.
Why? You are not into business. You are simply employed.

The second reason why it is modified is because you are
allowed personal deductions. (single, married or HOF=50k
and child max to 4=25k)
This is what made your taxation modified if you are a pure
compensation income tax earner.
To some extent you are allowed some type of deduction but
only this one; no expenses, no costs.

But if you venture into a business. Like you venture in the
practice of law.
Do you follow gross income taxation or net income taxation?
If you become a lawyer and you put up your own office. You
have expenses. You cannot deduct those expenses from the
receipts from your clients?
Once you are not a pure compensation earner as an
individual, whether you are into trade, business or exercise
of profession, you are now allowed to claim deductions.
You follow net income taxation.

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Why?
You necessarily incur the expenses just so you can generate
the income to be declared by the government.

So if you are a lawyer, you claim the expenses related to the
practice of profession.

1.12.24
How about if you are like me; I practice my profession during
the day and teach by night. Do I follow gross or net?
I am a mixed income earner.
So we have persons who are pure compensation earner,
business earner and those who are mixed.
Both mixed and business earners can claim deductions,
except for exemptions.

Why do we allow mixed income earner to deduct expenses?
Because partially he is engaged in the exercise of profession.
So all expenses in the exercise should be deducted.

But of course my expenses in coming into this school in
order to tech are not part of the deductible expenses.


What is pay as you earn system?
Just like my salary in San Carlos, as soon as I get my salary for
the month of July, the tax has been deducted.
So its pay the tax as you earn following the withholding tax
mechanism.

If it is not income subject to withholding tax, the general rule
would be, pay as you file your income tax return; which is
for my law profession.
At the end of every quarter of the year, youre supposed to
file the tax you earn and pay the tax thereon. Thats pay as
you file

While withholding taxes, thats pay as you earn.

Another example of withholding tax, pay as you earn system
is whenever you are earning interest from the bank
deposits.
In your bank deposits, as soon as you are credited an
interest today, you are withheld your 20% final withholding
tax payable. And thats given to the government.


Lets go to the features of corporate income taxation.
Is the feature of corporate income taxation the same as
individual?
Not necessarily.

Global tax system. There is no distinction as to the amount of
income earned by the corporate tax payer. It is taxed at
30%.

Does it follow gross income taxation or net income taxation?
The general rule is that corporations doing business in the
Philippines are allowed to claim deductions and expenses in
computing their income tax. So they are actually following
net income taxation because corporations are there to earn
income. Its always for profit. Therefore you expect that its
always business minded.
Its in view of earning income. Therefore there are expenses
incurred.

All corporations as a rule are allowed to claim expenses
except for non resident foreign corporation, for the simple
reason that they are not dong business in the Philippines.
They are the exception to the rule.



After break.

In determining whether an item is taxable or not
Diba ganina we say that we may be able to identify an item as
an income but it does not necessarily mean that it is taxable.

What are the criteria used in order to determine whether it
has situs in the Philippines?
Citizenship, residency and source.

We are talking of citizenship, so we are talking of the
citizenship of the individual taxpayer and the citizenship of
the corporation. That is one factor that we should look in to.


If an individual is a citizen in the Philippines, an individual
may be considered as a resident or a non resident citizen.
If he is not called a resident or non resident citizen, he must
be an alien.

But for residency, this time we dont consider the citizenship.
Its whether that person or that corporation is a resident or
not. Then we have different considerations to make whether
its income earned has Philippine situs or not.

In some cases, we also follow the sources of income.

What do you mean by source of income?
Is the source of income a place?
The sources of income are not necessarily at all times where
you render your service.
You dont refer to the place, US, Philippines, etc.
Its not the place but the property, activity or services that
produces the income.

For income taxation, we classify the four sources of income.
For that which produces the income:
Taxation

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Capital
Labor
Both capital and labor
Sale of a property

Capital. If you have capital and you put it into good use, then
it produces income.

Labor is something intangible. If you perform services, it will
produce income if you will be paid.

In some cases, you both employ labor and capital it will
produce income.

And the sale or transaction involving properties will produce
income.

Give an example for each source of income.
Capital, the dividends that you get if you invest in the
corporation.
The dividends that you get from the corporation is your
income.
The income of the corporation is not your income. Its the
income of the corporation. The corporation is a separate
and distinct entity. Whatever the corporations income is,
like for 2009, it is 1m, do you actually compute it and say 1
over 48 of that 1m is yours?
No, unless that is declared and given to you as dividends.

So the income arising out of a capital, examples are:
Interest from bank deposit
Dividends out of investment of the business

How about labor, give an example.
Labor may be from an employer employee relationship or
out of your own, like out of your services without
employment.

Labor and capital, give an example.
You put up a business like WT Constructions. This is a
corporation where you offer services but before you can
earn income from the service you offer, you have to put up
capital as well. So your capital is earning income. And your
services is as well earning income.

And finally, another source of income is sale or property.
An example would be exchange of capital assets.



True or false. Gains or profits constructively received should
already form part of the taxpayers income.

There are three criteria to determine whether an income is
taxable or not.
1. whether there is gain or profit.
-When is there gain or profit?
Any proceeds that you get less the cost that you
have incurred in order to get the proceeds; any
difference, if its positive, its a profit or a gain.

If its equal, you purchase 1m for parcel of land and
you sold it 1m, theres no gain or profit.

If you sell a motor vehicle that you bought for 500k
to 500k. No gain or profit. No income tax.

You have a motor vehicle you purchased for 1m and
you sold it for 2m. Do you have again? Yes. 1m

So you have satisfied criteria no. 1.

Can you say it is definitely taxable at this point?
Not yet.

2. whether income is received or realized
-You were able to get the last copy of the book for 1080
your seatmate offered to buy it for 2160, double the
price.
Is the gain of 1080 taxable?
If you closed the deal, and you received 2160, is the
income received as taxable?
As for all other transactions that you enter in to. Will you
stop at number two to say that an income received or
realized is taxable?
No. You have to satisfy the third criteria.

3. whether theres a law exempting it or not
So in our true or false question, when I say that all income
realized should already part of the income.
If there is an exemption, it should make it false already.
The operative word is should.

Lets go to number 1, there MUST BE GAIN OR PROFIT.
Does it mean to say that transactions in which you will suffer
a loss are never taxable?
As a rule, yes.
The nature of income tax is a tax on income.
There is not income, there is no profit, there is no tax.

But there is an exception to that rule that even when even
when there is no income, you get to be subject to income
tax and that is capital gains tax.

Just to illustrate, we always say that proceeds less cost equals
to gain or profits.
Proceeds-cost=gain or profit
1m-500k=500k
500k-1m=(500k)
GR: no tax
EXPT:CGT
Taxation

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24D
27D 6%GSP/FMV RP CA in Phil

It could have been easy if you had this 500k gain.
What is its the reverse? You bought it for 1m and sold it for
500k.
Its general rule is; there is no tax
Exception to the rule is; income tax applied notwithstanding
that you did not earn income is on capital gains tax in sec
24D and sec 27D in your tax code.
It simply refers to capital gains tax of 6% on the gross selling
price or fair market value, whichever is higher, of real
properties classified as capital assets in the Philippines.

