Tax Exemptions, Escape from

Taxation & Double Taxation

Chapter 4:

Tax Exemption

o Definition :
it is a grant of immunity,
express or implied,
to particular persons or corporations
from the obligation to pay taxes
in whole or in part

o Kinds of Tax Exemption:

As to Source:
1. Constitutional
2. Statutory
3. Treaty/Executive Agreements
4. Contractual (for a consideration)
As to Manner of Grant:
1. Express
o Verbally/oral
o In writing/ statutes
2. Implied
o Manifested by conduct
o Considering the totality of circumstances
As to Scope
1. Total/full/All-in/All the way
o Relates to the whole/entire tax
2. Partial/1st-base lang
o Affects only a portion
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 Tax exemptions may be given to achieve long term

economic objectives:
Exemptions, incentives and the likes are given, by the
state, occasionally
To attract new sexy business; as well as
To resuscitate the old and dying juridical bitches;
and more importantly to
To sensually stimulate and elevate our economy
towards economic prosperity and progress.
o Its designed, not to trigger off an instant surge of
revenues on a one night short term basis, but rather to
achieve a longer term symbiotic relationship which is way
better than a one night-er.
o What is the task of the Court?
CIR vs. Procter and Gamble (204 SCRA 377)
The task of the court is to GIVE EFFECT to the
legislative design and objectives as they are written
into the statute ** EVEN IF SOME REVENUES are
lost in that very smart process.
Because the congress knows what theyre
doing. lol.
Basis: Separation of powers and stuff like that

x------------x

 Exclusions and Deductions:

o Exemption vs. Exclusion
Tax Exemption
Refers to a statutory exception from the
payment of taxes; whereas
Exclusion
Refers to the Total absence/ or want/ or lack
of taxation in a particular circumstance
o example:
the non-inclusion in the taxpayers
taxable gross income of gifts,
bequest, and devises under Sec 32
(B)(3) of the NIRC
o Exemption vs. Deduction
Exemption
Refers to removal from taxation of a particular
class or item; whereas
Deduction
Refers to the reduction of taxable items
by way of subtraction of other items.
o example:

 Under Section 34 NIRC: the

ordinary business expenses and
depreciation are deductable.
o Deduction & Exclusion; Nature:
They are in the nature of Tax Exemptions
Thus, they are STRICTLY CONSTRUED

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Approaches for Exemption

o P I Org - I
1. Exemptions of Property
2. Exemption of Individuals
3. Exemption of Organization
4. Exemptions of Income
o Exemption of individuals
- certain classes of individual may be granted tax
exemption within the tax system which depends on
multiple criteria.
Specific monetary exemptions
- Monetary reduction of the tax base
o Personal allowance

o Which may be claimed to reduce the

taxable income
- Similar to the 50k basic personal
exemption and the 25k additional
exemption for every dependent under
Section 35 of the NIRC.
Tax exempt status
- Includes the exemptions to senior
citizens and minimum wage earners
(RA 9994 & 9504)
- A statute which provides a potential
tax payer complete relief from tax, or
a reduction on the rate, or a tax
only on a portion of the items.

o Exemptions of Organizations
An exemption to organizations which meets certain
conditions imposed by the taxing authority
It may be based on definitions or restriction or
characteristics set forth by law
1. Charitable, Religious and non-profit
organizations:
o These entities are considered to serve public
purposes

2. Government and its entities

o General rule:
The government and its instrumentalities
are exempt from tax and the local
government may never ever ever ever tax
the national government. Them boys only
have delegated powers. The delegated
powers cannot be superior to the powers
of the one who delegated the power.
3. Entities on pension schemes
o Based on social justice. It complements social
legislation.
o Pensions which do not amount to income are
not taxable.
4. Educational institutions

o Exemptions of Income
Includes:
Income earned outside the taxing jurisdiction

 Income consisting of compensation for loss

Inherited shit / properties acquired by gifts
Income earned in specific areas, such as the
Special Economic Zone, enterprises zones, etc.
o Exemption of Property
Certain properties used for
religious/educational/charitable purposes
Properties owned by the BSP within 5 years from
the effectivity of the General Banking Law are
exempt from taxes
Properties owned and used by Government, like for
example the GSIS, provided that they comply with
certain conditions.

