Memory Aid for Taxation

PRE-MIDTERM
Taxation
This is the act of laying a tax, this is the
process or means by which the sovereign
through its law making body raises income to
defray the necessary expenses of the
government.
It is merely a way of apportioning the cost of
the government to those who in some
measure are privileged to enjoy its benefits
and therefore must bear its burdens.
Who imposes tax? What is the purpose in which the
sovereign imposes taxes on the people?

The Sovereign
To raise income and defray the necessary expenses
of the government.

SOURCES OF TAX LAWS

1) Constitution
2) Legislation
3) Presidential Decrees
4) Executive Orders
5) Tax Ordinances
6) Administrative rules and regulations
7) Tax treaties
8) Judicial decisions
9) Contemporaneous construction
10) Opinions of BIR Commissioners
NATURE POWER OF TAXATION
Inherent Sovereignty
- Essential to the existence of government,
hence it can be exercised by the government,
even if the constitution is silent about it.

Is taxation a power?

Taxation is an inherent power of the State to demand

and enforce contributions for public purposes.

Essentially Legislative Function

- Even in the absence of any Constitutional
provision, the power falls to the legislature as
part of a more general power.

Subject to constitutional and inherent limitations

(1) Equal protection
(2) Due process
(3) Uniformity and equity of taxation

Why is it called enforced contribution?

Taxes are enforced and proportional contributions

from persons and property levied by the law making
body of the State having jurisdiction over the subject
of the burden for the support of the Government and
all public needs.

PURPOSES & OBJECTIVE OF TAXATION

Revenue to raise funds and property to
enable the State to defray expenses and
protect its citizens.
Non-revenue
1. Regulation
2. Reduction of social inequality
3. Protectionism
4. Encourage economic growth
5. Promotion of general welfare

WALTER LUTZ . vs. ANTONIO ARANETA :

It is inherent in the power to tax that a state be free to select the
subjects of taxation, and it has been repeatedly held that "inequalities
which result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation"
SISON . vs. ANCHETA :
It is inherent in the power to tax that a state be free to select the
subjects of taxation, and it has been repeatedly held that "inequalities
which result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation"
Where does tax law originate?

PLANTERS PRODUCTS INC. vs. FERTIPHIL :

The power to tax exists for the general welfare; hence; implicit in its
power is the limitation that it should be used only for public purpose.
And if the purpose for the levying of tax is primarily revenue or at least
one of its purposes is revenue then the exaction is properly called tax.
REPUBLIC OF THE PHILIPPINES vs. COCOFED :
Elements of Tax:
(1) It is an enforced proportional contribution from persons and
properties.
(2) It is imposed by the State by virtue of its sovereignty.
(3) It is levied for the support of the government.
Taxation is done not merely to raise revenues to support the
government, but also to provide means for the rehabilitation and the
stabilization of a threatened industry, which is so affected with public
interest as to be within the police power of the State.

Lower house or House of Representative

THEORY AND BASIS OF TAXATION: LIFE BLOOD

THEORY
CIR vs. ALGUE :
It is said that taxes are what we pay for civilization society. Without
taxes, the government would be paralyzed for lack of the motive power
to activate and operate it. Hence, despite the natural reluctance to
surrender part of one's hard-earned income to the taxing authorities,
every person who is able to must contribute his share in the running of
the government.

ESSENTIAL CHARACTER OF TAXATION

1. Enforced contributions
2. Generally payable in the form of money,
except if there is a law which allows payment
of tax in a form, other than money.
3. Laid by some rule of apportionment
4. Levied on persons, property or business acts,
transactions, right and privileges.
5. Levied by the State which has jurisdiction over
the object taxed.
6. Levied by the law making body of the State.
7. Levied for public purpose
TAXES MAY BE
National Taxes
- Those kind of taxes imposed on a nationwide
scope which are present in the NIRC and
Tariffs and Custom Code
Ex: Income tax, VAT, Tariffs
Local/ Municipal Taxes
- These are taxes in the Local Government
Code, imposed by the LGUs.
Ex: Cedula, Business Permit, Real Property
Tax, Garbage Tax
Will you be imprisoned for non-payment of Cedula?

No, as provided by the Constitution, no person shall

be imprisoned for non-payment of debts and poll tax.
However, misrepresentation in the Cedula is
punishable under the law as it is a criminal violation.