In order for you to remember it, if you have a parcel of land,
you sold it. If you sell it even at a loss, you will be taxed at
6%.
Why do we say that it is a tax on capital?
Because the basis is not the profit but the selling price or
the FMV whichever is higher.
What is the difference?
Because usually the tax is based on the profit lang.

So you are liable for capital gains tax if your property sold is a
property in the Philippines classified as capital asset.
You are not taxed on your income but on your capital.

So you would ask, is capital gains tax an income tax?
Yes, because all the taxes you would find in the chapter in
income tax is income tax. They are simply variated on
different names because of the mode they are being
collected.
So this is the only exception where even if there is no gain or
profit, you are subjected to tax.
Number two, IT MUST BE REALIZED OR RECEIVED.
Received means actually received or constructively received.

What is actually received?
The money is already with you.

What is constructive receipt is?
What should be within the right of the income earner?
Control and free disposal of the income.
Even if the income had not been actually received, so long as
it is within his free disposal to use the income, it is already
constructively received and it will form part of its income.

Whether its taxable or not, we move on to number three
later.

An example of constructive receipt is, the lessor is not willing
to rental payment. It is deposited in court and it is within his
free disposal, you get to have the income, which may be
properly taxable, in the absence of a law exempting it.

Another example is the owners of general professional
partnership has income.
Ex. You form a partnership (no limit- 2 or more) for exercise
of your profession.
If at the end of the year, you have not had sharing in the
partnership, you realize net income of GPP of 1b, and it is
not distributed to you actually, can you consider that as a
part of you, partners?
Yes.
Why?
Its a constructive receipt of income.
A GPP is not subject to income tax.
But any income that it earns, whether distributed or not are
considered income on the individual partners.
So even if you have not distributed it in cash but you have
the free disposal to get your share, it is constructive receipt
and will for part of your taxable income as individual
partners.

And when you say realized, what does it mean?
Would realized income always tantamount to received
income?
When you say realized income, it does not necessarily mean
that you have received the income actually or constructively.
It means that you have perfected the transaction to the
point of having the right to collect the income; because all
the events have been completed.

Ex. You made a sale on a motor vehicle. If the motor vehicle
has already been delivered but unpaid, you have already
realized the income.
The cut off is Dec 31 for every individual tax payer.
If you sold the motor vehicle in Dec 30, and you will be paid
on May.
The income has been realized. The transaction has been
perfected. You earned the income. Its already collectible by
May.
So at the time of filing your income tax return, you should
already include this income which has beed realized,
although uncollected.

Another example, if on June, you enter into a one year lease
contract.
If in the contract it says the 1 year lease contract is to be
paid june 30 the next year, will you declare as rental income
the 6 months on april 15?
Yes.
Because your tenant has fully used up the 6 months of the
contract. Its properly collectible. And the income has been
realized at the end of the year.
So you declare half of the contract by april 15.

So in realization, the income is collectible already, the
transaction has been perfected, all the events for you to
collect the income has already taken place.
Taxation

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In receipt, there is actual or constructive free disposal of the
income by the taxpayer.

Third criteria. WHETHER THERE IS A LAW EXEMTING THE
INCOME FROM TAX.
In the absence of a law or treaty, then totally it is taxable.
That is why I want you to study very well sec 32b on the
exclusions of income. Because it provides you the idea of
whether an income actually received is taxable or not.
Not al economic gains are taxable.
Even if your assets have increased, if it does not qualify all
the criteria, theres no need to declare the income as
taxable.

Lets say you have a parcel of land inherited at 1990 valued at
1m. Today, the value is 25m. Is the 24m increase a gain or
profit subject to income tax?
No.
Despite the increase in the value, it is not taxable because it
is an unrealized income.
Unless and until that property has actually been disposed of
in a completed transaction, it is still non taxable.

Were done with the criteria to determine income.

For the entire sem, our focus will be income tax.
There are two types of properties which are which may be
subject o income tax.
We have categorized the two types of transactions
1. ordinary transaction
-where it involves ordinary assets
2. capital transactions
-involving capital assets
When an ordinary asset is sold, it results to ordinary gains.
When a capital asset is sold, it will result to capital gains.
Which is easier for us.

But for bar purposes, and in reality actually, what is more
profitable for the government are the ordinary transactions.
Why? Ordinary transactions are more inclined to those which
are in the course of trade or business.

If it is not used in trade or business, that is capital.
That is why I gave you the example that capital gains tax is tax
on a capital asset.
A good example is you residence.
Your residence is not part of your business.

Of course an apartment is an ordinary asset because it is
used in the business.

There are different rules in taxing an ordinary gain and a
capital gain.
So thats why at this point, I want you to know the
difference between an ordinary asset and a capital asset.

So whats the difference between the two under the tax
code?
ORDINARY ASSETS:
1.stocks in trade/inventories
2.other properties held primarily for sale
3.property which is subject to depreciation
4.RP used in business

CAPITAL ASSETS:
1.share of stock not listed and not traded in LSE
2.RP in the Philippines
3.those not in OA

For purposes of income tax, there are different rules for
capital transactions and ordinary transactions.
Those that are considered as capital transactions, only three
kinds of capital assets:
1.share of stock not listed and not traded in LSE
2.RP classified as capital assets located in the Philippines
3.all other capital assets which are not stocks, which are not
real properties.
-so these are you jewelries, you motor vehicles owned in
your personal capacity
-this is a catch all provision.

On the other hand, is there a definition of what an ordinary
asset is under the tax code?

More or less the definition given to a capital asset is an
ordinary asset.
Look at sec 39 of your tax code. It is a negative definition of
what a capital asset is.
It says that a capital asset which are not part of the stock in
trade of the corporation.
Other properties which are held primarily for sale,
Properties which are used in business subeject to
depreciation,
Real properties used in business.

If you will notice the negative definition, these are the
ordinary assets.

What is the underlying/common factor of these ordinary
assets?
They are used in business

For real property used in business, an example is the land in
which the factory stands.
Therefore if it is sold, is it subject to 6% capital gains tax?
NO. because its not a capital asset. Its used in business. Its
subject to 30% tax of the corporation.

Properties subject to depreciation, used in business is
machinery.
Taxation

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Other properties held primarily for sale; ex. Manny Villar and
you have subdivisions, what are the properties held for sale?
Subdivision units.

For Manny, it is ordinary asset. Fir you it is capital asset.
So it will differ into who is holding it and in what capacity he
is holding.

Stocks in trade or inventories.
SM has inventories. It holds out to the public for sale.

Whenever these are subject to transaction, we go to ordinary
transaction.


