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Master Tax Concepts: Essential Reviewer with Cases & Codals

School
Rizal Memorial Colleges, Davao City**We aren't endorsed by this school
Course
LAW TAX
Subject
Law
Date
Dec 12, 2024
Pages
108
Uploaded by BrigadierWolfMaster1198
TAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASESTHIRDEDITION2021IGNATIUSMICHAELD.INGLESIsp4-..Published&DistributedbyREXBookStore856NlcanorReyes,Sr.St.Tel.Nos.:8736-0567/8733-67462161-65FreedomBldg.,C.M.RectoAvenueTel.Nos.:8522-4521/8522-4107Manila,PhilippinesI$
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J9JC9B0Mwww.rex.com.ph-•?-Fal1
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J9JC9B0MPREFACETOTHETHIRDEDITIONThisthirdeditionincludesSupremeCourtdecisionsandrelevantBIRissuancesuptoSeptember2020.ItalsoincorporatestheTRAINamendmentsintothemaintextofthebook,finallyputtingtorestallthequestionsI'vehappilyreceivedforthepasttwoyearsof"KasamanapobayungTRAIN?"I'mpleasedtosay,"Yes!Kasamana\"ItalsoaddssuggestedanswerstoBarExamquestionsfrom
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2017to2019.I'vealsoaddedsomeQuickHitsNotesonPercentageTax,ExciseTax,andDocumentary StampTaxforlagniappe.Updatingthebookinthemiddleofthepandemichasbeenaweirdandsurrealexperience.Hopefully,bythetimethisbookcomesout,we'veflattenedthecurve,savedasmanylivesaswecould've,andlearnedathingortwoabouteffectiveleadershipinturbulenttimes.PasigCitySeptember2020iiiivJ9JC9B0MACKNOWLEDGMENTFORTHETHIRDEDITIONTaxMadeLessTaxing:Threepeatwouldnothavebeenpossiblewithoutthehelpandsupportofthefollowing:•Mytaxsupportgroup,Attys.AdanDelamide,AlexNer,T.J.Rocamora,PaoloSantos,CamilleLim-Go,andGiaGeraldez-Abarquez,whoareeversokindtoreplyto
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mymessagesonFacebookorWhatsApp;•DeanLilyK.GrubaandAtty.MichaelSnoopsMontero,mytaxidolsandfrequentka-kwentoaboutbasketballandvolleyball;•EveryonewhousedtheSecondEditionandtheTRAINSupplement,forthecontinuedpatronagethathasmadethisbookaviablebusinessoptionformypublisher;•RexBookStore,Inc.,forthebeliefandtheInvestmentinayounglawyer;•MystudentsintheAteneoLawSchool,forconstantlypushingmetobebetter—andforaskingreallyhardquestionsandreadingtheoriginals;f•TheLawFirmofIngles,Laurel,andCalderon,fortheInvaluablesupportandflexibility;•Myminions,Fabio,Elton,Sassy,andElfie,andparticularlyElvisandPierre,whomwemissdearly;•Myparentsandmybrother,fortheunconditionalloveandsupport;•Mywifeandmyson,whoarejusttheabsolutebestpeopleIntheworld—oneofthesilverliningsofthepandemichasbeenbeingstuckathomewiththem;and•God.AdmajoremDeigloriam.vJ9JC9B0MViJ9JC9B0MPREFACETOTHESECONDEDITIONForthosewholiketokeepcount,thissecondeditionincludesSupremeCourtdecisionsandrelevantBIRissuancesuptoJune
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2017,addssuggestedanswerstoBarExamquestionsfrom2014to2016,incorporatesupdatesfromnewlawslikeR.A.10653,correctsannoyingtypographicalerrors(whichIapologizefor),andrevampsthechapteronTariffsandCustomswiththenewCustomsModernizationandTariffsAct(R.A.10863).MakatiCityNovember2017vilJ9JC9B0MI
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J9JC9B0MACKNOWLEDGMENTFORTHESECONDEDITIONTaxMadeLessTaxing:EpisodeTwo(asI'dliketocallit.)wouldnothavebeenpossiblewithoutthehelpandsupportofthefollowing:•Attys.MichaelSnoopsMontero,AdanDelamide,RaymondRoque,AlexNer,T.J.Rocamora,PaoloSantos,CamilleLim,andGiaGeraldez-Abarquez,whowereallkindenoughtoentertainmytaxandcustomsquestionswhilemakingthisbook;•TheAteneodeManilaUniversityandAteneoSchoolofLawforselectingmeastherecipientoftheNipponFoundationProfessorialChairfor2016-2017—thisupdatededitionistheresultofthegenerousgrant;•Everyone,especiallythestudents,whoboughtandusedthefirstedition—thissecondeditionwouldliterallynotbepossibleifthefirsteditionhadnotsoldandhadturnedouttobeamagnificentdud;•RexBookStore,Inc.whichgavethisreviewerahome;•MangNatsoftheAteneoSchoolofLawRexBookStorebranch;•FolksonFacebookandonTwitter,whokeptmepleasantlydistractedwithwordsofaffirmationandfunnygifs',•TheLawFirmofIngles,Laurel,andCalderon,forgivingmethevaluableresourcesoftimeandflexibility(nottomentionaccesstoanonlinelegaldatabase);•Myminions,whonowincludeSassytherescuedpitbull;•Myparentsandmybrother,fortheirloveandencouragement;•Mywife,forherunendingpatienceandsupportandtheamazingdakgalbithatshecanwhipupatamoment'snotice;and•God.AdmajoremDeigloriam.ix
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J9JC9B0MIJ9JC9B0Mfr.