DEFINITION & CONCEPT OF TAXATION

PASEO REALTY & DEVELOPMENT CORP VS. CA :
Taxation is a destructive power which interferes with the personal and
property rights of the people and takes from them a portion of their
property for the support of the government. And since taxes are what
we pay for civilized society, or are the lifeblood of the nation, the law
frowns against exemptions from taxation and status granting tax
exemptions are thus construed strictissimi juris against the taxpayer
and liberally in favor of the taxing authority.

NATURE OF TAXATION
CHAMBER OF REAL ESTATE vs. ROMULO :
Taxation is necessarily burdensome, by its nature, it adversely affects
property rights.

CHARACTERISTICS OF TAXATION
CIR vs. FORTUNE TOBACCO CORPORATION :
The rule in the interpretation of tax laws is that a statute will not be
construed as imposing a tax unless it does so clearly, expressly, and
unambiguously. A tax cannot be imposed without clear and express
words for that purpose. it is basic that in case of doubt, such statutes
are to be construed most strongly against the government and in favor
of the subjects or citizens because burdens are not to be imposed nor
presumed to be imposed beyond what statutes expressly and clearly
import. As burdens, taxes should not be unduly exacted nor assumed
beyond the plain meaning of the tax laws.

TOLL FEES AS DISTINGUISHED FROM TAXES

DIAZ vs. SEC. OF FINANCE :
A tax is imposed under the taxing power of the government principally
for the purpose of raising revenues to fund public expenditures. Toll
fees, on the other hand, are collected by private tollway operators as

reimbursement for the costs and expenses incurred in the construction,

maintenance and operation of the tollways, as well as to assure them a
reasonable margin of income. Although toll fees are charged for the
use of public facilities, therefore, they are not government exactions
that can be properly treated as a tax. Taxes may be imposed only by
the government under its sovereign authority, toll fees may be
demanded by either the government or private individuals or entities,
as an attribute of ownership.

DOUBLE TAXATION
CIR vs. SOLIDBANK CORP :
Double taxation means taxing the same property twice when it should
only be taxed once. The two taxes must be imposed on:
The same subject matter
For the same purpose
By the same taxing authority
Within the same jurisdiction
During the same taxing period
And they must be of the same kind or character.
CIR vs. CITY TRUST INVESTMENT PHILS. INC. :
Double taxation means taxing for the same tax period the same thing
or activity twice, when it should be taxed but once, for the same
purpose and with the same kind of character of tax.26 This is not the
situation in the case at bar. The GRT is a percentage tax under Title V
of the Tax Code ([Section 121], Other Percentage Taxes), while the
FWT is an income tax under Title II of the Code (Tax on Income). The
two concepts are different from each other. In Solidbank
Corporation,27 this Court defined that a percentage tax is a national
tax measured by a certain percentage of the gross selling price or
gross value in money of goods sold, bartered or imported; or of the
gross receipts or earnings derived by any person engaged in the sale
of services. It is not subject to withholding. An income tax, on the other
hand, is a national tax imposed on the net or the gross income realized
in a taxable year. It is subject to withholding. Thus, there can be no
double taxation here as the Tax Code imposes two different kinds of
taxes.
VILLANUEVA vs. CITY OF ILOILO :
ISSUE:
Whether or not the plaintiffs are doubly taxed because they are paying
the real estate taxes and the tenement tax imposed by the ordinance?
HELD:
It is a well settled rule that a license tax may be levied upon a business
or occupation although the land or property used in connection
therewith is subject to property tax, the imposition of the latter kind of
tax being in no sense a double tax. In order to constitute double
taxation in the objectionable or prohibited sense the same property
must be taxed twice when it should be taxed but once; both taxes must
be imposed on the same property or subject-matter, for the same
purpose, by the same State, Government, or taxing authority, within
the same jurisdiction or taxing district, during the same taxing period,
and they must be the same kind or character of tax.
It has been shown that a real estate tax and the tenement tax imposed
by the ordinance, although imposed by the same taxing authority, are
not of the same kind or character.

INTERNATIONAL DOUBLE TAXATION

CIR vs. S.C. JOHNSON AND SON :
Double taxation usually takes place when a person is resident of a
contracting state and derives income from, or owns capital in, the other
contracting state and both states impose tax on that income or capital.
In order to eliminate double taxation, a tax treaty resorts to several
methods. First, it sets out the respective rights to tax of the state of
source or situs and of the state of residence with regard to certain
classes of income or capital. In some cases, an exclusive right to tax is
conferred on one of the contracting states; however, for other items of
income or capital, both states are given the right to tax, although the
amount of tax that may be imposed by the state of source is limited. 14
The second method for the elimination of double taxation applies
whenever the state of source is given a full or limited right to tax
together with the state of residence. In this case, the treaties make it
incumbent upon the state of residence to allow relief in order to
avoid double taxation.