For corporations, we will not deal with capital assets.
Ordinary assets only.


What are the inclusions to gross income?
Gross income is income from whatever source, inclusing but
not limited to the following
So what is listed in sec 32 are:
Compensation for services redered
Business income
Gains for sale of real property
Interest
Rents
Royalties
Dividends
Partners distributive share
Pensions
Annuities
Etc.
Since it is including but not limited to the following, the list is
non exclusive.
It means to say that whatever income you can name, it is part
of the gross income unless it is part of the exclusion.

So once you memorize the exclusions, you will know the
inclusions.

Revenues
Less:cost .
Gross income
Less:expenses .
Taxable income
Tax rate .
Tax due .

Do not memorize this yet.
I just need to show you that first off, if you derive anything,
you consider that revenues.
You can deduct the cost which you have to incur in order to
get the revenues.
From the gross income, you deduct the expenses.
Because in businesses, you are in the business of selling
motor vehicle.
Than motor vehicle that you sold for 1m, you purchased that
for 500k.
Is that the only amount that you will deduct before you
determine your profit?
No. you have other expenses.
So you deduct the expenses to arrive at the taxable income
before you use the tax rate applicable.

In our discussion, we will focus on gross income. Its inclusions
and exclusions. After that, we go to the expenses allowable
and not. Then we proceed to determine what are the tax
rates applicable to this type of business income, to this type
of taxpayer, etc.
Then we will know how much to give to the government.
Then we will know at what intervals do we pay the taxes.
Can we pay in installments the tax?
So that is the flow if discussion.

For now, gross income inclusions, it is not all exclusive.

I have in the outline two items which I said two items which I
said two items of income which may be an inclusion of
income.

If you have been condoned of an utang or an indebtedness,
can you consider that as income subject to tax?
Ex. You obtained a loan for 1m. When it was due, he told you
not to pay anymore.
Will that 1m that you were subjected then forgiven subject
to income tax?
No. it is subject to donors tax.
If you have been forgiven of a debt or condoned of a debt, it
is not subject to income tax, if it was given out of pure
liberality without any exchange.
So since its a gift, it will be subject to donors tax.
Donors tax with income tax will never co exist.

Basis is sec32b no. 3. exclusions for gross income gifts.
The reason there is that it has already been subject to donors
tax.

The problem there is that you seat mate will not be paid of
1m, and he will also be liable for donors tax.

When will it be subject to income tax? When will it be
included as part of your income?
If the reason for the condonation or the forgiveness of debt
is an exchange for a service which was already rendered, it
will be subject to income tax.

Why?
Taxation

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Number 1 item for gross income inclusion is compensation
for service rendered. Therefore it is now subject to income
tax.

So for every condonation of indebtedness, you have to look
into the reason it was condoned.

Who pays the income tax?
The recipient of 1m.


We say that if there is gain or profit and it has been realized
or received and there is no law exempting it, its subject to
tax.
But we still have to know if its in Philippine situs or not.
Because if its situs is abroad, the Philippine government
cannot collect the tax even if its an income.

We will study the situs of the gross income inclusions.
We start of with compensation.

If you render service, you are to receive compensation.
Where is the situs of income?
The place where the service is rendered.

If you go to US and performed nanny service, will that
compensation income have Philippine situs?
At this point, we will not study the type of taxpayer. What we
will study is what type of situs it is in. who the taxpayer is is
another concern.
Compensation has situs where the service is rendered.

So for usher,even if he is not a resident a=of the Philippines,
not a citizen, he has singing activity in the Philippines. The
activity is here. Therefore, the situs is here, it is subject to
income tax here. Unless there is a law exempting him.

Lets go to the second one.
How about the business income, where is the situs?
Ex. There are many businesses that are organized in the
British Virgin Islands. Transactions are made in the
Philippines. Where is the situs of business income if the
office is not located here, and the transaction is located
here?
Its not where the business is located. For a business income
to have situs here, the business should have been
undertaken here in the Philippines.

Ex. If you are a non resident Filipino citizen, and you still have
a sari-sari store in cebu, because the business is undertaken
in cebu, therefore the Philippines has situs on the business
income.

So regardless where you are, if the activity is here, it has
Philippine situs.

But what is so special about the manufacturing company?
Why is it different from a merchandising, trading and mining
industry?

So for manufacturing, there are special rules in the situs.

If its manufactured in the Philippines and sold in the
Philippine territory, then definitely it has Philippine situs.

If it is manufactured abroad and sold abroad without coming
into the Philippines, no Philippine situs.

But one it is manufactured here and sold outside, it may
have two situses. Partly within the Philippines and partly
without. Depending on where the contract of sale is
perfected.

If it is manufactured abroad and the sale took place here, we
claim situs. And the foreign government claims situs.
Therefore it is partly within and partly without depending on
whether there is an exemption granted by one party with
the other.

The other one, farming , mining; the reason why there is a
direct rule of saying that the situs is where the business is
undertaken is because this is more or less permanent. In
mining you know where the natural resources are.
If it is in the Philippines, it is taxable here.

Income from sale or exchange of property, where is the situs
of taxation?
If its real property, no question about that. If the property is
located in the Philippines, we follow where the property is
located. Philippines will always claim that it is giving benefit
and protection who ever the owner is, notwithstanding his
citizenship or residency. The sitis is due to its location.

But what about personal property?
If a motor vehicle is purchased abroad and shipped to
Philippines, is it subject to tax?
The rule is simple. Where the sale took place.

But do you know where the sale took place if the thing is
movable and crosses border?
You have studied that in the law on sales; where the
contract is perfected.

If at the time that you purchased it, the seller abroad
relinquishes its ownership at the point of delivering to the
carrier, sale is perfected abroad. Sale has situs abroad.

But if the seller retains ownership until it reaches Philippine
ports and until then, it is relinquished. Sale took place here
and is subject to Philippine situs.
Taxation

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Its not a question of where the document of sale was
signed, or where invoicing took place.


Interest income; where is the situs?
Interest income on a foreign loan paid by a non resident
Filipino citizen, does it have Philippine situs?
It has no Philippine situs is not because the loan obtained is
foereign. Or that the interest is going to be paid abroad.
The reason why it has no situs is because the residence of
the debtor is not in the Philippines.
So the situs of interest income is where the debtor is
residing.
The reason there is that it is an intangible asset; the right to
receive the asset.
The reason being is because the debtor is receiving benefit
and protection from the government.

So if the debtor has a residence here, what ever interest he is
paying abroad will have to be paid income tax.

Lets go to the situs of rent income. Where is the situs of rent
income?
Where the property that has been leased is located.
The activity of leasing is undertaken in the Philippines;
therefore, it has Philippine situs.

Intangible property.

Royalties will have situs in the Philippines, give an example
for that.
What type of activities will you pay royalties for?