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XPREFACETOTHEFIRSTEDITIONThisworkwasandisthechildofnecessity.WhenIwasalawstudentintheAteneodeManilaCollegeofLawstudyingtaxationlaw,thebiggestchallengeIfacedwasfindingstudymaterialsthathadeverything.Byeverything,Imeanthecodalprovisions,relevantBIRissuances,andSupremeCourtdoctrines.Asastudentwhoabsolutelydetestedstudyinginadeskwithgazillionsofpaperstrewninfrontofhim,IknewIhadtocompileeverythingintoonestudymaterial,lesta)coffeeshopbaristasshoomeawayformakingatotalmessontheirsmalltablesandb)Igocrazycomeexamtime.Whatyouareholdingrightnowisthe"newandimproved"versionofthenotesImadeandusedasastudent,abarcandidate,andataxpractitioner.As"TaxMadeLessTaxing"isthecombinedworkofanerdystudent,anervousbarcandidate,andanewbiepractitioner,Ibelieveitwilllikewisebehelpfulforthelawstudents,thebarcandidates,andthetaxpractitioners."TaxMadeLessTaxing"will
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appealtolawstudentswhoneedexamplestothreshoutmindbogglingtaxconcepts.Itwillappealtobarcandidateswhoneedacomprehensivereviewerwithon-pointdoctrinesandenumerations.Anditwill(hopefully)appealtotaxpractitionersasanadequateresearchmaterial.Butasthenamesuggests,thisworkIsareviewer.Itisnotatreatiseontaxation;itwillnotincludegroundbreakinganalysisoftaxconceptsandproblems.Itwillalsonotincludedocumentarystampandpercentagestaxes(whichareexcludedintheBarExams).Isuggestreaderssupplementtheircuriosityandinterestwithothertextbooks.Ilikewisesuggestreaders—specifically,thelawstudentswhoarestudyingtaxforthefirsttime—toreadtheoriginaltextsoftheSupremeCourtcases.AsIhaverepeatedlytoldmystudents,thereisnosubstituteforreadingthe"originals";thepainthatcomeswithpouringoverthewordsoftheCourtoftenleadstoadeeperunderstandingandeasiermemorization.Moreimportantly,itleadstocriticalanalysis,which,inturn,leadstocreativethinkingandInnovation.ThegoalofthisbookIstomaketaxeasiertodigest.Peoplefinditdifficulttounderstandtaxandthatiscompletelyunderstandable.Taxisnotthemostexcitingofsubjects,andpayingtaxisneitherexciting.Hence,IhaveendeavoredtobreakdownthecodalprovisionsXiJ9JC9B0M
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andconceptswithoutsacrificingtheessenceofthelawandtoincludefunexamplestolightenthemood.Anyway,enoughofthisbabble,getthosehighlightersoutandstartreading.Donotbescaredoftax;tryitout.Hopefully,afterafewreadings,taxwillbelesstaxingforyou.Whoknows?Itmightevenbefun.PasigCityandBoston,MassachusettsNovember2014xil
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IACKNOWLEDGMENTFORTHEFIRSTEDITIONThisbookwouldnothavebeenpossiblewereitnotforthehelpandguidanceofthefollowing:•Atty.MichaelSnoopsMontero,mytaxprofessorwhomadetaxlesstaxingforeveryone(OBF1);•Atty.SerafinU.Salvador,Jr.,myboss,theJediMasteroftax;•DeanLilyK.Gruba,whoIworkedwithfortheAteneoBarOperationsforTax;•MyofficematesfromSalvadorandAssociates,whocontinuetoteachmetheropesandarerepositoriesoftaxknowledge;•Myfriends,blockmates,andbatchmatesinAteneoLawSchool,whoencouragedmetomakethereviewersinthefirstplace(theencouragementincreasedasexamsneared)andwhosekindwordsofaffirmationIstilllookbackupontoday;•Elvis,Fabio,Pierre,andElton,myminions,whomakemehappy;•Myparents,forshowingmeanythingispossiblesince1984;•Mywife,whosewonderfulnameIsovershadowedonlybyherbeauty,support,love,andpatience;and•JesusChrist,myLordandSavior,forIamabletodoallthingsthroughHimwhostrengthensme(Philippians4:13).AdmajoremDelgloriam.xlii
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J9JC9B0M1
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xiv
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J9JC9B0MDEDICATIONFormylovingparents,mylovelywife,mylovableson.ForElvisandPierre.XV
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J9JC9B0MxviJ9JC9B0MA.CONTENTSGeneralPrinciplesofTaxationDefinition11NatureandCharacteristicsofTaxationandTaxes...B.3C.AttributesofaSoundTaxationSystem4D.TaxasDistinguishedfromOtherExactionsE.ImpactandIncidenceofTaxation(Directand7IndirectTaxes)8InherentLimitationsonthePowerofTaxationF.ConstitutionalLimitationsonthePowerofTaxation11G.21DoubleTaxationH.23FormsofEscapefromTaxationI.26ExemptionfromTaxationJ.29OtherDoctrinesK.IncomeTax
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A.IncomeTaxSystems3233Income,InGeneralB.35GeneralPrinciplesofIncomeTaxationC.36SitusofTaxationD.46IncomeTaxonIndividualsE.80PartnershipsF.G.Corporations84EstatesandTrustsH.TaxableIncome.I.GrossIncomeJ.Deductions.K.CapitalGainsandLosses(SaleorExchangeofProperty)........................................DeterminationofGainorLossfromSaleorM.TransferofProperty125131132157206217227N.FringeBenefitsTaxO.WithholdingTax236253P.A.B.J9JC9B0MReturnsandPaymentsofTaxEstateTaxPrinciplesandDefinitionRatesandValue
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xvii271271C.GrossEstateD.ComputationfortheNetEstateE.NetStateComputationofMarriedPersonsF.GrossEstateG.ExemptionfromEstateTaxH.EstateTaxReturns.......................................I272283296298300302PaymentofTaxI.MiscellaneousProvisionsJ.Donor'sTax304A.InGeneralB.GrossGiftsC.TransferforInsufficientConsiderationD.CancellationofIndebtednessE.ValueoftheGiftsDeductionsfromGrossGifts307309311312 312F.313ResidentorCitizenDonorsG.DeductionsfromtheGrossGiftsbyHusbandandWife316DeductionsforaNonresident,NotCitizenDonorH.OtherDeductionsI.ExemptionsUnderSpecialLawsJ.317317 318K.TaxRatesPayablebyDonorL.Donor'sTaxReturnM.Donor'sTaxCreditValue-AddedTax319320InGeneralA.NormalVATTransactions(12%)B.
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Zero-rated/EffectivelyZero-ratedTransactionsC.323329342350D.ExemptTransactions362E.Input VATF.TransitionalandPresumptiveInputTaxCredits369andWithholdingVAT.372G.VATRefundsorTaxCredits380H.VATonRealProperties384I.AdministrativeProvisionsQuickHitsNotes393A.PercentageTaxandExciseTax396B.DocumentaryStampTaxGovernment'sRemediesA.PowersoftheBIR398411B.TaxAssessment...xviiiJ9JC9B0MC.D.E.A.B.