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 Reciprocal Exemptions
o Some tax jurisdictions allow tax exemptions Subject to
Reciprocity
o States may enter into a bilateral agreement which
provides for certain tax exemptions this stipulation is
common in:
tax treaties
Cross border agreements
DTAs Double Taxation Agreements
Limitation under the constitution
o Under Section 28(4) Article VI of the 1987 Constitution:
no law granting tax exemption shall be passed
without the CONCURRENCE of a Majority of all the
Members of the Congress
o NOT SUBJECT TO CONSTITUTIONAL LIMITATIONS:
Exemption is not the same as a total absence of
taxation dumbfuckery, thus:
A repeal or withdrawal of a tax law resulting to non
taxability of all taxpayers = or a total absence of
taxation is not subject to the constitutional
limitations.
x----------------------x

 Strict Construction & Burden of Proof:

1. It is NOT PRESUMED.
Exemption is highly disfavored in law (CIR vs.
Manila Jockey Club)
The law frowns on exemption, hence an
exempting provisions should be construed
STRICTISSIMI JURIS.
General Rule: Taxation is the Rule
Exception: Exemption is the Exception
o Thus , Exemptions are CONSTRUED
STRICTLY against the grantee; and
o LIBERALLY in favor of the Taxing
authority.
Burden of Proof:
Rests upon the person who is claiming for the
exemption. (Caltex Phil. Vs. Commission on
Audit)
o The party claiming the exemption must
therefore be
clearly/unequivocally/expressly
mentioned in the exempting law or at
least within the purview of the legislative
intent.

2. it must be Justified by Words TOO Plain to be

Mistaken (unequivocal/Clear/Direct to the point)
it must be expressly granted in a statute in a
language too clear to be mistaken, and too
categorical to be misinterpreted
3. It is a PERSONAL Privilege:
Exemptions, like taxes, are personal. It does not
extend to yo mama.
4. Never created by Implication:
An exemption from a common burden cannot be
permitted to exist based on some vague implications
(Asiatic Petroleum Co. vs. Llanes)
5. There must be Convincing Proof
The term which grants exemption must be crystal
clear, and convincing like a wet pussy cat on a cold
damp morning.
6. F. Equity it does not apply:
it lacks statutory basis fuck justice and equity.
7. Exemption is Not INHERENT:
Exemption cannot be deduced from concepts an
argument that exemptions are inherent in a special
economic zone is a heresy.
The exemptions of SE proceeds from the law, and
not the other way around. The tail does not wag the
dog. (John Hay vs. Lim (2005))
8. it cannot be granted by Regulation
the subordinate legislation made by Quasi Judicial
Bodies cannot be superior to the fundamental law.

The Constitution provides for the mechanism for

granting tax exemptions.
9. There is No VESTED Right in a Tax Exemption
Duh
It is a mere statutory privilege which may be
modified or withdrawn at the will of the granting
authority, depending on the external circumstances
of the socio political and economic stuff; depending
internally on their whims and caprices; depending
more importantly on your budget.
10.
A tax exemption CANNOT be GROUNDED upon
the continued existence of a statute which precludes
its change or repeal
No law is irrepealable. Nothing is forever.
Even Sasha Grey will be forgotten in time.
x---------------x
Basis of Strictissimi Juris:
1. Doctrine of Strict interpretation
I. The lifeblood theory
The blood is the life thus exemptions are
highly disfavored in law.
II. Equal treatment of taxpayers
Strict construction in order to minimize
differential treatment which results to
partiality, unfairness and some bad stuff.
III. Sovereign Act
Tax you if you claim to be exempt. Taxation is a
high prerogative of sovereignty whose