Ex. Mcdonalds or KFC, if you are franchising in the
Philippines, you pay royalties.
Does it have Philippine situs?
You open Mcdonalds in Cebu and KFC in Papua New Guinea,
which if the two royalty payments has situs in Philippines?
Mcdonalds because the intangible property or the right is
actually exercised in the Philippines.

When you say intangible property is used, it also refers to
the technical know hows.
Sometimes you manufacture microchips in the Philippines,
and you get technical knowledge or knowhow from foreign
corporation, you pay royalties for the sales; that is also
where the intangible property is sold and used here.

Dividend would call for a very long discussion. Lets skip
dividend for the next meeting.

Where is the situs of prizes and winnings?
If a prize is given for a service rendered, you go back to the
first rule if its a compensation for any service rendered,
you look at where the service is rendered.

But sometimes prizes are given without the consideration of
service. Where is the situs of the prize given where no
service is rendered?

For me, winnings, totally you dont render a service.
For prizes, it can be with service of not.

So if its winning, you go to US and won the lotto of $1b, does
it have Philippine situs?
No. the situs of the winnings is in US.
Philippines has no situs.

But is it subject to Philippine income tax as a Filipino citizen
who went abroad for vacation?
Remember that all resident citizens wherever our income
is , whether here or abroad, it is subject to income tax.

So $1b income in US, although it does not have Philippine
situs, but because of the rule that resident Filipino citizens
are taxable for the income outside, the $1b winnings is
subject to Philippine income tax.

So knowing whether income has situs in the Philippines or
not, it is not tantamount to saying that it is totally not
subject to income tax.
Because you consider the residency and the citizenship of
the taxpayer.

So what do you do to avoid paying income tax on $1b?
Stay in the US at least to achieve the status of non resident
citizen. Because then, only the income that has Philippine
situs is subject to phil tax. So do not go home for at least 183
days.


















Taxation

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July 20, 2010

Transcription from room 403 for July 24, 2010 class
Were now with exclusions from gross income.
The enumeration sec32b are substantive exclusion from gross
income. So it is by law an exclusion regardless of the point of
realization.

There is what we call a temporary exclusion from gross
income from gross income.
The word temporary means that in some point in time, the
income is excluded from the gross income because either it
has not been realized or it has not yet been perfected.
Ex. although there is a gain or profit, so long as it has not yet
been realized, it is not a taxable income as yet. It is
excluded.
But once it is realized, it ripens into an income that is
taxable.
Those are the types of income that is listed in 32b.

Those that are listed in 32b whether it is received, realized,
unrealized, etc, these are already exclusions from gross
income.
And we started off discussing number 1 last meeting.

PROCEEDS FROM LIFE INSURANCE
What is the reason why proceeds from life insurance are
excluded?
It is to indemnify the beneficiary of the death of the person.

So there must be somebody who will die?
Yes.

There are insurance policies which are life insurance policies
but are the other type. At the point of maturity of that
insurance policy, even life insurance policy, the insured has
the option of receiving the proceeds from the insurance
company. Is that the same type that is not taxable?
To be totally free from income tax, the proceeds of the life
insurance policy must result to the death of the insured?
True or False. The proceeds from life insurance policy
regardless of the designated beneficiary is not subject to
income tax.
False.
As an exception to the rule, if and when the insurance
proceeds are withheld by the insurance company on the
condition that interest will be paid upon release, the interest
or any income derived from the withholding, meaning the
point of not yet releasing the insurance proceeds will be
subject to income tax. It is already an income of insurance
proceeds.

But the life insurance proceeds, the reason why its not
subject to income tax or is an exclusion from gross income is
because its simply a payment or an indemnity for a loss or a
death of a person.
We are looking here at somebody who died. The person who
is insured will never get the chance to receive the insurance
proceeds.
Otherwise, if he does so receive it, it will only be covered by
exclusion number 2.

We have another exception to the rule why it is false.
Since we are talking about exception to the rule, this means
to say that there will be tax implication or some form of
taxes that needs to be paid.

Just like number 1, we said any interest derived from
withholding the release of the life insurance proceeds is
already an inclusion from gross income which is taxable.

Taxation

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Second exception is when there is a transfer to life insurance
policy.
What do you mean by that one?
If an insurance policy is subsequently sold or transferred to
another person, what will happen is that any difference
between the amount paid to get the insurance policy versus
the proceeds will already be subject to income tax.

Ex. if the face value of the insurance policy is 10m and you
are required to pay 5m in premiums over a period of 5 years,
that means to say over five years you have to pay 1m per
year.
And it will produce face value or face amount of 10m. So
half diba?

If along the way, second year of the insurance policy, you
have already paid 2m, and you sell it to your friend for 3m,
how much is your friend going to pay to the insurance
company to finish off the policy?
3m pa diba.

Because the seller sold it at a point after the point of paying
the premium which is 2m.

Although the seller paid 2m in premiums but sold it for 3m,
transfree paid 3m to seller and 3m remaining premiums
since the insurance company is expected to receive total of
5m.

How much did the buyer paid for the contract?
6m

If he receives the insurance policy face value of 10m, is the
10m exclusion from gross income?
Not anymore because it is an exception to the rule.

Therefore, is 10m taxable?

The insurance policy has a face value of 10m. How much do
you expect to receive upon maturity or upon death?
10m

But you dont pay 10m premiums just to get the face value
of 10m. Otherwise theres no sense of getting the insurance
policy.

So if the insurance policy says 5m of premiums in 5 years,
that means to say 1m per year.

If the first insured sells it for 3m after paying 2m, the buyer
actually has a capital of 3m. If he decides to finish by paying
off the remaining 3m which is unpaid, he actually paid for
6m.
So if the beneficiary receives the 10m in proceeds, this is not
anymore covered in the exclusion number 1 because there is
already a subsequent transfer of the policy.

But the entire 10m is not taxable because we also have to
apply the exclusion number two which says that if the part
of the proceeds is a return on premium payments or cost,
then it has to be exclusion from gross income or nontaxable.

How much of the 10m is premium and cost?
The 3m and 3m=6m

So only 4m is taxable in the hands of the recipient.

So again, true or false. All proceeds from the life insurance
policy regardless of the designated beneficiary is not subject
to income tax.
FALSE.
Because not all proceeds will have to be, except if it falls
under the exception 1 and 2.

The statement regardless of the beneficiary, is that correct?
Yes.

So would the designation of the beneficiary matter insofar as
considering the income as exclusion?
No. Whoever is the beneficiary of the life insurance
proceeds would enjoy the exemption from income tax
because the law does not distinguish.

But it does not mean to say that if the proceeds or life
insurance proceeds is an exclusion from life insurance
program, totally there would be no other tax applicable.

What are the applicable tax, just in case? Lets talk about the
beneficiary.

Life insurance proceeds; if the beneficiary is any of the
relations of the insured: heirs, estate, administrator
executive, is it subject to income tax?
Is it an inclusion to gross income?
Yes. Therefore it is not subject to tax.