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A.B.A.B.C.D.E.F.G.H.A.B.C.D.E.F.G.H.A.B.C.D.E.J9JC9B0MImpositionofPenaltiesCriminalActionandOtherPenaltiesPowerofCollection
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Taxpayer'sRemediesProtestinganAssessmentClaimingaRefundCourtofTaxAppeals(R.A.1125,asamendedandRevisedRulesofCourtoftheCTA,A.M.No.05-11-07-CTA,asamended)JurisdictionoftheCTAProcedureinCivilandCriminalCasesLocalGovernmentTaxationPrinciples,Definitions,andLimitationsTaxingPowersofLGUsSitusofLocalTaxesCollectionofLocalTaxesRetirementofBusinessRemediesforCollectionofLocalTaxesExemptionfromLocalTaxPrescriptivePeriodsandTaxpayer'sRemediesinLocalTaxationRealPropertyTaxationGeneralPrinciplesandDefinitionsRealPropertyandMachineryAppraisalandAssessmentImpositionofRealPropertyTaxandSpecialLeviesExemptionfromRealPropertyTaxCollectionofRPTandLGL)RemediesforCollection,Taxpayer'sRemedies..............................................DispositionandAllotmentofLocalTaxesTariffandCustomsCodeof1978,AsAmendedbytheCustomsModernizationandTariffAct(R.A.10863ortheCMTA)TariffandDutiesRequirementsofImportationAccrualandPaymentofTaxandDutiesUnlawfulImportationorExportation....Remediesxix
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4264374564814965095185265395575625645655725755845875906016056146216276346456526726801
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GENERALPRINCIPLESOFTAXATIONA.Definition•Taxationisanenforcedproportionalcontribution,imposedbytheStateinitssovereigncapacity,tosupportthegovernment.•Threeelementsoftaxation:Itisanenforcedproportionalcontributionfrompersonsand1.properties.ItisimposedbytheStatebyvirtueofitssovereignty.2.Itisleviedforthesupportofthegovernment.(PCGGv.3.Cojuangco,G.R.No.147062,December14,2001)Moreover,ataxisapecuniaryburden.XYZCorporationmanufacturesglasspanelsandisalmostatthepointofinsolvency.Ithasnomorecashandallithasareunsoldglasspanels.ItreceivedanassessmentfromtheBIRfordeficiencyIncometaxes.Itwantstopaybutduetolackofcash,itseekspermissiontopayinkindwithglasspanels.Canitdoso?(2013BarExam)Suggestedanswer:Ofcoursenot.Taxisgenerallyapecuniaryburden.Youcan'tpaywithglasspanels.B.NatureandCharacteristicsofTaxationandTaxesThepoweroftaxationisinherenttotheState(alongwiththepowerofeminentdomainandpolicepower);hence,therightoftheStatetoimposetaxesexistsapartfromtheConstitution.oo
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J9JC9B0MTheStateIsfreetoselectthesubjectsoftaxation,andtheCourthasrepeatedlyheldthatinequalitieswhichresultfromasinglingoutofoneparticularclassfortaxationorexemptionInfringenoconstitutionallimitation.(Lutzv.Araneta,G.R.No.L-7859,December22,1955)AstheStatehasthepowertodeterminethesubjectsoftaxation,itIsalsofreetoselectthosewhowillbeexemptfromtaxation.(Gomezv.Palomar,G.R.No.L-23645,October29,1968)1TAXMADELESSTAXING:2AREVIEWERWITHCODALSANDCASESLifebloodtheory:TaxesarethelifebloodoftheState,throughwhichthegovernmentanditsagenciescontinuetooperateandwithwhichtheStateeffectsitsfunctionsforthewelfareofitsconstituents.(CommissionerofInternalRevenue[CIR]v.CourtofTaxAppeals,G.R.No.106611,July21,1994)Taxesarewhatwepayforacivilizedsociety.Withouttaxes,OtheStatewouldbeparalyzed.(CIRv.Algue,G.R.No.L-28896,February17,1988)Hence,becauseofthelifebloodtheory...InjunctiongenerallydoesnotlieagainstthecollectionoftaxesO(CIRv.CebuPortlandCementCompany,G.R.No.L-29059,December15,1987);TheStateisnotestoppedfromcollectingtaxesbytheOmistakesorerrorsofitsagents(PhilippineGuarantyCo.,Inc.v.CIR,G.R.No.L-22074,April30,1965);■Theno-estoppelruleisnotabsolute.Hence,whenthetaxpayeronlyraisesthedefenseofprescriptiononlyonappealandtheStatedoesnotquestionthetimelinessofthedefense,theStatecanbeboundbytheactsofitsagents.(ChinaBanking
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Corporationv.CIR,G.R.No.172509,February4,2015,whereitalsotooktheBIRmorethan12yearstocollectthetax,)LawsexemptingsubjectsfromtaxationarestrictlyconstruedOagainstthetaxpayer.However,evenwiththelifebloodtheory,thepoweroftaxationmuststillbeexercisedreasonablyandinaccordancewiththelawandprescribedprocedure.(CIRv.Algue,G.R.L-28896,February17,1988)Moreover,whiletheStatehasthepowertomakeareasonableOclassificationfortaxationpurposes,itmustnotbepromptedbyaspiritofhostility,orattheveryleastdiscriminationthathasnoreasonablebasis.(Reyesv.Almanzor,G.R.Nos.L-49839-46,April26,1991)ThepoweroftaxationissometimesalsocalledthepowerOtodestroy.Therefore,itshouldbeexercisedwithcautiontominimizeinjurytotheproprietaryrightsofataxpayer.Itmustbeexercisedfairly,equallyanduniformly,lestthetaxcollectorkillthe"henthatlaysthegoldenegg."(PhilippineHealthCareProviders,Inc.v.CIR,G.R.No.167330,September18,2009)J9JC9B0MGENERALPRINCIPLESOFTAXATION3•Taxesarenotpoliticalinnatureandassucharecontinuedinforceduringtheperiodofenemyoccupation.Suchtaxlawsaredeemedtobethelawsoftheoccupiedterritoryandnotoftheoccupyingenemy.Hence,taxlawswereconsideredeffectiveduringtheJapaneseOoccupation.(Hiiadov.CIR,G.R.No.L-9408,October31,1956)Brieflyexplainthefollowingdoctrines:lifeblooddoctrine;necessitytheory;benefitsreceivedprinciple;and,doctrineofsymbioticrelationship.(2016BarExam)Suggestedanswer:Thelifeblooddoctrinestatesthattaxesarethelifebloodofthestate;withouttaxes,thegovernmentwillnotoperate.The