relinquishment is never presumed (Luzon

Stevedoring vs. CA)
Exceptions to Strict Constructions:
1. If the law is clear , unambiguous, unequivocal there is
not room for construction
2. When the law does not provide a qualification for tax
exemption then the court cannot fucking supply one
Ubi lex non distinguit nec nos non distinguerre
debemus.
3. When the exemption refers to public property
In this case the rule is exemption, taxation is the
exception
4. Exemption in favor of the Government, its
instrumentalities and agencies.
5. When the law itself provide for liberal constructions
6. In case of special laws imposing a special tax
7. Exemption to Religious, Charitable, Educational
institutions (the usual stuff)

Illustrations; Examples ; Application

1. Tax exemption covering items used in Constructions
It does not apply to taxes on unrelated items
2. Exemptions to corporations on things directly connected
to something, does not cover those which are not directly
related to it

3. Tax exempt bonds received is not exempt in computing

income tax
4. Condonation is in a nature of a tax exemption to be
exempt there must be a clear cut provision in law
condoning such taxes.
5. Salaries of Judges are taxable (Nitifan vs. CIR) - what
the constitution prohibits is that their salaries may not
be decreased during their continuance in office.
6. an exemption on the sale of machinery does not extend
to the products produced by such machinery
7. Maceda vs. Macaraeg Jr. the NPC was exempted from
both direct and indirect taxes they are exempt from
absorbing the economic burden of taxes previously paid
to the BIR thus the NPC is entitled to be reimbursed by
the BIR.
x--------------------x

Constitutional Grants do not need legislative enactment:

1. They are presumed to be self executing (Manila Prince

Hotel vs. GSIS; Oposa vs. Factoran) unless stated
otherwise.
Otherwise the very purpose and intention of the
fundamental law could be nullified by the
legislature; their effectivity would be subject to the
mercy of the congress. @.@
Withdrawal of Exemption
1. Exemption may be withdrawn at the pleasure of the
taxing authority.
So if you dont want your exemption to be
withdrawn, you must pleasure the taxing authority.
2. Exception:
When the exemption was granted based on a
MATERIAL CONSIDERATION of a mutual nature, it
partakes the nature of a Contract
Non impairment Clause.
Examples:
If the exemption is based on the constitution:
o It may be withdrawn only by an
amendment to the Constitution.
If the exemption is granted by a special law
o it cannot be withdrawn by a regulation,
o It cannot be withdrawn by a general law:
EVEN when the terms of the general
law is so broad, as to include the
matter in general law, it cannot be
withdrawn
Except if there is a manifest intent
to alter or repeal the special law; if
there is a special/specific provision

in the general law which clearly

intends to repeal the special law.
If the tax exemption is based on a TREATY
o May be revoked only pursuant to the
withdrawal provision of the treaty.
Only Congress has the power to grant tax incentives
1. Taxation is an inherent power which is legislative in
nature. The power to select the subjects of tax, and the
power to grant exemptions is inherent in the legislature,
since it involves the promulgation of laws.
2. Basis:
Article VI Section 28(4) of the Constitution
provides: no law granting any tax exemption shall
be passed without the concurrence of a majority of
all the members of the CONGRESS including
Manny Pacquiao
Tax-exempt buyer vs. Tax exempt transaction
1. If the BUYER is EXEMPT
Seller is still taxable/liable as the tax is not a tax
on the buyer
2. If the TRANSACTION is EXEMPT
Seller is not liable for tax. There is no tax due.
If the buyer is not so smart and he pays taxes
despite the fact that the transaction is exempt
It is the sellers obligation to hold in trust for
the buyer the refunded tax
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 HORNBOOK DOCTRINE in applying tax exemption

principles
Before determining if the person is tax exempt, we
must first determine if he falls within the scope
covered by the law imposing taxes
It is illogical and impractical to determine who are
exempted without first determining who are covered
by the tax provisions.
2. It is a HORNBOOK DOCTRINE in the interpretation of
tax laws:
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.
3. The provision of a taxing act cannot be extended by mere
implication.
4. In case of doubt,
it is construed most strongly against the
government and in favor of the tax payers,
Because burdens are not to be imposed nor
presumed to be imposed beyond what statutes
expressly and clearly import (CIR vs. CA)