If the beneficiary is a third person other than those related to
the estate of the decedent or the insured; ex. the company
who took the life insurance policy of the insured or any
other friend, would it be an exclusion from gross income of
the beneficiary?
Is the recipient beneficiary be subject to income tax or
would that life insurance proceeds be part of his gross
income?
It is one of the exclusions because its regardless of who the
beneficiary is.

Taxation

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Its no longer taxable insofar as the beneficiary whether he is
beneficiary class number and number 2; he is not required
to pay income tax on the proceeds.

But would the estate of the decedent be liable for estate tax
by the mere transfer? Or would it be liable for estate tax
because it is part of his estate upon death?
Yes. Because if the beneficiary is the estate itself, then it
goes to the estate. If the heirs, it goes still to the estate. If
the executor or administrator, it goes still to the estate.
Therefore it just goes to show that its part of the property
of the decedent upon death.

Remember estate taxation is taxing the decedent on all
properties existing at the point of death.

How about life insurance proceeds, when does it accrue?
Upon death of the insured.

Beneficiaries would not have to pay the income tax but the
estate itself is liable for estate tax.

Remember an estate if the decedent is a separate entity. Its
an individual for tax purposes.


If the beneficiary is a third person; the company who took the
insurance policy, a friend, a relative who is not near the
heirs, is the estate liable?
At the point of computing the estate tax, will the BIR include
the proceeds as part of the estate and be liable for estate
tax?
Mr. A, the insured is the president of company B who took
out the insurance company in favor of the prior.
There are two scenarios.
One, beneficiary is in relation of Mr. A which can be the
estate of Mr. A itself, heir, administrator or executor.
Second scenario is the company made itself the beneficiary.
Insofar as recipient beneficiary is concerned, we dont have
any problem. Its never subject to income tax.
But how about estate tax?
Will it be subject to estate tax if the beneficiary of the policy
is the third person, the company itself?
NO.
Because ownership of the proceeds belongs to the company
who is not part of the estate of the decedent.
Therefore it is not subject to the estate tax.
Estate tax refers only to the estate of the dead person.

And if its now the ownership of the company who has
designated itself as the beneficiary, of course you do not co-
mingle the company with the estate.

So there is the irrevocable designation of the company as
the beneficiary, no way is it subject to income tax.

But if in default, the company is the designated beneficiary,
then it is.
And what is default of insurance policy?
The designation is revocable.

Only if the designated beneficiary is irrevocably designated
that it not belong to the estate of the decedent.

So as a general rule, you will see that majority, it will always
form part of the estate of the decedent, relations or third
party revocably designated.

It will only be excluded from the estate of the decedent if it
is irrevocably designated. And irrevocable designation must
be clear from the policy itself. Otherwise, default is
revocable.


Mr.A took out a life insurance policy wherein the terms of the
contract is 10 years payment of premium and on the 20
th
, it
will mature.
If he outlives the policy he gets the insurance proceeds.
If he dies before the 20 year period, his beneficiaries or heirs
will get the life insurance proceeds.
What is the tax if he outlives the policy and if he has not?
If he outlives the policy, meaning he himself outlives the
policy, it will be taxable except for the portion which
represents the return of the premium payments that he has
made.

If he gets 100m after outliving the policy after it has matured
on the 20
th
year, and by computation he was only able to
pay 5m in premiums, then the 95m difference will have to
be declared as part of his gross income taxable to 32%.

If he dies before maturity of the policy, then we will follow
exclusion number 1.






Lets go to exclusion number 3.
ITEMS ALREADY COVERED BY DONORS TAXATION AND
ESTATE TAXATION

Why is it excluded from gross income?
If X gives a gift to D, who is subject to tax? What tax?
X, for donors tax.

Will D be liable for tax on the amount received?
No.

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The taxability of income tax would have to be on the part of
recipient.
The taxability of donors tax would have to be on the part of
the donor.

So there are 2 exceptions to the rule that gifts are not subject
to income tax because they are exclusions from gross
income:
1. any income or fruit derived from the gift is not covered by
the exclusion. Its subject to income tax.
Naturally. Its like exclusion number 1, if life insurance
proceeds is withheld and it bears interest, the interest as
a fruit will have to be subjected to income tax.
2. if you require the done to perform some services in
exchange for the gift.
Who here will be taxable?

Whichever way, the amount given is always subject to
tax.
It might be on his part, if its purely gratuitous, the entire
donation will be subject to donors tax.
If its for compensation as a whole because services are
to be performed, he will be free from taxes but the done
will be taxed for income.
If its half-half or partly, the donor will pay the donors
tax and the done will pay the income tax.


Next exclusion is.
COMPENSATION FOR INJURIES AND SICKNESS.
What injury are we talking about?
Would all types of injury be covered in the exclusion?
What type of compensation do you get out of a physical
injury case?
What are the sources wherein you derive compensation for
physical injury?
Compensation for injuries, do you agree that it refers only to
physical injuries?

As discussed by some of the authors, when you say
compensation for sickness and injuries, it would have to
refer to physical injuries and sickness.


And when you say compensation for physical injuries, its
related to sickness. You have to take it with the other.

The law itself says that, for compensation maybe by virtue of
a suit or a case or paid by virtue of a health insurance,
personal heath insurance, accident insurance, and
workmans compensation act.
It simply boils down with there being something wrong with
the physical body or physical disability.


Would the damages received as part of the compensation for
injuries and sickness be subject to income tax?
No. Its not subject to income tax because it is derived not
from labor, capital, labor or capital and properties.

And again, its exclusion is not stemmed from the other laws
but because of this 32b which actually says that any
compensation received including damages on account of
such injury or sickness is not part of the gross income
subject to income tax.

The only gray area there is the compensation for loss for
future earnings.
If you have studied torts, somewhere along the way you will
come across SC granting compensation for the loss of the
future earnings which could have been derived by the
person who met the accident.

So whatever is derived from that; EX. if the dead or injured is
expected to receive 50k a month times the number of years
of his life expectancy. That will be awarded by SC.

As to whether it is taxable or not, there are conflicting views.
Some of the authors would say that it is subject to income
tax because it is compensation for future services which
could have been rendered.

But some of the authors would also say that it is not subject
to income tax because it is part of the compensation for the
injury or sickness.

We can say that it is not taxable.
We use the word compensation. And it means all types of
awards given by either the SC or insurance companies.



INCOME EXEPMT UNDER TREATY
Since the doctrine of incorporation, any agreement we have
entered into with the other countries that there are
exemption to be granted to the taxpayers earning income
here, the principle of reciprocity will be respected.
We consider those as exclusions from gross income.

But mind you, this is not even self executing. Whatever the
provisions of the tax treaties are, we have to seek
confirmation from the national office of the bureau of
internal revenue in Quezon City.
Otherwise, if we dont seek for a confirmation ruling, even if
youre situation falls squarely with what the treaty provides,
you will not be allowed to avail of the exemption or the
preferential treatment of the treaty.