BASIC PRINCIPLE OF A SOUND TAX SYSTEM

Fiscal Adequacy sufficient to meet the
demands of public expenditure.
Equality or Theoretical Justice the tax
burden should be proportionate to the taxpayers
ability to pay.
Administrative Feasibility the tax laws should
be capable of convenient, just and effective
administration. It should not be complicated for
easy administration.
TAX AVOIDANCE & TAX EVASION
CIR vs. GONZALEZ :
Lack of consent by the taxpayer under investigation does not imply that
the Bureau of Revenue (BIR) obtained the information from third
parties illegally or that the information received is false or malicious.
Nor does the lack of consent preclude the BIR from assessing
deficiency taxes on the taxpayer based on the documents. In the same
vein, the taxpayer cannot be allowed to escape criminal prosecution
under sections 254 and 255 of the National Internal Revenue Code
(NIRC) by mere imputation of a fictitious or disqualified informant
under section 282 of the NIRC simply because other than disclosure of
the official registry number of the third party informer, the BIR insisted
on maintaining the confidentiality of the identity and personal
circumstances of said informer.
CIR vs. ESTATE OF BENIGNO TODA JR. :
Tax avoidance and tax evasion are the two most common ways used
by taxpayers in escaping from taxation. Tax avoidance is the tax
saving device within the means sanctioned by law. This method should
be used by the taxpayer in good faith and at arms length. Tax
evasion, on the other hand, is a scheme used outside of those lawful
means and when availed of, it usually subjects the taxpayer to further
or additional civil or criminal liabilities.
Tax evasion connotes the integration of three factors:
(1) The end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-payment
of tax when it is shown that a tax is due;
(2) An accompanying state of mind which is described as being
"evil," in "bad faith," "willful," or "deliberate and not
accidental";
(3) A course of action or failure of action which is unlawful.

INCOME TAXATION
A tax on the net income or the entire income
received or realized in one taxable year.
It is levied upon corporate and individual
incomes in excess of specified amounts, less
certain deductions and/or specified
exemptions in cases permitted by law.
What is the earliest tax law in the Philippines?

Internal Revenue Law of 1904 as Act 1189.

FINAL TAX
Final tax on certain passive income and
withholding tax
GUAGUA ELECTRIC vs. COLLECTOR :
The right to assess and to collect is governed by Section 331 of the
Tax Code rather than by Article 1145 of the Civil Code, as a special
law prevails over a general law.

INCOME
All wealth which flows to
the taxpayer other than
mere return of capital.

CAPITAL
Fund or property, existing at
an instant of time, which can
be used in producing goods
or services.

CLASSIFICATION OF TAXPAPYERS
1. Individual
2. Corporations (at least 5, maximum of 15)
3. Estate
4. Trust
5. Partnership
INCOME SUBJECTED TO GRADUATED RATES
1. Compensation income
2. Business and professional income
3. Capital gains not subjected to final tax
4. Passive income not subjected to final tax
5. Other income
INCOME TAX SYSTEMS
GLOBAL TAX SYSTEMS
The total allowable deductions as well as
personal and additional exemptions, in case of
individuals, or the total allowable deductions,
in case of corporations, are deducted from the
gross income.
SCHEDULAR TAX SYSTEMS
There are different types of income that are
subject to different sets of graduated or flat
income rates. The applicable tax rates will
depend on the classification of the taxable
income and the basis could be gross income
(without deductions) or net income.
SISON vs. ANCHETA :
The Supreme Court ruled in favor of the constitutionality of said law.
The court said that there is no legal objection to a broader tax base or
taxable income by eliminating some deductible items from business or
professional income and at the same time reducing the applicable tax
rate on compensation income. Taxpayers may be classified into
different categories. It is enough that the classification must rest upon
substantial distinctions that make real differences.

SEMI-SCHEDULAR or SEMI-GLOBAL TAX

SYSTEM
All compensation income, business or
professional income, capital gain, passive
income and other income not subject to final
tax are added together to arrive at the gross
income, after deducting the sum of allowable
deductions from business or professional
income and other income not subject to final
tax.
FEATURES OF THE PHILIPPINES INCOME TAX LAW

1) INCOME TAX IS A DIRECT TAX

- The tax burden is borne by the income
recipient upon whom the tax is imposed.