x------------------------------x

REFUNDS
1. Definition
Tax refunds is the return of excess amounts of
income tax that a taxpayer has paid to the state or
local government throughout the past year
In Reality it represents an interest free loan that a
taxpayer makes to the government because the
government merely returns the exact amount
regardless of the period that has lapsed.
2. NATURE:CONSTRUCTION; EVIDENCE
Tax Refunds are in the nature of a tax exemption/ a
derogation of sovereign authority
Construed Strictissimi Juris against the person
claiming the refund; as well as the pieces of
evidence presented which must be scrutinized.
burden of proof is upon him who claims the
exemptions
Persons entitled in case of indirect tax
1. The Statutory Taxpayer
The proper party
The person on whom the tax is imposed by law, and
who paid the same even if he shifts the burden to
another.
2. The person who shoulders the burden (indirect tax = part
of the purchase price) has no cause of action against the
taxing authority.

x-------------------x

TAX AMNESTY
1. Definition
It is an OPPORTUNITY afforded to a taxpayer to
RECTIFY errors or omissions in past tax years or
returns relieving delinquent tax debts and criminal
prosecution.
It is a GOVERNMENT PROGRAM (permanent or for
a limited period) which allows the taxpayers to
address the collecting agency and disclose
inaccurate information from the past tax years,
without penalty or prosecution
2. Nature and Characteristics
It partakes an absolute forgiveness or WAIVER by
the Government of its right to collect what
otherwise would be due to it,
And to give tax evaders and other fuckers, who wish
to relent and are willing to reform, a chance to do
so, to become part of the new society with a clean
slate. (CIR vs. Botelho corp)
3 General Characteristics of a Typical Amnesty
I. Short lived (2-3 months)
II. Voluntary (participation is up to them)

III.

Waiver of fines and penalties but not the principal

amount of taxes that are due.(unless if the amnesty law
provides otherwise)
3. CONTROVERSIAL ISSUE: Tax Amnesty
The proponent of a tax amnesty claims that the
government can raise more tax revenue
Not only in the short run from collecting
overdue taxes
But also by bringing them old bitch fucks into
the tax system for the long run.
However, some questions as to whether this shit
really produces additional revenue given that they
simply collect revenue that could have been raised
in a normal enforcement procedures.
They said that tax amnesties induces or
provides incentives to honest tax payer to start
evading taxes, in hope of an amnesty in the
future, and this shit tends to weaken tax
compliance.
4. Amnesty is not presumed
Strictissimi juris
Not covered by the Presidents Amnesty Powers
under the RPC. Based on the Constitution Article 6
Section 28 a tax exemption can only by granted
with the concurrence of all the members of the
congress.
5. Government is never estopped from questioning a tax
liability even if amnesty tax payments were already
received by it.

 The erroneous application of a tax law by a public

officer do not prohibit subsequent correction
Basis: lifeblood
EXCEPTION
Republic vs IAC(1991)
Issue: Won the payment of deficiency income
tax under the tax amnesty (PD#213) and its
acceptance by the government operated to
divest the government of its right to further
recover from the taxpayer, even if there was an
existing assessment against the latter at the
time he paid the amnesty tax.
HELD:
o Even assuming that the deficiency tax
assessment were correct, since the latter
have already paid almost the equivalent
amount to the government by way to
amnesty taxes under PD#213, and were
granted not merely an exemption
BUT AN AMNESTY for the past tax
failings, the Gov. is not ESTOPPED from
collecting the difference.
6. Availment of tax amnesty is a purely personal defense
and not available to co conspirators
-People vs. Castan~eda
-The defense relates to the circumstances of a
particular accused and not to the character of the
acts charged in the criminal information.
7. Effects of Use of All Encompassing Words
-Metropolitan Bank & Trust Co. vs. CIR