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So again, its like lifeblood doctrine that in construing
exemptions, it has to be strictly construed against the tax
payer.


RETIREMENT BENEFITS
What retirement benefits are subject to tax?
1. If it falls under RA 7641 which actually is part of the labor
code, art 287 on retirement benefits.
2. If it is part of the private retirement fund.

So, what are the conditions for excluding from income the
benefits received under retirement benefits plan?
1. recipient must be at least 50 years old
2. at least 10 years of services
3. retirement plan is reasonable
4. in nature of pension, stock option or profit sharing
5. availed once
6. approved by BIR
7. employer must contribute and for the common benefit


How many situations are the in 6a, how many retirement
benefits are we referring?

If you are 48 years old and you have rendered 48 years with
the company, can you retire with the retirement pay tax
free?
If you retire at the age of 51 and have rendered 8 years of
service, can you retire tax free?
Should both (age, years of service) requirements co exist in all
cases?
This matters. Because most of the companies I know, most of
the employees will wait until the point that they can get the
retirement benefit free of tax. Otherwise they will have to
pay 30%.
When can you say that 60 year old rule will apply rather than
the 50 year old rule? Can both requirement co exist?
Can we expect the two types of benefits under the 7641 and
the reasonable retirement benefit plan to be applied in one
and the same company?
So that some can retire at 60 tax free while others can retire
at 50?
After break.

Would the two situations mentioned before co exist in one
company?

This rule is under the tax code reasonable private benefit
plan.
If the company sets up a reasonable retirement benefit plan,
retirements for it to be exempt from tax must be by a
person at least 50 years old, having rendered service for at
least 10 years and it is his first availment of retirement.

When will the 60 year old, 5 years of service apply?
In the absence of a reasonable private benefit plan
established by the company,
In the absence of collective bargaining agreement,
In the absence of the employment contract designating
when the retirement is.

So it is a catch all rule.

If there is no reasonable private benefit plan, there is no
collective bargaining agreement, no employment contract,
no other agreement entered into by the employee and
employer, then use this.
He gets to retire tax free at the age of 60, having rendered
five years of service.

But in more cases than not, companies, since they are
encouraged to establish a reasonable retirement benefit
plan, then the default is the retiree should at least be 50
years old with at least 10 years of service.


So if there is a reasonable private benefit plan, to be tax free,
it should be:
1. duly approved by the BIR
2. gratuity plan
3. employer established the fund, contributing to the fund
itself
4. fund will be for the sole benefit of employees

What are the requirement of private benefit plans proceeds
to be tax free?
1. employee is at least 50 years old
2. has rendered at least
3. first availment of retirement

For you to be exempt, not only must you be at least 50 years
old and had at least 10 years of service. It must be the first
time that you have availed of a tax free retirement, exclusive
of the government retirement.

Of course if its a government retirement, its totally tax free.

So in this case, for example, you have reached 50 years old
and have rendered 5 years of service with company A. This is
the first time you have availed of the retirement.
Are you tax free?
Yes.

Then you got yourself hired with the government at age 51.
You rendered 10 years of service with the government and
retired at the age of 60. Is the retirement pay that you will
receive from the government exempt from tax?
No.

Taxation

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The rule is to exclude retirements from government.
So if the second retirement is from the government
institution, it will have to be exempt from tax.

But if your second retirement after you first private
institution retirement, is still with another private
institution, regardless of how old you are, it is already
taxable.

Even if you rely on the law itself, it says there retirement
benefit plan of a private institution or private corporation
So if its not a private institution, its government, its not
availing twice with the private.

So if its private-government, both are exempt.
If its private-private, that is taxable.


This will apply if there is a reasonable private benefit plan.
Let us say there is no private benefit plan. A collective
bargaining agreement is in effect. And it says that an
employee can retire at the age of 60 or after rendering 20
years of service.
A, 40 years old, wants to retire after rendering 21 years of
service.
Taxable or not?
Not taxable.

Another case, no collective bargaining agreement, no
employment policy, no reasonable private benefit plan.
A, 60 years old, wants to retire after rendering 4 years of
service in the company.
Taxable or not?
Taxable.

Theres an existing retirement benefit plan, 50 years old, ten
years of service.
Taxable or not?
Not taxable

You always consider if there is an existing retirement benefit
plan with the company. Because the law says; retirement
benefits derived are exempt if its derived from RA 7641 or a
reasonable private benefit plan RPBP.
But the law also says that for the benefits derived in RPBP
would only be exempt if it satisfies the requirements: 50
years old, 10 years of service, and first availment of in a
private institution. Well of course the RPBP would also be
duly approved with all the requirements.

But would that 10 years- 50 years old apply to 7641?
No. because this is a different law. This is the tax code itself.

If there is no retirement benefit plan, you have to apply the
retirement benefits derived from 7641.

But 7641 is not exclusive to 60 years old or 5 years.
It says that it will only be applicable if there is no CBA,
employer policy, etc..

Now if there is a CBA, do not use this as yet.

If the CBA says you can retire at the age of 60 plus 20 years of
service, then it must be PLUS. Both conditions must exist.

If the CBA says 60 years old or more than 20 years of service,
if you can satisfy just 1, then it is exempt.

So long as the CBA is not more burdensome than the 60-5
year rule.
It says in 641, any CBA or policy that is not more
burdensome than the 60-5 year rule can be acceptable.

The 60-5 year rule will be applied if there are no agreements
existing.

So in the case of 60 years old or at least 20 years of service,
and the employee has been working for 21 years, this is
exempt. Because the CBA says OR. So even if you are still
young at the age of 40, you can still retire if you have
rendered at least 20 .


**If there is a CBA and RPBP at the same time, it has to be
well defined in the CBA to whom and to what extent it will
be applied.
I dont really know if it can co-exist

But in this ruling in BIR, an employee retired at less than 50,
and rendered 21 years of service. His retirement benefits are
granted with exempt by BIR. Why?
Because the CBA itself which is duly approved, says than
employee may be retired at the option of the company upon
reaching the age of 60 years or upon having completed
more than 20 years of service.

So it can even be more than 10 years of service. At the age of
30 he can retire. And that is exempt.
But then again, if you get yourself rehired in a private
institution, and you get again your retirement, that is
taxable na.


You retired and got the retirement pay of 10m. Because of
your excellent service, you receive a gratuity pay of 4m. Plus
15 days of work, 50k. Your vacation leave and sick leave
credits that have not been used are 500k and 500k
respectively. You are 50 years old with 10 years of service.
In total, you receive 15,050k.
Taxation

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Which of the items are subject to tax if the you are under
the RPBP?
If the company has a retirement fund, and you retire, your
retirement pay will not be taken out of the retirement
funds. It will be taken out from a plan, which plan is a
separate entity itself. It is usually handled by insurance
companies or banks.
If you did your job well, you can be given gratuity pay which is
outside of the fund. It is bonus
Is the gratuity pay subject to tax?
No.