Indirect Tax a tax demanded in the first

instance from one person in the expectation
and intention that he can shift the burden to
someone else.
2) INCOME TAX IS A PROGRESSIVE TAX
- The tax base increases as the tax rate
increases.
3) The Philippines has adopted the most
comprehensive system of imposing income
tax by adopting the citizenship principle, the
residence principle and the source principle.
4) The Philippines follow the semi-schedular or
semi-global system of income taxation.
5) The Philippine income tax is a law of American
origin.
CRITERIA IN IMPOSING PHILIPPINE INCOME TAX
CITENSHIP or NATIONALITY PRINCIPLE
- A citizen of the Philippines is subject to
income tax:
a) On his worldwide income if he resides
in the Philippines.
b) Only on his Philippine-Source income if
he qualifies as a non-resident citizen. His
foreign source income shall be exempt
from Philippine income tax.
RESIDENCE or DOMICILE PRINCIPLE
- An alien is subject to Philippine income tax
because of his residence in the Philippines.
- A resident alien is only liable to pay Philippine
income tax on his income from source within
in the Philippines but is exempt from tax on
his income from source outside the
Philippines.

7. Final withholding tax on certain passive

investment incomes
8. Final withholding tax on income payments
made to non-residents
9. Fringe benefit tax
10. Branch profit remittance tax
11. Tax on improperly accumulated earnings
WHEN IS INCOME TAXABLE
1. There is income, gain or profit
2. The income, gain or profit is received or
realized during the taxable year.
3. The income, gain or profit is not exempt from
income tax.
REALIZATION OR RECEIPT OF INCOME
NOTE: Income is realized from the sale, exchange or other
disposition of real property. As a general rule, a mere increase
in the value of the property is not income but merely an
unrealized increase in capital. No income is derived nor a loss
incurred by the owner until after the actual sale or other
disposition of the property in excess of its cost.
LIMPAN INVESTMENT CORP VS. COMMISSIONER :
Income is received not only when it is actually handed to a person
but also when it is merely constructively received by him. The
withdrawal in 1958 of the deposits in court pertaining to the 1957 rental
income is not sufficient justification for the non-declaration of the said
income, since the deposit was resorted to due to the refusal of the
lessor to accept the same, and was not the fault of the its tenants. The
lessor is deemed to have constructively received such rentals.

INCOME, GAIN OR PROFIT IS NOT EXEMPT FROM

TAX
-

The income, gain or profit may be exempt

from income tax under Section 30(B) of the
Tax Code or under the Constitution, tax treaty
or a special law. The exemption must,
however be express provided for and in case
of doubt, it is safer to tax it, because taxation
is the rule and exemption it exception.

EFFECTS OF THE APPLICATION OF TAX TREATIES

SOURCE OF INCOME PRINCIPLE

- An alien is subject to Philippine income tax
because he derives from sources within the
Philippines, despite the fact that he has not
set foot in the Philippines.
TYPES OF PHILIPPINES INCOME TAX
1. Graduated income tax on individual
2. Normal corporate income tax on corporations
3. Minimum corporate income tax on
corporations
4. Special income tax on certain corporations
5. Capital gains tax on sale or exchange of
unlisted shares of stock of a domestic
corporation classified as a capital asset.
6. Capital gains tax on sale or exchange of real
property located in the Philippines classified
as a capital asset.

GENERAL RULE:

In case of conflict between the

provisions of a tax treaty and domestic law, the
provision of the tax treaty generally prevail over the
provision of the domestic law.
EXEMPTION:

Where the rate of tax imposed under the

domestic law is lower than the rate imposed under the
tax treaty, the lower tax rate under the domestic law
shall prevail.
DEFINITION OF IMPORTANT TERMS TO REMEMBER
PERSON means an individual, trust, estate or

corporation.
CORPORATION shall include partnerships, no matter

how created or organized, joint-stock companies, joint

accounts, associations or insurance companies, but
does not include general professional partnerships and a
joint venture or consortium formed for the purpose of

undertaking construction projects or engaging in

petroleum, coal, geothermal and other energy operations

pursuant to an operating or consortium agreement

under a service contract with the Government.
CHAPTER III: KINDS OF INCOME TAXPAYERS
NOTE: In general, the term tax payer means any person
subject to tax imposed by Title II of the Tax Code.

(3) A citizen of the Philippines who works and

derives income from abroad and whose
employment thereat requires him to be
physically present abroad most of the time
during the taxable year.
(4) A citizen who has been previously considered
as non-resident citizen and who arrives in the
Philippines at any time during the taxable year
to reside permanently in the Philippines.