 If the amnesty law uses an ALLENCOMPASSING WORDS

There is absolutely no basis to limit immunity
resulting from the payment of the tax amnesty
only to income tax and to exclude others.
8. Amnesty in case of Merger
- Tax liabilities of the Merged Corporation are
ABSORBED by the surviving corporation.
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Escape From Taxation

SHI T Ca P- ha- D S- a-D

Forms of Escape from Taxation
1. Tax Shifting
2. Tax Transformation
3. Tax Capitalization

4. Transfer Pricing
5. Resort to tax Haven
6. Tax Deferral
7. Tax Shelter
8. Tax Avoidance
9. Tax Dodging/Evasion
;
Tax Shifting:
o It is the transfer of the burden of tax by the original payer
(impact) to another (incidence)
Impact of taxation the point on which the tax is
originally imposed
Incidence the point where the final burden settles
down
o Direct tax cannot be shifted.
o Tax cannot be shifter if:
i. Purely personal (poll tax)
ii. It has no relation to any business dealing of the
taxpayer (donors/estate tax)
iii. If it is levied on economic surplus (income tax)
o Kinds of shifting
i. Forward s. when the burden is transferred from a
factor of production thru the factors of distribution
until it finally settles on the ultimate
purchaser/consumer. (example : seller increase
price of beer)
ii. Backward s. when the burden is transferred from
the consumer thru the factors of distribution to
the factors of production (example: seller doesnt

iii.

increase the price of beer but reduces the price in

materials)
Onward s. when the tax is shifted 2 or more times
either forward or backward.

Tax Capitalization/amortization
- Circumstance where the purchaser of a taxable
object, by cutting down the purchase price,
discounts all the taxes which he may be called to
pay upon in the future.
- By depreciating the capital value to a sum equal to
the capitalized value of the tax (1/5 = 20%)
Tax Transformation
- In a situation where the producer upon whom the tax is
imposed fearing that the consumers would not opt to
buy his shit if he adds the tax to the price
- The producer pays the tax; and
- endeavors to recoup himself by improving/transforming
his process of production to make it more cost effective.
- The loss due is TRANSFORMED to a gain.
Resort to TAX Haven/ secrecy jurisdiction
- Definition
It is a place that deliberately provides an escape
route for people or entities elsewhere, shielding
them from whatever taxes, criminal laws, licking
their balls clean
It is a State where certain taxes are levied at a low
rate or not at all while offering due process, good
governance, and low corruption rate.
It is a country that imposes little or no tax on
profits.
- When is a place considered as a tax haven?

 If it has a composite tax structure established

deliberately to take advantage of a worldwide
demand for opportunities to engage in tax avoidance
- Examples?
Liechtenstein
Panama
Bahamas
British Virgin Islands
Transfer Pricing
- It is the price charged by 1 segment of an organization
For a product/service supplied to another segment
of the same organization
Especially, the charged assigned to an exchange of
goods or services between a corporations
organizational units.
- When subsidiaries inside 1 company trade with each
other across borders, they can manipulate the internal
transfer prices in order to shift their cost into high tax
countries, and shift the profit into low taxing
countries/haven.
Transfer Mispricing
o Happens when transfer pricing is ABUSED.
- Unitary Taxation
o Related to Transfer Pricing
o The income of all related parts of the company are
combined and the profits are shared between
different countries where they were actually created
by using an agreed formula based on a ratio of
sales, employment costs and capital invested
- There is a need to regulate it : because it has grave
implications on tax liabilities.
- Section 50 of NIRC:

o Authorizes the CIR to distribute/allocate gross

income or deductions between 2 or more
organizations owned directly or indirectly by the
same interests if such distribution apportionment or
allocation is necessary in order to prevent evasion of
taxes or clearly to reflect the income of any such
organization, trade or business.
- Stateless Income/Homeless Income:
o It is the result of transfer pricing/mispricing.
o It means profit earned in a country other than
where the firm is headquartered and subject to tax
only in another country which imposes little or no
tax.
o Particularly, stateless income comprises income
derived for tax purposes by a multinational group
from business activities in a country other than the
domicile of the groups ultimate parent company,
but which is subject to tax only in a jurisdiction
that is neither the source of the factors of
production through which the income was derived,
nor the domicile of the groups parent company.
Tax Deferral
o Paying taxes in the future for income earned in the
current year
o Some bitches leave their profits offshore untaxed they
dont have to pay shit unless they repatriate said income
to their home base
Tax Shelter
o It is a sexy device used by a taxpayer to reduce or defer
payment of taxes; or any financial investment made in
order to acquire expenses, depreciation allowances, etc,
or to defer income so as to reduce ones income tax.

o It includes investment or deposits in accounts that are

not heavily taxed and shit (example long term deposits);
and investing in real estate to avail deductions such as
mortgage loan interest, mortgage insurance and property
taxes.
Tax Avoidance and Evasion
o This 2 sons of bitches are the 2 most common ways used
by your average motherfucker in escaping taxation (CIR
vs Estate of Benigno Toda)
o TO AVOID IS LEGAL
o TO EVADE IS ILLEGAL

Tax Avoidance/Loophole
o A tax saving device within the means sanctioned by law
o Should be used in good faith and at arms length.
o To get around/avoid the spirit of the law and the will of
the legislature, WITHOUT ACTUALLY BREAKING THE
FUCKING LAW
o It is the lessening of tax liabilities thru maximizations of
deductions exclusion and exemptions and the
minimization of income by legal means.

Tax Evasion- Dodge/Dodging

o A scheme used outside of those lawful means and when
availed of, it usually subjects the taxpayer to further civil
or criminal liabilities (CIR vs Estate of Benigno Toda)
o Illegal method of paying taxes
Criminal activity
Usually thru deception
o Elements of Tax Evasion; 3 factors

1. The END to be Achieved

o Pay less- or not pay at all bitch
2. State of mind
o It must be fucking intentional
o Bad faith / willful
3. A course of action or failure of action which is
unlawful
Tax Fraud (intentional fraud)
o The use of deceit in order to evade taxes
o Fraud
1. Actual
2. Constructive
3. Anything calculated to deceive them bitches
Including all acts, omissions, and concealment
involving a breach of legal/equitable duty, trust or
confidence justly reposed, resulting in the damage
to another, or by which an undue and
unconscionable advantage is taken of another.
o Cannot be usually proven by direct proof
It must be proven by circumstantial
evidence and reasonable
inference
o Negligence is not equivalent to fraud(whether slight or
gross)
The fraudulent intent cannot be presumed
Intentional fraud must be established: he must act
knowingly and willfully
o Assessment is not necessary
Ungab vs. Cusi, Jr.
An assessment of deficiency is not necessary
to a criminal prosecution for willful attempt to
defeat and evade the income tax xxx A crime is

complete when the motherfucker with intent

to evade - acted knowingly and willfully. The
fact that the government failed to discover the
error and failed to assess promptly xxx has no
connection with the commission of the crime
o It must first be proved that a tax is due
In CIR vs CA:
before 1 is prosecuted for tax evasion, the fact
that a tax is due must first be proven.
No prima facie case not fraudulent unless
and until the BIR has made a final
determination of what is supposed to be the
correct tax, the taxpayer should not be placed
in the crucible of criminal prosecution
In Ungab vs. Cusi Jr:
For a criminal prosecution to proceed without
assessment there must 1st be a PRIMA FACIE
showing of willful attempt to evade taxes.