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necessitytheorystatesthatthegovernmentcannotcontinuetooperatewithouttaxestopayforexpenses;hence,itcancompelitscitizenstopayup.Thebenefitsreceivedprinciplestatesthattaxesarewhatwepayforacivilizedsociety—wepay,thegovernmentprotects.Thesymbioticrelationshipdoctrinestatesthattaxpayersandthegovernmenthavereciprocalobligations:thetaxpayertopaytaxesandthegovernmenttoprovideprotectionand benefits.c.AttributesofaSoundTaxationSystemTheattributesofasoundtaxationsystemare:oOoJ9JC9B0MFiscaladequacy•Thesourcesofrevenueshouldbeadequatetomeetgovernmentexpendituresandtheirvariations.(Chavezv.Ongpin,G.R.No.76778,June6,1990)AdministrativeFeasibility•Thetaxsystemshouldbecapableofbeingeffectivelyadministeredandenforcedwiththeleastinconveniencetothetaxpayer.•However,evenIftheimpositionisburdensometothetaxpayer,the
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taximpositionIsnotnecessarilyinvalidunlesssomeaspectofitisshowntoviolateanylawortheConstitution.(Diazv.SecretaryofFinance,G.R.No.193007,July19,2011,wheretheVATontollwayfeeswasquestionedasburdensome)TheoreticalJusticeThetaxsystemshouldbefairtotheaveragetaxpayerandbasedupontheabilitytopay.TAXMADELESSTAXING:4AREVIEWERWITHCODALSANDCASESExplaintheprinciplesofasoundtaxsystem.(2015BarExam)Suggestedanswer:AsoundtaxsystemisFAT.Therearethreeprinciplesofasoundtaxsystem.Firstisfiscaladequacy,meaningthesourcesofrevenuemustbeadequatetocovergovernmentexpenditures.Secondisadministrativefeasibility,meaningthesystemshouldatleastbecapableofbeingeffectivelyadministered.Thirdistheoreticaljustice;itshouldbefairandbebasedonataxpayer'sabilitytopay.TaxasDistinguishedfromOtherExactionsD.Itisimportanttodifferentiatetaxesfromotherexactions,especiallywhenitcomestoproblemsandissuesondoubletaxation,taxexemptions,thejurisdictionoftheCourtofTaxAppeals,andtaxpayerremediessuchasrefundclaims.Simply,ifanexactionisnotatax,thenthedefenseofaotaxpayerofdoubletaxationwillnecessarilyfail.Inthesamemanner,atax-exemptindividualorcorporationoIsgenerallyonlyexemptfrompayingtaxes;hence,iftheexactionisnotatax,thentheindividualorcorporationmuststillpaytheexaction.Asagainstllcense/regulatoryfees___________TAX______________LICENSEFEE_______SourcePurposeObjectAstotheamountTaxingpower_________Raiserevenue________Persons,propertyandprivilege______________NolimitPolicepoweroftheStateRegulation_________________Righttoexerciseaprivilege____________________Onlynecessarytocarryoutregulation
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IfgeneratingrevenueistheprimarypurposeandregulationismerelyIncidental,theimpositionisatax;butifregulationistheprimarypurpose,thefactthatrevenueisincidentallyobtaineddoesnotmakeitatax.ooJ9JC9B0MForexample,theUniversalChargeimposedthroughtheElectricPowerIndustryReformAct(EPIRA)washeldtobearegulatoryfeeasitwasimposedtoensuretheviabilityofthePhilippines'electricpowerindustry.(Gerochiv.DepartmentofEnergy,G.R.No.159796,July17,2007)FeesfortheconstructionofspecialprojectssuchascellsiteswereheldasregulatoryfeesbecausethemainpurposeoftheordinanceimposingsuchfeeswastoregulatecertainGENERALPRINCIPLESOFTAXATION5constructionactivitiesliketelecommunicationtowersandtelephonelines.(SmartCommunicationsv.MunicipalityofMalvar,Batangas,G.R.No.204429,February18,2014,reiteratedinCagayandeOrov.CagayanElectricPowerandLightCo.,G.R.No.224825,October17,2018)Thepoweroftaxationcanbeusedasanimplementofpolicepower(i.e.,itcanalsobeusedtoregulatecertainindustriessuchasthesugarindustryorpowerindustry);however,ifthepurposeisprimarilyrevenue,orifrevenueisatleastoneoftherealandsubstantialpurposes,thentheexactionisproperlycalledatax.(PlantersProducts,Inc.v.Fertiphi!Corporation,G.R.No.166066,March 14,2008)TheSocializedHousingTax(SHT)imposedbyQuezonCityOis anexampleofataxthatisusedtoimplementthestate'spolicepower.(Ferrerv.CityMayorBautista,G.R.No.210551,June30,2015,wheretheSCupheldthevalidityoftheSHTwhichitfoundtoserve