INDIVIDUAL TAXPAYERS
CITIZENS
(1) Those who are citizens of the Philippines at
the time of the adoption of the Constitution.
(2) Those whose fathers or mothers are citizens
of the Philippines.
(3) Those born before January 17, 1973, of
Filipino mothers, who elect Philippine
citizenship upon reaching the age of majority.
(4) Those who are naturalized in accordance with
law.
GENERAL RULE:

A citizen has only one tax status during

the calendar year, either as a resident citizen or nonresident citizen.
EXEMPTION:

It may be possible for a citizen to have a

dual status. He may be treated as a resident citizen
and at the same time a non-resident during the
taxable year, if at the beginning of the year, he
derives compensation and/or business/professional
income in the Philippines but later part departs as an
immigrant or qualified non-resident citizen.
NOTE: A person will be taxable on his worldwide income if
he is treated as a resident citizen, and he shall also be taxable
on his income from sources within the Philippines. However,
he shall be exempted on his income from sources outside the
Philippines, if he qualifies as a non-resident citizen.

TWO TYPES OF CITIZENS

RESIDENT CITIZENS
a) Engaged in trade or business or in the
exercise of his profession in the Philippines.
b) Not engaged in trade or business or in the
exercise of his profession.
c) Engaged in trade or business or in the
exercise of his profession and at the same
time, he derives compensation and/or other
income.
NON-RESIDENT CITIZENS
(1) A citizen of the Philippines who establishes to
the satisfaction of the Commissioner the fact
of his physical presence abroad with a definite
intention to reside therein.
(2) A citizen of the Philippines who leaves the
Philippines during the taxable year to reside
abroad, either as an immigrant or for
employment on a permanent basis.

NOTE: If the reason for the physical presence abroad is

established such as employment on a more or less regular
tenure, such physical presence abroad for the taxable year is
not deemed interrupted by reason of visits or travels to the
Philippines, no matter how often made as to negate the
citizens status as a non-resident citizen.

NOTE: Under section 22E of the 1997 Tax Code, the

employment abroad of a citizen must be on a permanent
basis and not just ona more or less permanent basis
required under the 1977 Tax Code, as amended.

Pilot, Stewardess and other crew members

- If they are flying on international routes and
are holders of immigrant visas or working
visas and have left the Philippines, qualify as
a non-resident citizens. The fact that their
salaries are paid locally does not remove
them from this category.
Employees under secondment agreement
- Those employees of a company who are
assigned abroad through Secondment
Agreement with its overseas client are
classified as non-resident citizens or overseas
contract workers, if they spend at least 183
days during any given taxable year, or if the
workers employment contract passes through
the Philippine Overseas Employment Agency.
ALIENS
RESIDENT ALIEN
- An individual whose residence is within the
Philippines and who is not a citizen thereof.
- He is taxed in the same manner as a resident
citizen, except that only his income from
Philippine sources is taxable in the Philippines
beginning Jan. 1, 1998.
- His income from foreign sources is not liable
to Philippine income tax, hence up to Dec. 31,
1997, a resident alien was subject to income
tax on his worldwide income.
Pre-arranged Alien Employee

- An alien who has acquired residence in the

Philippines retains his status as a resident
until he abandons the same and actually
departs from the Philippines.

NON-RESIDENT ALIEN
- An individual whose residence is not within
the Philippines and who is not a citizen
thereof.
(a) Engaged in trade or business in the
Philippines.
(b) Not engaged in trade or business in the
Philippines.
IF THE AGGREGATE PERIOD OF HIS STAY IN THE PHILIPPINES
IS MORE THAN 180 DAYS DURING ANY CALENDAR YEAR:
He shall be deemed as a non-resident
alien doing business in the Philippines.

He is taxed on his income from sources

within the Philippines (after deducting
personal and additional exemptions, if
any) at the graduated income rates 5% to
32%, while his passive investment
incomes shall generally be subject to 20%
final tax.
IF THE AGGREGATE PERIOD OF HIS STAY IN THE PHILIPPINES
IS LESS THAN 180 DAYS DURING ANY CALENDAR YEAR:
He shall be deemed as a non-resident
alien not doing business in the Philippines

He is taxed on his compensation income,

business or professional income, capital
gain, passive investment income and
other income from sources within the
Philippines at the flat rate of 25%.
ENGAGED IN TRADE OR BUSINESS WITHIN THE
PHILIPPINES includes the performance of personal

services within the Philippines. Whether a nonresident alien has an office or place of business,
however, implies a place for the regular transaction of
business and does not included a place where casual
or incidental transactions might be or are, affected.
NOTE: 180 DAY RULE
If an alien stays in the Philippines for 180 days or

less during the calendar year, he shall be deemed a

non-resident alien not doing business in the
Philippines, regardless of whether he actually
engages in trade or business therein.
If his stay exceeds 180 days during the calendar
year, he shall be deemed engaged in trade or
business in the Philippines, although he does not
actually engage in trade or business in the
Philippines.