Substance over form

The court should examine with particular care
the forms used by him for the accomplishment
of his purpose and if his ingenuity fails at any
point, such court should not lend him its aid
by resolving doubts in his favor.
Payment is NOT A VALID DEFENSE
Payment after apprehension is fucked up it
is not a valid defense. Because he already
transgressed the law.

o Prima facie evidence of fraud

1. Sec. 248 B NIRC: A Substantial Underdeclaration

of taxable income/sales/receipt
Or a Substantial OVERDECLARATION of
Deductions
o Shall constitute PRIMA FACIE evidence of
false or fraudulent return
Failure to report sales/income/ receipt in an
amount exceeding 30% of that declared per
return
o And a claim of deductions in an amount
exceeding 30% of actual deductions
o Shall render the taxpayer liable for
substantial underdeclaration of sales,
receipts or income or for overstatement of
deductions
2. Failure to declare for taxation purposes True and
Actual income derived from business for 2
consecutive years
3. Substantial under declaration of income in the tax
returns for 4 consecutive years coupled with
intentional overstatements of deductions.
o Must be proven by Circumstantial evidence and
reasonable inferences
o It generally involves the following elements:
1. Deception
2. Misrepresentation of material facts
3. False or altered documents
4. Evasion/ diversion / omission
Badges of Fraud
5. Improper deductions
6. Accounting irregularities
7. Inconsistent explanation/behavior
8. Attempt to conceal illegal acts

9. Inadequate records
10.
Failure to file returns
11.
Destruction of records (acts)
o Honest difference in opinion and inadvertence do not
amount to fraud
There must be a clear and convincing evidence to
prove that some part of the underpayment of a tax
was due to fraud.
Intent is different from mere inadvertence, honest
difference in opinion, reliance on an incorrect
technical advice, negligence or carelessness,
dumbfuckery.
x-------------------x

Tax credit

Tax Credit vs Tax Deduction

o Tax Credit
Generally refers to an amount that is subtracted
directly from ones total tax liability
It is an allowance against the tax itself, or a
deduction from what is owed by a taxpayer to the
government
Examples
Withheld taxes, payments of estimated tax,
and investment tax credits
o Tax Deductions
A subtraction from income for tax purposes, or an
amount that is allowed by law to reduce income
prior to the application of the tax rate to compute
the amount of tax which is due.
Tax Liability is required for tax credit

o There ought to be a tax liability before a tax credit can be

applied
Since the purpose of a tax credit is to reduce the tax
liability. Without any tax liability, the tax credit is a
piece of shit. It would be PREMATURE and
IMPRACTICAL.
o The existence of a tax credit is not the same as the
availment (tax credit is mandatory; whereas the
availment of such credit is optional)
Prior tax payment not necessary
o While tax liability is necessary for the availment of a tax
credit prior tax payments are not. Payment is not
indispensible.
o Nirc is replete with provisions granting tax credits even
though no taxes have been previously paid
Examples
Under Section 86(E) in computing estate tax
due a tax credit is allowed subject to certain
limitations. The tax credit in this instance
allude to the prior payment of taxes, even if not
made to out government.
Sec 110 a VAT registered person engaging in
transactions is allowed a tax credit that
includes a ratable portion of any input tax xxx
which does not need to be paid etc etc.
Tax credit is not the same as a discount
o Tax credit
Is a deduction after the income is computed
o Discount
Is a deduction before the income is computed
1. Cash discount

 One granted by business to credit customers for their

prompt payment
Purchase discount is on the part of the seller
2. Quantity discount
Reduction in price allowed for purchase made in large
quantities justified by savings in packaging, shipping and
handling
-A.k.a : Volume or Bulk discount
3. Trade discount
Percentage reduction from the list price allowed by
manufacturer to wholesalers.
Chain Discount a series of discounts from one list price
is recorded at net
4. Functional discount
Similar to trade discount
x---------------------x

Double Taxation

Double Taxation
o Definition
Taxing twice the same subject matter -done by the
same taxing authority, within the same taxing
district, for the same purpose, in the same taxing
period.
o No constitutional prohibition
It is not forbidden by our fundamental law
It is not favored but is still permissible
Discretion of the Legislative
General Rule:

o Double taxation should not be permitted

unless the legislature has authority to
impose it.
However
o Since the taxing power is exclusively a
legislative function, and since it is
absolute and unlimited: it is generally
held that there is nothing to prevent the
imposition of more than one tax on the
same subject matter, in the absence of
an express or implied constitutional
prohibition xxx such shit is a matter
within the discretion of the legislature.