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theregulatorypurposeofremovingslumareasinQC)beconsideredalicensefee,theimpositionmustrelate toTooccupationoractivitythatsoengagesthepublicinterestinanhealth,morals,safety,anddevelopmentastorequireregulationfortheprotectionandpromotionofsuchpublicInterest.Thefeeimposedbyacityonliquorvendorsfortheprivilegeoofsellingliquorisalicensefee.Itisnotatax;hence,theliquorvendorscannotstatethattheyaresubjecttodoubletaxation.(CompaniaGeneraldeTabacosdeFilipinasv.CityofManila,G.R.No.L-16619,June29,1963)Buildingfeesarenottaxesorimpositionsuponproperty,butoregulatoryfeesimposedbyacityfortheactivityofbuildingorrepairingastructure.Hence,afoundationwhichisexemptfromtaxescannotclaimthatItisexemptfromthepaymentofbuildingfees,asthesearenottaxesinthefirstplace.(AngelesUniversityFoundationv.CityofAngeles,G.R.No.189999,June27,2012)TheImpositionmustalsobearareasonablerelationtotheprobableexpensesofregulation,takingintoaccountnotonlythecostsofdirectregulationbutalsoitsincidentalconsequencesaswell.oAchargeofafixedsumwhichbearsnorelationatalltothecostofinspectionandregulationmaywellbeconsideredatax.(ProgressiveDevelopmentCorporationv.QuezonCity,G.R.No.L-36081,April24,1989)J9JC9B0M6OoTAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASES
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Hence,exactingacertainamountofmoneyasemployee'sfeesfromalienswhohavealreadybeenclearedforemploymenthasnojustificationasaregulatorymeasureandisactuallyataxundertheguiseofregulation.(Villegasv.HiuChiongTsaiPoHo,G.R.No.L-29646,November10,1978)FeesimposedonaperliterbasisonfuelenteringtheClarkSpecialEconomicZonewereheldtoberegulatoryfeesbecausetherewasareasonablerelationbetweenthehighvolumeoffuelbroughtintothezoneandthegreaterextentofsupervisionandinspectionneededtomonitorthefuel.(ChevronPhilippines,Inc.v.BasesConversionDevelopmentAuthority,G.R.No.173863,September15,2010)•ExactionswhicharecollectedbyagenciesotherthantheBureauofInternalRevenuecanstillbeconsideredtaxesifthelawspecificallystatesthattheseexactionsaretaxes.(AgusanWoodIndustriesv.DENR,G.R.No.234531,July10,2019,wherethetaxpayerfiledarefundclaimforforestchargeswiththecollectingagencyDENR,whichtheSCstatedwasthewrongagencytofilewithastheforestchargeswereinfacttaxes,)AsagainstspecialassessmentsTAXSPECIALASSESSMENTImposedonOnlyonlandPersons,properties,etc.WhyimposedPurposeWhenimposedRegardlessofpublicimprovementSupportofgovernmentRegularexactionPublicimprovementbenefitsthelandandincreasesitsvalueContributiontocostofpublicimprovementExceptionalastotimeandlocalityBasisNecessityBenefitsobtained
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UndertheLocalGovernmentCode,localgovernmentunitsmayimposeaspeciallevyonlandsspeciallybenefitedbypublicworksprojectsorimprovementsfundedbythelocalgovernmentunit.Thepurposeofspeciallevies/assessmentsistofinancetheimprovementofparticularproperties,withthebenefitsoftheimprovementaccruingorinuringtotheownersthereofwho,afterall,paytheassessment.(RepublicofthePhilippinesv.BacolodMurciaMillingCo.,G.R.No.L-19824,July9,1966)J9JC9B0MGENERALPRINCIPLESOFTAXATION7AsagainsttollfeesImposedbyPurposeBasisTAXStateRaiserevenuesState'ssovereignpowerTOLLFEESPrivatepersons______________Reimbursementofcostsandexpensesincurredintheconstructionoftollways,andtoassurereasonablemarginofincomeAttributeofownershipFeespaidbythepublictotollwayoperatorsfortheuseoftollwaysarenottaxes.Theseareexactionswhichendupasearningsoftollwayoperators,not thegovernment.(Diazv.SecretaryofFinance,G.R.No.193007,July19,2011)ImpactandIncidenceofTaxation(DirectandIndirectE.Taxes)Impactoftaxation:pointwherethetaxisoriginallyImposedortheoneonwhomthetaxisformallyassessed(thestatutorytaxpayerinmostcases)Incidenceoftaxation:pointonwhomthetaxburdenfinallyrestsItisessentialtoknowwheretheimpactoftaxationliesbecauseitgenerallydetermines:Theproperpartytoclaimarefundoferroneouslyimposedo
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indirecttaxes,andWhethertheindirecttaxescanbepassedontoanexemptobuyer.Basedonthepossibilityofshiftingtheincidenceoftaxation,taxesmaybeclassifiedintodirectandindirecttaxes.(CIRv.PLOT,G.R.No.140230,December15,2005)Directtaxesarethosethatareexactedfromtheverypersonowhoshouldpaythem.•TheyareimpositionsforwhichataxpayerIsdirectlyliableonthetransactionorbusinessheisengagedin.•Example:incometax,transfertaxes(estatetaxanddonor'stax),residencetax(cedula)J9JC9B0M18TAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASESIndirecttaxesarethosethataredemandedinthefirstOinstancefromorarepaidbyoneperson,withtheexpectationandintentionthathecanshifttheburdentosomeoneelse.•Indirecttaxesaretaxeswhereintheliabilityforthepaymentofthetaxfallsononepersonbuttheburdenthereofcanbeshiftedorpassedontoanotherperson,suchaswhenthetaxisimposedupongoodsbeforereachingtheconsumerwhoultimatelypaysforit.•Whenthesellerpassesonthetaxtohisbuyer,he,ineffect,shiftsthetaxburden,nottheliabilitytopayit,tothepurchaseraspartofthepriceofgoodssoldorservicesrendered.•Hence,thetax-exemptstatusofabuyerwillnotaffecttheliabilityofasellerfortheindirecttaxastheselleristhetaxpayerstatutorilyliableforthepaymentofthetax.