Is the 50k taxable?
Yes because it is compensation for the service rendered.

How about the leave credits?
If you work and you are given vacation leave and you dont
utilize them, in some companies it can be converted to cash
and can be accumulated for as long as you want.
Are they subject to tax?
No.

If you have plans of retiring, do not compute or convert your
leave credits before retiring. Because usually if you convert
your leave credits on a regular basis without being
connected to any retirement, they are taxable in excess of
ten days.

But if you retire and its the only time that you convert all
leave credits, it becomes a terminal leave pay, everything is
taxable.

Everything given during retirement if your retirement is
qualified, tax free, is exempt.
So even the gratuity pay is not taxable.
Only the 15 day salary is taxable.
But all the rest, retirement pay, bonuses, gratuity pay, leave
credits, whatever it is named, basta lang the basic is exempt,
everything that follows will also be exempt.





SEPARATION PAY
Separation pay. Is it subject to tax? What are the rules for it
to be exempt from tax?
Is separation pay taxable if it is given out of pity?

You were hired by the government as one of the midnight
appointees of GMA. When Aquino came in you will be
separated from work.
You got 100k separation pay. Is that taxable?


Quizer question: if you are given separation pay at the age of
48 years old after rendering 9 years of service due to
occupying a redundant position, is it an inclusion to gross
income?

For separation pay, there is no age requirement, no years of
service rendered requirement for the payment to be tax
free.

All that it requires is that your separation from the company
must be due to death, sickness, physical disability or indury
and those other causes beyond your control.
For example, redundant position, or those that you find in
you LC, labor saving device, retrenchment, occupying a co
terminus position.

How about social security benefits? Is that an exclusion from
gross income?
Social security benefits for us Filipinos receiving from our
Philippine social security system is not taxable. Even from
the GSIS as well as social security benefits from abroad.

Ex. you have been a citizen or a resident in the US and you
retired here, you will get your pension and social security
benefits, its also tax free.
Probably thats the reason why there are so many retirees
here.


US VETERANS BENEFITS
Thats self explanatory


MISCELLANEOUS ITEMS
Quizer Question: Mr. A received a 100k cash prize after his
cell number was automatically included in the electronic
draw effected by the service provider. He did not perform
any act to enter the contest nor is he ever required to
render future services as a condition to getting the prize.
Is the 100k part of the exclusion?
Yes?
How about joining the raffle in SM. If the prize is motor
vehicle. Is it subject to tax?
Yes.
There is an on going restoration project of the church. In
order to encourage people to donate, they sell raffle tickets
and if they win its tax free?
What are the requirements?
What about buying the ticket itself, is that not active part of
joining the contest?
Its taxable. Even if the purpose is religious.

So long as you do some or theres an action on your part in
order to join the contest and win it, it is taxable.

Taxation

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If youre a taxicab driver and you are given money for
returning the money left in your cab as an award.

Educational naman, you join whos smarter than a fifth
grader, thats taxable because there is active participation.

So both requirements should be satisfied.
1. without any action on the part of the recipient to enter the
contest
2. not required to render substantial future services

Prize given to Pacqiao by the government is not because he
was not expecting that. It was given for giving honor to the
country.

PRIZES AND AWARD IN SPORTS COMPETITION
Is Pacqiaos last tournament winning taxable?
Yes.

In sports competitions, for your awards to be tax free or
excluded in gross income, the competition must have been
duly approved by the national sports associaltion and
approved as well by the Philippine Olympic committee,
whether it may be an international competition or neld in
the Philippines or not.

What it means to say is that the exclusion from gross income
would never include a professional fight.

Many is a professional boxer. He is not representing any
sports in the Olympics. Everything that he earns is taxable.

In one of the BIR rulings, there is this one boxer who sought
for exemption. He was granted an exemption on the ground
of bringing glory to the Philippines.

But if it granted to that boxer, no other boxer can avail or use
that ruling for an exemption.
Why do you think other boxers cannot avail of the exemption
if the exemption is granted by BIR to one of them?
Exemptions are personal.
So whenever rulings or SC says that this person is exempt,
then no other person can use that provision unless the law is
general.
In any case, if and when prizes and award granted in sports
competition or if any literary, religious, charitable
educational achievements that you get, if it does not satisfy
the condition, therefore it is taxed; it will now be with held
of tax. Because the nature of prizes and awards is that it will
be given to the recipient net of taxes.

Now if you happen to win in SM 1m, do not expect to get 1m.
its only 800k because the tax withheld is 20%.

If in the posters it is said to be tax free, will you receive 1m?
Yes. But do not be misled. There is tax but the burden of tax
is shifted to the one giving the price. SM will pay 1250k. the
1m you received is as if it is the 80% of the price.

If it is not tax free, the price (motor vehicle) will not be given
unless the winner pays the tax.



INCOME DERIVED BY GOVERNMENT OR POLITICAL
SUBDIVISIONS
In this exclusion, whose income is exempt?
Whats a government entity? Does it include government
agencies?
No.
You have to strictly construe it.
In this case, this is exclusions are only the income of the
government of the Philippines or the income of political
subdivisions.

And you know political subdivisions as composing of the
provinces, cities, municipalities and barangays.

It does not include government instrumentalities nor
entities nor GOCCs.

If you have seen from your readings that here is exemption
granted to agencies, instrumentalities or GOCCs, that basis is
not 32b but some other provision of the law.

What were talking about here is the income from the
exercise of the essential governmental function of the
government of the Philippines and its political subdivisions
as well.

The basis here is that we cannot tax the government who is
taxing us.

How about income derived by foreign government? Is that
subject to income tax?
If there is income received by a non resident foreign bank
fully owned by the Japanese government, is that taxable?
So when we say income derived from investment in the
Philippines, would it include extending a loan to the
corporations in the Philippines or the Philippine government
itself?
If a domestic corporation of the Philippines is obtaining a
loan from a bank in Japan fully owned by the Japanese
government, is that taxable?
You get 1b loan and will have interest of 100k monthly. Is
this covered by the exclusion that investments made by a
foreign government or a financial institution fully owned by
the government are exempt from tax?

Taxation

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If the 1b is claimed in the Philippines, it is a domestic
corporation, the operation is expectedly in the Philippines.

The SC has already included granting of loans by foreign
banks to domestic corporations, investment not only in
stock, bonds and also extending loans.
So any income derived from money extended to the
Philippines by a foreign government or even if it is a financial
institution so long as its fully owned by the foreign
government is already exempt from tax.

So in the Philippines, it also works the other way around.
There is already a tax treaty.
If we extend a loan as well to foreign government, the
income derived from that loan is also exempt.

But not all banks are considered as covered in this exclusion.
In Japan there are only two banks. In the Philippines are
Land bank of the Philippines and Development bank in the
Philippines.