Kinds of double taxation

1. Direct Duplicate taxation (obnoxious double
taxation)
o In order to constitute double taxation in
the objectionable/prohibited sense:
The same subject matter must e
taxed twice for the same purpose,
by the same taxing authority, within
the same taxing jurisdiction, during
the same period, and they must be
of the same kind or character.
2. Indirect duplicate taxation
o When any or some of the requisites of
direct duplicate taxation are not present.
This is permissible.

 Schemes to AVOID double taxation

1. Tax Credit
o A sum deducted from the total amount a
taxpayer owes to the taxing authority
2. Tax Deduction
o Fixed amount or percentage write-off or
permitted reduction in the gross amount
on which a tax is calculated.
3. Tax Reduction
o Relinquishing or reducing the amount or
rate of tax a taxpayer has to pay.
o Example
The TAX SPARING CREDIT RULE
under Section28 of the NIRC.
4. Tax Exemption
o Immunity from this shit
5. Tax Treaties
o Agreement between 2 jurisdictions that
mitigates the problem of double taxation
that can occur when tax laws consider a
taxpayer a resident of more than 1
jurisdiction.
x----------------x
INTERNATIONAL JURIDICAL DOUBLE TAXATION (IJDT)
o The imposition of comparable taxes in 2 or more states
on the same taxpayer in respect of the same subject
matter and for identical periods.
o Rationale for doing away with this shit:
To encourage free flow of goods and services and the
movement of capital, technology and persons
between countries, conditions deemed vital in
creating robust and dynamic economies.

 Foreign investments will only thrive in a fairly

predictable and reasonable international investment
climate and the protection against double taxation
is crucial in creating such a climate.
o 2 General Approaches to AVOID IJDT
1. Territorial based system
o The foreign source income is normally
exempted from domestic tax
o it generally leaves the taxation of foreign
income to the government whose territory
the activity occurs
2. Worldwide income/global
o This approach necessitated the
development of specific mechanisms to
reduce double taxation when the country
within whose borders the income had
been derived also imposed a tax on that
income
o Methods in tax treaties
1st method
Tax Treaty sets out the respective right to tax
of the STATE OF SOURCE and 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 madafaking state
2nd method
o 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 tallow relief in order to
avoid double taxation.

1. EXEMPTION METHOD
a. The income which is taxable in the state
of source is exempted in the state of
residence
b. This may be done by using tax deduction
methods which allows foreign income to
be deducted from the gross income :in
effect exempting the payment from being
further taxed.
c. The focus is on the income or capital
2. Credit Method
a. Although the income is taxed in both the
State of Source and the State of
Residence the tax paid in the state of
source is credited against the tax levied in
the state of residence.
b. The focus is on the tax
Income tax credit under Philippine law
o NIRC
Credit against Tax for taxes of Foreign countries
- If a taxpayer signifies in his return his desire
to have the benefits of this paragraph, the tax
imposed by this Title shall be credited with:
o Citizen and Domestic Corporation
o Partnership and Estates
An alien individual and a foreign
corporation shall not be allowed
the credits against the tax for the
taxes of foreign countries allowed
under this paragraph.
Read Sec 34 and 86 if NIRC.
Tinatamad nako mag type

 Limitations on Credit
Tax Credit for Estate Tax Paid to a Foreign Country
Most favored nation clause
o The purpose of this clause is to grant to the contracting
party treatment not less favorable than that which has
been granted to the most favored among other countries.
o Intended to establish a principle of equality of
international treatment by providing that the citizens or
subjects of the contracting nations may enjoy the
privileges accorded by either party to those of the most
favored nation.
To allow the taxpayer of 1 state to avail the more
liberal provisions granted in another tax treaty. For
equality of treatment.

END of chapter 4