CIR vs. BAIER-NICKEL

Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not
engaged in trade or business, are subject to the Philippine income
taxation on their income received from all sources in the Philippines. In
determining the meaning of source, the Court resorted to origin of Act
2833 (the first Philippine income tax law), the US Revenue Law of
1916, as amended in 1917.
US SC has said that income may be derived from three possible
sources only: (1) capital and/or (2) labor; and/or (3) the sale of capital
assets. If the income is from labor, the place where the labor is done

should be decisive; if it is done in this country, the income should be

from sources within the United States. If the income is from capital,
the place where the capital is employed should be decisive; if it is
employed in this country, the income should be from sources within
the United States. If the income is from the sale of capital assets, the
place where the sale is made should be likewise decisive.
Source is not a place, it is an activity or property. As such, it has a
situs or location, and if that situs or location is within the United States
the resulting income is taxable to nonresident aliens and foreign
corporations.
The source of an income is the property, activity or service that
produced the income. For the source of income to be considered as
coming from the Philippines, it is sufficient that the income is derived
from activity within the Philippines.

INDIVIDUALS SUBJECT TO PREFERENTIAL TAX RATES

Certain alien individuals who are employed in the

Philippines are entitled to the 15% preferential income
tax rate on their gross compensation income from
sources within the Philippines:
1) Regional or area headquarters and regional
operating headquarters of multinational
companies in the Philippines.
2) Offshore banking units established in the
Philippines.
3) Foreign Service contractor or sub-contractor
engaged in petroleum operations in the
Philippines.
NOTE: The same tax treatment shall apply to Filipinos
employed and occupying the same position as those of aliens
employed by the entities mentioned above, regardless of
whether or not there is an alien executive occupying the
same position.

NOTE:

Filipino employees employed by Regional

Headquaters or Regional Operating Headquarters governed
by EO No. 226, as amended by RA No. 8756, may choose to
be taxed either at the 15% preferential tax rate on their gross
income or at the graduated tax rates.

ESTATES & TRUSTS

Taxable estates and trusts are taxed in the same
manner as an individual and on the same basis as an
individual. However, he is only entitled to a personal
exemption equivalent to a single individual in the
amount of P50,000.
Taxable income of estates and trusts
1) Income accumulated in trust for the benefit of
unborn or unascertained person or persons
with contingent interests and income
accumulated or held for future distribution
under the terms of the will or trust.
2) Income which is to be distributed currently by
the fiduciary to the beneficiaries, and income
collected by a guardian of an infant which is to
be held or distributed as the court may direct.
3) Income received by estates of deceased
persons during the period of administration or
settlement of the estate.

4) Income which, in the discretion of the

fiduciary, may be either distributed to the
beneficiaries or accumulated.
CO-OWNERSHIP ESTATES & TRUSTS
SECTION 22(B) OF THE 1997 TAX CODE:
- The co-owners in a co-ownership report their share
of the income from the property owned in common
by them in their individual tax returns for the year
and the co-ownership is not considered as a
separate taxable entity or a corporation
CO-OWNERSHIP ARISING FROM THE DEATH OF A
DECEDENT :

- The co-ownership is not converted into a

partnership where the transactions of the co-owners
intended to liquidate the co-ownership are few or
isolated, and the element of habitually is not
present.
DE LEON vs. COMMISSIONER:
Generally the income of co-ownership is not subject to income tax, if
the activities of the co-owners are limited to the preservation of the
property and the collection of the income therefrom. In this case, each
co-owner is taxed individually on his distributive share. However,
should the co-owners invest the income of the co-ownership in any
income-producing properties after the extrajudicial partition of the
estate, they would constitute themselves into a partnership which is
consequently subject to income tax as a corporation. The coownership of inherited properties is automatically converted into an
unregistered partnership the moment the said common properties
and/or their income are used as a common fund with the intent to
produce profits for the heirs in proportion to their respective shares.
PASCUAL vs. COMMISSIONER:
It was held that there was no adequate basis to support the proposition
that they thereby formed an unregistered partnership. The character of
habituality to business transactions for the purpose of gain must be
present to consider them so. Where the transactions are isolated, in
the absence of other circumstances showing a contrary intention, the
case can only give rise to co-ownership. The sharing of the profits in a
common property does not of itself establish a partnership that is but a
consequence of a joint or common right or interest in the property.
There must be a clear intent to form a partnership, the existence of a
juridical personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.
OBILLOS vs. COMMISSIONER:
The division of the profit was merely incidental to the dissolution of the
co-ownership which was in the nature of things a temporary state. The
sharing of gross returns does not of itself establish a joint partnership
whether or not the persons sharing them have a joint or common right
or interest in the property from which the returns are derived. There
must instead be an unmistakable intention to form that partnership or
joint venture.
SOLID BANK CORPORATION vs. COMMISSIONER:
Persons who contribute property or funds to a common enterprise and
agree to share the gross returns of that enterprise in proportion to their
contribution, but who severally retain the title to their respective
contribution, are not thereby rendered partners.