When it says income from investment, it does not mean to
say lang investment in the business. It includes and it has
expanded the meaning to those extending a loan to
domestic corporation.

But if the extension of the loan is to a foreign corporation or
not a domestic corporation, then its not income having situs
here. Thats another issue.

GAINS DERIVED FROM REDEMPTION OF SHARES OF STOCK BY
THE MUTUAL FUND COMPANY
It should be the mutual fund company. If not, no exclsions, no
exemptions.

CONTRIBUTIONS TO SSS, GSIS, PAGIBIG AND UNION DUES
You will notice that your salary is already deducted with
these contributions. Its your share. Because the share of
you employer is not reflected in the pay slips.
In the computation of you tax, those items are deducted from
your income because of the provision of the law.
After the law made in 1997, they were already made as
deductions.


If your have monthly salary, you will give PAGIBIG 100. Your
employer will also give 100. Your PAGIBIG account will be
added 200.

But if you have a housing loan and you want to contribute to
PAGIBIG 1100 and your taxable income if 8900, this will
actually benefit you. This will reduce your taxable income.


























































Taxation

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July 20, 2010
Taxation
Pre-midterms - July 17 20%
Midterms 30%
Finals 30%
20% - class standing (orals,
unannounced quizzes)

Coverage:
III. Tax 1
3. General Principles
- You have studied this in constitution wherein you studied
the three powers of sovereignty.
4. Taxation
5. Eminent Domain
6. Police Power

4. Income Taxation
- By far is the largest chunk in bar
40% - Income taxation
60% - General principles
Estate taxation
Donors taxation
VAT
Local taxation
Real property taxation
Tariff and customs code
Remedies of government
So tax 1 is important because of income taxation.

IV. Tax 2 (4 units)
8. Estate Taxation and Donors Taxation
9. VAT
10. Remedies in taxation
a. Remedies of government if cannot called
b. Remedies of taxpayer if harassed or if overpaid
erroneous taxes.

11. Local Government Code
- Local taxation is that which is imposed by city mayor
office, actually the Treasurers Office.
These are taxes imposed by the Local Government Units.

12. Real Property Taxation
- Used to be a national tax but is now delegated for
collection LGUs. So in every area wherein you have real
properties either in parcels of land, building, machineries,
then you will be subjected to real property taxes.

13. Tariff and Customs Code
- This is enforced by the Bureau of Customs

14. National Internal Revenue Code
- Covers the percentage taxes and documentary stamp
taxes
As of right now, these are not part of the BAR.

So for Tax 1, we will have General Principles today, and for
succeeding, we will have income taxation.

Book: De Leon Fundamentals of Income Taxation
- For general principles

National Internal Revenue Code
RA 8424, Jan 1, 1998 (effectively)
- Sometimes called 1997 tax code

Has NIRC been amended since then? Yes
c. 2005, RA 9337 amended parts of NIRC specifically VAT
and a portion of income taxation especially passive incomes.

d. In 2008, RA 9504 took effect on July 6, amending portion
of income taxation of individual taxpayers.

You are familiar with minimum wage right? Minimum wage
income earners are no longer subject to income tax.

So if your income is 267, your income will not be held by the
employer.

But if I were your employer and I pay you 268, will I subject
you to tax?
Yes, because you are no longer a minimum wage income
earner.

So I want you to have a copy of the tax code and at least 1
textbook and outline of the subject.

Discussions will be according to the outline.

Is the power of taxation an inherent power of the
government or does it depend on the law granting such
power?
If we take out the constitution, will it change the power of
the government to impose taxes on its people?
No. Because it is inherent in every sovereign.

You think the Philippines can survive without taxation?
Youre saying no state could survive without financial
stability? That puts in equal footing the Philippines and US
and for that matter developed countries and third world
countries?
Almost all states actually impose taxes and burdens among
people out of necessity.

I think there is only 1 state that does not and they solely exist
on
So as a rule, taxation is applicable to third world countries or
developed or developing countries.

Taxation

Kwin
Kwin
K w i n T r a n s c r i p t s

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US is taxing in people because in 1939 we followed the tax
code of US, s we did with our civil code from some other
countries.

So the tax code was patterned after the tax code of US on
1939.

It eventually evolved into our code and in 1997, we also had
the version of the 1977 rational internal revenue code,
amended in part in 1983 and now our current tax code is
National Internal Revenue Code of 1997 which is RA 8424.


What is taxation?
Taxation is the inherent power of every sovereign nation
Exercised through its legislative or law making body
Imposing burdens
Upon people, subjects or objects within its jurisdiction
For the purpose of raising revenue
To meet the legitimate needs of the government

So if you break it down,
It is an INHERENT POWER of sovereignty.

Who exercise the power?
The legislative body which is the congress composed by
senate and the house on the national scope.

And on the lower levels/local government units, who
comprises the legislative bodies?
The Sangguniang Panlalawigan for the province;
Sangguniang Panglunsod for the cityetc

So taxation is exercised the lawmaking body of every
sovereignty.

Against whom is the burden of taxes imposed?
Against subjects and objects

But are all subjects and objects covered by taxation?
Say for example, you went abroad as a nurse. You have
immigrant status in US. Will you be covered by Philippine
income taxation?
When you say subjects and objects within its jurisdiction, it
actually refers also to taxation observing territorial
boundaries.

The power of taxation extends to everyone within the
territorial jurisdiction.

Of course, that is a very general definition, later one you will
know who are actually covered by tax, who are liable, who
are not.


Then for the PURPOSE OF RAISING REVENUES TO MEET THE
NEDDS OF THE GOVERNMENT

As a rule, what kind of purpose may a government have in
order to raise revenues for taxation?
For public purpose

The power of taxation has 3 natures. What are there? (2 are
included in definition)
1. Legislative in nature
2. Inherent in sovereign
3. Subject to constitutional and inherent limitations

4. So you are saying that the power of taxation is legislative
in nature.
In the exercise of power of taxation, it is required that only
congress or local lawmaking bodies are the only ones
authorizes to impose taxes.

Wherein you say that it is legislative in nature

Can congress collect a tax without enacting a law, if the need
arises?
Probably you might be referring to the time when there is
no constitution but 1986-87, when congress cannot convene
but tax laws is civil in nature. They are not affected.

5. Inherent in sovereignty
We have earlier said that the power of taxation exists in every
government without need that the constitution will provide
and grant such power.
And even if the constitution is removed, amended, etc, the
power to tax is still inherent for survival of the government.

If we see a constitutional provision discussing about taxes,
what is tits purpose?
For limitations only
It is not the grant of power if you see the word tax in the
constitution but simply a constitutional provision to limit an
otherwise unlimited power of taxation.

6. Subject to constitutional and inherent limitation

What is the difference between the two?
Can you remember a limitation provided by the constitution
insofar as the power of taxation is concerned?
There are various, I think there are more than 12. Whether is
a direct limitation or indirect.

Example: Uniformity and Equity of Taxation