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■Example:VAT,percentagetaxesF.InherentLimitationsonthePowerofTaxation•WhilethepoweroftaxationisinherenttoaState,suchpowerisstillsubjecttolimitations.Ifnolimitationswereimposedonthepower,thentheStatewouldbedangerous,rampantinwieldingsuchpower.Let'sbeginwiththeinherentlimitationsonthepoweroftaxation.1.TaxesmustbeexactedforaPUBLICPURPOSE.•Moneyraisedbytaxationcanbespentonlyforpublicpurposesandnotfortheadvantageofprivateindividuals.(Pascua!v.SecretaryofPublicWorks,G.R.No.L-10405,December29,1960)•Publicpurposemaylegallyexistevenifthemotivewhichimpelledthelegislaturetoimposethetaxwastofavoroneindustryoveranother.(Tiov.VideogramRegulatoryBoard,G.R.No.75697,June19,1987,wherethefavoredindustrywasthevideoindustry)ThepowertotaxisINHERENTLYLEGISTLATIVEinnature.2.Generalrule:Thepowertotaxispurelylegislativeandcannotbedelegatedtootherbranchesofthegovernment.(Pepsi-ColaBottlingCompanyv.MunicipalityofTanauan,G.R.No.L-31156,February27,1976)oJ9JC9B0MEXCEPT:•Delegationtolocalgovernments(aslocalgovernmentsaregrantedtheautonomousauthoritytocreatetheirownsourcesofrevenueandlevytaxes)GENERALPRINCIPLESOFTAXATION9DelegationtothePresident(suchasthegranttothePresidenttoimposetariffrateswithintheboundssanctionedbytheCustomsandTariffsModernizationAct)Delegationtoadministrativeauthorities(suchastheauthoritytofixrateswithinlimitsspecifiedbythelaw)
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GOVERNMENTentities,agencies,and3.generallyexemptfromtaxation.instrumentalitiesareThereisnopointinnationalandlocalgovernmenttaxingeachother,unlessasoundandcompelling policyrequiressuchtransferofpublicfundsfromonegovernmentpockettoanother.Note,however,thatwhilegovernmentinstrumentalitiesareoexemptfromrealpropertytaxes,government-ownedorcontrolledcorporationsarenotexemptfromrealpropertytaxes.{ManilaInternationalAirport Authority[MIAA]v.CityofParanaque,G.R.No.15560,July20,2006,wheretheMIAAwasconsideredagovernmentinstrumentalityandthusexemptfromthepaymentofrealpropertytaxesimposedbyParanaque)4.INTERNATIONALCOMITYTaxtreatiesareenteredintotominimizetheharshnessofinternationaldoubletaxation.LawsandIssuancesmustensurethatthereliefsgrantedOundertaxtreatiesareaccordedtothepartiesentitledthereto.Theobligationtocomplywithataxtreatymusttakeprecedenceoveranadministrativeissuance.AnadministrativeissuancesuchasaRevenueMemorandumOrder(RMO)shouldnotoperatetodivestentitlementtoareliefgrantedbyataxtreaty.ThedenialofareliefbasedonataxtreatyduetothefailureOofataxpayertocomplywithaRMOwouldImpairthevalueofthetaxtreatyandtheState'sdutytocomplyingoodfaithwiththetaxtreaty.{DeutscheBankAGManilav.CIR,G.R.No.188550,August19,2013,wheretheSCheldthatthenon-complianceofthetaxpayerofaperiodprescribedbytheRMOshouldnotdivestitofitsreliefbasedontheRP-GermanyTaxTreaty;reiteratedinCBKPowerCompanyLimitedv.CIR,G.R.No.193383,January14,2015)However,taxexemptionsbasedonInternationalagreementsarestillsubjecttotherule"lawsgrantingtaxingexemptionareconstruedstrictlyagainstthetaxpayer."{Sea-LandServices,Inc.v.CourtofAppeals,G.R.No.122605,April30,2001,wheretheCourtheldthatthetransportofhouseholdgoodsofUSmilitary
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J9JC9B0MI10TAXMADELESSTAXING:A REVIEWERWITHCODALSANDCASESpersonnelwasnotincludedinthetaxexemptionsgrantedbytheRP-USMilitaryBasesAgreement)•AnExchangeofNotesisconsideredanexecutiveagreementbindingonstates.Hence,anExchangeofNotesbetweenthePhilippinesandJapanwhichstatesthatthePhilippineGovernmentwillassumetaxesinitiallytobepaidbyJapanesefirmsshouldberespected.(MitsubishiCorporation-ManilaBranchv.CIR,G.R.No.175772,June5,2017)5.TaxesarelimitedtotheState'sTERRITORIALJURISDICTION•ThepowertotaxislimitedtotheterritorialjurisdictionoftheState.EXCEPTwhereprivityofrelationshipexistsbetweentheStateoandthetaxpayer.Inthesecases,theStatecanexerciseitstaxingpowersoverthetaxpayerevenoutsideitsterritory(suchasthetaxationofresidentcitizensforincomefromsourcesworldwide).•AstheStatecanexerciseitspowertotaxwithinitsterritorialjurisdiction,itcantaxsaleswithinforeignmilitaryzonesasthesemilitaryzonesarenotconsideredforeignterritory.(Reaganv.CIR,G.R.No.L-26379,December27,1969)•TheStatecantaxatransactionifsubstantialelementsofthecontractaresituatedinthePhilippines.(ManilaElectricCompanyv.Yatco,G.R.No.45697,November1,1939)•InCIRv.Marubeni(G.R.No.137377,December18,2001),involvedwereturnkeycontractsrelatingtotheinstallationofawharfcomplexand anammoniastoragecomplexinLeyte.MarubeniCorporationwasaresidentforeigncorporation.TheSupremeCourtheldthattheturnkeycontractswereactuallydivisiblecontractswhicheachhaddifferentstages,witheachstagehavingadifferenttaximplication.Forthestagesinvolvingthedesign,engineering,andoprocurementofequipmentandsupplies,thesewereallconsideredoutsidethehandsofthePhilippinetaxingauthority