GENERAL PROFESSIONAL PARTNERSHIP (GPP)

This is a partnership formed by persons for the sole
purpose of exercising their common profession, no

part of the income of which is derived from engaging

in any trade or business.
NOTE: A GPP is not considered as a taxable entity for
income purposes. The partners themselves, not the
partnership, are liable for the payment of income tax in their
individual capacity computed on their respective distributive
shares of the partnership profit.

CORPORATIONS
DOMESTIC created or organized in the Philippines
or under its laws.
FOREIGN means a corporation which is not a
domestic.
RESIDENT FOREIGN CORPORATION a foreign
corporation engaged in trade or business within the
Philippines.
NON-RESIDENT FOREIGN CORPORATION a foreign
corporation not engaged in trade or business within
the Philippines.
TEST IN DETERMINING RESIDENCE OF CORPORATIONS

Law of Incorporation Test

A corporation is considered as a domestic

corporation, if it is organized or created in
accordance with or under the laws of the
Philippines, or as a foreign corporation, if it is
organized or created in accordance with or
under the laws of a foreign country.

DOMESTIC CORPORATION
FOREIGN CORPORATION
Taxable on all income
Whether engaged or not in
derived from sources within
trade or business in the
& without the Philippines.
Philippines, is taxable only
on income derived from
sources within the
Philippines.

NON-STOCK NON-PROFIT INSTITUTION

CIR vs. ST. LUKES:
Section 27(B) of NIRC that proprietary education insitutitons and
hospitals which are non-profit shall pay a tax of 10% on their taxable
income.
Section 30 of NIRC provides for tax exemptions on corporations:
Non-stock Corporation or Association organized and operated
exclusively for religious, charitable, scientific, athletic or cultural
purposes or for the rehabilitation of veterans, no part of its net income
or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.
Civic League or Organization for profit but operated exclusive for the
promotion of social welfare.
The Supreme Court held in this case that "Non-Profit" does not
necessarily mean "charitable". To be charitable institution, an
organization must meet the substantive test of charity. Charitable
institutions provide for free goods and services to the public which
would otherwise fall on the shoulders of government. Thus, as a matter
of efficiency, the government forgoes taxes which should have been
spent to address public needs, because certain private entities
already assume a part of the burden. This is the rationale for the tax
exemption of charitable institutions. The loss of taxes by the
government is compensated by its relief from doing public works which
would have been funded by appropriations from the Treasury.

Section 30(E) of the NIRC defines the corporation or association that is

exempt from income tax. On the other hand, Section 28(3), Article VI of
the Constitution does not define a charitable institution, but requires
that the institution actually, directly and exclusively use the property
for a charitable purpose. (Emphasis supplied)
To be exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property
actually, directly and exclusively for charitable purposes

STRICTISSIMI JURIS
ATLAS CONSILIDATED MINING & DEVELOPMENT CORP vs.
PROVINCE OF QUEZON:
Assessments are prima facie presumed correct and made in good
faith. Contrary to the theory of ACMDC, it is the taxpayer and not the
BIR who has the duty of proving otherwise. It is an elementary rule that
in the absence of proof of any irregularities in the performance of
official duties, an assessment will not be disturbed. All presumptions
are in favor of tax assessments. Verily, failure to present proof of error
in assessments will justify judicial affirmance of said assessment.
CIR vs. SAN MIGUEL CORP
The rule in the interpretation of tax laws is that a statute will not be
construed as imposing a tax unless it does so clearly, expressly, and
unambiguously. A tax cannot be imposed without clear and express
words for that purpose. Accordingly, the general rule of requiring
adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be
extended by implication. As burdens, taxes should not be unduly
exacted nor assumed beyond the plain meaning of the tax laws.
Hence, while it may be true that the interpretation advocated by
petitioner CIR is in furtherance of its desire to raise revenues for the
government, such noble objective must yield to the clear provisions of
the law, particularly since, in this case, the terms of the said law are
clear and leave no room for interpretation.
NATIONAL POWER CORP vs. PROVINCE OF QUEZON
If a taxpayer disputes the reasonableness of an increase in a real
property tax assessment, he is required to "first pay the tax" under
protest. The case of Ty does not apply as it involved a situation where
the taxpayer was questioning the very authority and power of the
assessor, acting solely and independently, to impose the assessment
and of the treasurer to collect the tax. A claim for tax exemption,
whether full or partial, does not question the authority of local
assessors to assess real property tax.