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asthesewerealldoneinJapan.Forthestagesinvolvingtheactualinstallationandoconstruction,thesewereallconsideredwithinthejurisdictionofthePhilippinetaxingauthorityastheconstructionandinstallationofworksweredonewithinthePhilippines.Theimplicationhereisthatifyoucanarguethatthecontractoisdivisible,youcanalsoarguethatsomestagesofthecontractwerenotsourcedhereinthePhilippines,andthusbeyondthetaxingjurisdictionofthePhilippines.J9JC9B0MGENERALPRINCIPLESOFTAXATION11Thiswouldbehuge,consideringthatifthecontractwereOconsideredindivisible,theneverythingwouldbeconsideredsituatedhereinthePhilippinesandthusthewholecontractwouldbefullytaxed.JenniferistheonlydaughterofJaninawhowasaresidentinLosAngeles,California,U.S.A.JaninadiedintheU.S.leavingtoJenniferonemillionsharesofSunLife(Philippines),Inc.,acorporationorganizedandexistingunderthelawsoftheRepublicofthePhilippines.Said shareswereheldintrustforJaninabytheCorporateSecretaryofSunLifeandthelattercanvotethesharesandreceivedividendsforJanina.TheInternalRevenueService(IRS)oftheU.S.taxedthesharesonthegroundthatJaninawasdomiciledintheU.S.atthetimeofherdeath.a)CantheCIRofthePhilippinesalsotaxthesameshares?Explain.b)Explaintheconceptofdoubletaxation.(2016BarExam)Suggestedanswer:a)Yes,theCIRcanalsotaxtheshares.Generally,thestatehasthepowertotaxsubjectswithinitsterritorialjurisdiction.AnexampleofthispowerishowtheTaxCodestatesthatadecedent'sgrossestatesubjecttoestatetaxincludespropertieslocatedinthePhilippines,whetherthedecedentisacitizen,aresidentalien,oranon-residentalien.PropertiesInthePhilippinesincludesharesincorporationsorganizedhere,suchasSunLife(Philippines),Inc.Hence,theCIRcantaxtheseshares.Therearetwokindsofdoubletaxation.ThefirstIsdoubleb)
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G.1.J9JC9B0Mtaxationinthebroadsenseorindirectdoubletaxation;thisoccurswhenapecuniaryburdenisimposedonthesamesubjectmatterbytwodifferenttaxingauthorities.TheproblemaboveIsanexampleofindirectdoubletaxation,asthetaxisimposedbytwodifferenttaxingauthorities(theUSandthePhilippines).ThesecondIsdoubletaxationinthestrictsenseordirectdoubletaxation;thisoccurswhenthesamepropertyIstaxedtwicebythesametaxingauthorityforthesamepurposewithinthesamejurisdictionduring thesametaxingperiod,withthetwotaxesofthesamekindofcharacter.Thisisprohibited.ConstitutionalLimitationsonthePowerofTaxationTheState'spoweroftaxationisalsolimitedbytheConstitution.Let'sgothroughthelimitationsonebyone.DueProcessArticleIII,Section1.Nopersonshallbedeprivedoflife,liberty,orpropertywithoutdueprocessoflaw,norshallanypersonbedeniedtheequalprotectionofthelaws.I
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12TAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASES•Taxlawsandtheirenforcementmustcomplywithsubstantiveandproceduraldueprocess.Substantive:thelawmustbereasonableandmustbeforaOpublicpurposeProcedural:theremustbenoarbitrarinessintheassessment0andcollection;theprescribedrulesmustbefollowedbeforeassessmentandcollection2.EqualProtectionofLaws•Thereisvaliddiscriminationwhentheclassification:Restsonsubstantialdistinctions;0Isgermanetothepurposeofthelaw;oNotlimitedtoexistingconditionsonly;andoAppliesequallytoallmembersofthesameclass.0•Equalprotectionguaranteedoesnotrequireterritorialuniformityoflaws.Aslongasthereareactualandmaterialdifferencesbetweenterritories,thereisnoviolationoftheconstitutionalclause.(Tiuv.CourtofAppeals,G.R.No.127410,January20,1999,wheretheCourtsaidthattherearesubstantialdifferencesbetweenbusinesseslocatedwithinafenced-inareaofspecialeconomiczoneandthoselocatedwithout)•Taxexemptionshaveneverviolatedtheequalprotectionclause,astheLegislaturehastheinherentpowernotonlytoselectthesubjectsoftaxationbuttograntexemptions.(CIRv.LingayenGulfElectricPowerCo.,Inc.,G.R.No.L-23771,August4,1988)ThemunicipalityofSanIsidropassedanordinanceimposingataxonInstallationmanagers.Atthattime,therewasonlyoneinstallationmanagerinthemunicipality;thus,onlyhewouldbeliableforthetax.Isthisconstitutional?(2013BarExam)Suggestedanswer:Yes,itisconstitutional.Itcomplieswiththerequisitesofequalprotection.Itisnotlimitedtoexistingconditionsonly,asfutureInstallationmanagerswillbesubjecttothetax.(Shellv.Vano,G.R.No.L-6093,February24,1954)
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HeedingthepronouncementofthePresidentthattheworseningtrafficconditioninthemetropoliswasasignofeconomicprogress,theCongressenactedRepublicActNo.10701(RA10701),alsoknownasAnActImposingaTransportTaxonthePurchaseofPrivateVehicles.UnderRA10701,buyersofprivatevehiclesarerequiredtopayatransporttaxequivalentto5%ofthetotalpurchasepricepervehicleJ9JC9B0MGENERALPRINCIPLESOFTAXATION13purchased.RA10701providesthattheLandTransportationOffice(LTO)shallnotacceptforregistrationanynewvehicleswithoutproofofpaymentofthe5°/otransporttax.RA10701furtherprovidesthatexistingownersofprivatevehiclesshallberequiredtopayataxequivalentto5%ofthecurrentfairmarketvalueofeveryvehicleregisteredwiththeLTO.However,RA10701exemptsownersofpublicutilityvehiclesandtheGovernmentfromthecoverageofthe5°/otransporttax.AgroupofprivatevehicleownerssueonthegroundthatthelawisunconstitutionalforcontraveningtheEqualProtectionClauseoftheConstitution.RuleontheconstitutionalityandvalidityofRA10701.(2017BarExam)Suggestedanswer:Thisisconstitutional.Itcomplieswiththerequisitesofequalprotection.Thereisasubstantialdistinctionbetweenprivatevehiclesvs.publicutilityvehiclesandgovernmentvehicles.Further,taxingprivatevehiclesandnotPUVsisgermanetothepurposeofthelawtoalleviatetrafficbecauseit'llincentivizetheuseofPUVswhichcancarrymorepeoplepervehiclecomparedtoprivatevehicles.3.ReligiousFreedomArticleIII,SectionS.Nolawshallbemaderespectinganestablishmentofreligion,orprohibitingthefreeexercisethereof.Thefreeexerciseandenjoymentofreligiousprofessionandworship,withoutdiscriminationorpreference,shallforeverbeallowed.Noreligioustestshallberequiredfortheexerciseofcivilorpoliticalrights.TheconstitutionalguarantyofthefreeexerciseandenjoymentofreligiousprofessionandworshipcarrieswithIttherighttodisseminatereligiousinformation.