COMPENSATION & SET-OFF

PHILEX MINING CORP vs. CIR
No generally taxes cannot be set-off. The Supreme Court held in the
case of PHILEX Mining Corporation vs. Commissioner of Internal
Revenue and Court of Appeals, GR No. 125704 (1998) that taxes
cannot be subject to compensation for the simple reason that the
Government and the Taxpayer are not credits and debtors of each
other. There is a material distinction between a tax and a debt. Debts
are due to the Government in its corporate capacity, while taxes are
due to the Government in its sovereign capacity.
FRANCIA vs. INTERMEDIATE APPELLATE COURT
There can be no off-setting of taxes against the claims that the
taxpayer may have against the government. A person cannot refuse to
pay a tax on the ground that the government owes him an amount
equal to or greater than the tax being collected. The collection of a tax
cannot await the results of a lawsuit against the government.
A claim for taxes is not such a debt, demand, contract or judgment as
is allowed to be set-off under the statutes of set-off, which are
construed uniformly, in the light of public policy, to exclude the remedy
in an action or any indebtedness of the state or municipality to one who
is liable to the state or municipality for taxes.
Government and taxpayer are not mutually creditors and debtors of
each other under Article 1278 of the Civil Code and a claim for taxes is

not such a debt, demand, contract or judgment as is allowed to be setoff.

DOMINGO vs. GARLITOS
An exception to the general rule exist allowing tax compensation and
set-off when it shows that the claim of the Government for tax and the
claim of the taxpayer for services rendered have already become
overdue and demandable as well as fully liquidated. Compensation in
this case takes place by operation of law in accordance with the
provisions of Article 1279 and 1290 of the Civil Code and both debts
are extinguished to the concurrent amount.

TAX AMNESTY
Refers to the articulation of the absolute waiver by a
sovereign of its right to collect taxes and power to
impose penalties on persons or entities guilty of
violating a tax law. Tax amnesty aims to grant a
general reprieve to tax evaders who wish to come
clean by giving them an opportunity to straighten out
their records.
CS GARMENT INC. vs. CIR
Pursuant to Section 6 of the 2007 Tax Amnesty Law, those who
availed themselves of the benefits of the law became "immune from
the payment of taxes, as well as additions thereto, and the appurtenant
civil, criminal or administrative penalties under the National Internal
Revenue Code of 1997, as amended, arising from the failure to pay
any and all internal revenue taxes for taxable year 2005 and prior
years."
CIR vs. MARUBENI
Marubeni, however, was able to sufficiently prove in trial that not all its
work was performed in the Philippines because some of them were
completed in Japan (and in fact subcontracted) in accordance with the
provisions of the contracts. All services for the design, fabrication,
engineering and manufacture of the materials and equipment under
Japanese Yen Portion I were made and completed in Japan. These
services were rendered outside Philippines taxing jurisdiction
and are therefore not subject to contractors tax.
ASIA INTERNATIONAL AUCTIONEERS INC. vs. CIR
ISSUE:
Is AIA disqualified from availing itself of the Tax Amnesty under
Section 8 (a) of RA 9480?
HELD:
No. Under Section 8 (a) of the RA 9480 withholding agents with
respect to their withholding tax liabilities shall be disqualified to avail of
the tax amnesty. In this case, AIA was not being assessed as
withholding agent that failed to withhold or remit the deficiency VAT
and excise tax but as taxpayer who is directly liable for the said taxes.
Moreover, RA 9480 does not exclude from its coverage taxpayers
operating within special economic zones. Hence, AIA is qualified to
avail of the Tax Amnesty under RA 9480.
-------PREPARED BY ANONYMOUS DONOR & JG FORTUNA----------

Life is a journey to be experienced, not a

problem to be solved.
~Winnie the Pooh~