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AnyrestraintsofsuchrightcanonlybejustifiedlikeotherorestraintsoffreedomofexpressiononthegroundsthatthereisaclearandpresentdangerofanysubstantiveevilwhichtheStatehastherighttoprevent.Hence,ataximposedonthedistributionandsaleofbiblesoandotherreligiousliteratureisinvalid.(AmericanBibleSocietyv.CityofManila,G.R.No.L-9637,April30,1957)Note,however,thatunderSection30,NationalInternalRevenueCodeofthePhilippines(NIRC),incomeofreligiousorganizationsfromactivitiesconductedforprofitorfromanyoftheirproperty(regardlessofdispositionofsuchincome)Issubjecttoincometax.J9JC9B0MTAXMADELESSTAXING:14AREVIEWERWITHCODALSANDCASES4.Non-impairmentofContractsArticleIII,Section10.Nolawimpairingtheobligationofcontractsshallbepassed.•Thetaxexemptionsprotectedbythenon-impairmentclausearecontractualtaxexemptions,notthosegrantedbyfranchisesorlicenses.Alicenseconferringataxexemptioncanberevokedatoanytimesinceitdoesnotconferanabsoluteright,eveniftheseweregrantedasinducementstoinvestinthecountry.(Republicv.Caguioa,G.R.No.168584,October15,2007)Afranchiseislikewisesubjecttoamendment,alteration,oorrepealbyCongresswhenthepublicinterestsorequires;hence,anyexemptionbasedonafranchiseisnotprotectedbythenon-impairmentclause.(CagayanElectricPowerandLightCo.,Inc.v.CIR,G.R.No.L-60126,September25,1985)
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•Contractualtaxexemptionsare:oThoseenteredintobythetaxingauthority,oLawfullyenteredinto themunderenablinglaws,oWhereinthegovernmentactsinitsprivatecapacityandshedsitscloakofauthorityandimmunity.(ManilaElectricCo.v.ProvinceofLaguna,G.R.No.131359,May5,1999)•Examplesofcontractualtaxexemptionswhichareprotectedbythenon-impairmentclause:o1GovernmentbondsordebenturesoPerfectedminingconcessiongrantedbytheSpanishGovernment.(Casanovasv.Hord,G.R.No.3473,March22,1907)5.ProhibitionAgainstImprisonmentforNon-paymentofPollTaxArticleIII,Section20.Nopersonshallbeimprisonedfordebtornon-paymentofapolltax.•InthePhilippines,polltaxreferstothecedulaorresidencetax.
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oTheConstitutionalprotectiononlyappliestopolltaxes;hence,peoplecanstillbeimprisonedfornon-paymentofJ9JC9B0MGENERALPRINCIPLESOFTAXATION15otherkindsoftaxeswherethelawsoexpresslyprovides(likefortaxevasioncases).UniformityandEqualityofTaxationandProgressiveSystemof6.TaxationArticleVI,Section28.(1)Theruleoftaxationshallbeuniformandequitable.TheCongressshallevolveaprogressivesystemoftaxation.Equalityanduniformityintaxationmeansthatalltaxablearticlesorkindsofpropertyofthesameclassshallbetaxedatthesamerate.(CityofBaguiov.deLeon,G.R.No.L-24756,October31,1968)Uniformitydoesnotcallforperfectuniformityorperfectoequality;reasonableclassificationsdonotviolatetheuniformityandequalityoftaxation.(Sisonv.Ancheta,G.R.No.L-59431,July25,1984)TheConstitutionisalsonotviolatedwhenacertaintaxisnotoimposedinotherjurisdictions,fortheConstitutiondoesnotrequirethattaxesforthesamepurposeshouldbeImposedindifferentterritorialsubdivisionsatthesametime.(Villanuevav.CityofIloilo,G.R.No.L-26521,December28,1968)Congressisfreetodeterminethesubjectsoftaxation;hence,othetaxisstillvalidwhensomeclassesaresubjecttotaxwhilesomearenotsubjecttotax.(EasternTheatricalv.Alfonso,G.R.L-1104,May31,1949)•However,theclassificationmuststillbevalidandreasonable,accordingtotherulesonequalprotection.Iftheclassificationisunreasonable,thentheruleonuniformitywillbeviolated.(Pepsi-ColaBottlingv.CityofButuan,G.R.No.L-22814,August28,1968)
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•ABIRIssuancewhichunwittinglyimposesdifferenttaxratestothesameclassofproductsviolatestheruleonuniformity.(CIRv.FortuneTobaccoCorporation,G.R.No.180006,September28,2011)Note:aclassificationfreezeprovisionwhichimposesadifferent taxbasedependingonthedateofIntroductionofaproductinthemarkethasbeenheldtobevalidbecauseitsimplifiedtaxadministrationandeliminatedpotentialabuseandcorruptionintaxcollection.(BritishAmericanTobaccov.Camacho,G.R.No.163583,April15,2009)J9JC9B0M16TAX MADELESSTAXING:AREVIEWERWITHCODALSANDCASES•Taxationisprogressivewhenitsrategoesupdependingontheresourcesofthepersonaffected.oVATisadmittedlyregressive,becauseitisimposedonpersonsregardlessofincome.However,itisstillvalidastheConstitution'smandateissimplytoevolveaprogressivesystemoftaxation.Inanycase,theVATsystemminimizestheregressiveeffectsbyprovidingzero-ratedtransactions.(AbakadaGuroPartyListv.Ermita,G.R.No.168056,September1,2005)7.DelegatedAuthoritytothePresidenttoImposeTariffRatesArticleVI,Section28.(2)TheCongressmay,bylaw,authorizethePresidenttofixwithinspecifiedlimits,andsubjecttosuchlimitationsandrestrictionsasitmayimpose,tariffrates,importandexportquotas,tonnageandwharfagedues,andotherdutiesorimpostswithintheframeworkofthenationaldevelopmentprogramoftheGovernment.8.ProhibitionAgainstTaxationofRealPropertyofCharitableInstitutions,Churches,ParsonagesorConvents,MosquesandNon-profitCemeteriesArticleVI,Section28.(3)Charitableinstitutions,churchesandparsonagesorconventsappurtenantthereto,mosques,non-profitcemeteries,andalllands,buildings,andimprovements,actually,
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directly,andexclusivelyusedforreligious,charitable,oreducationalpurposesshallbeexemptfromtaxation.•Theexemptiononlyappliestorealpropertytax.(Lladocv.CIR,G.R.No.L-19201,June16,1965)•"Actual,directandexclusiveuseoftheproperty"isthedirectandimmediateandactualapplicationofthepropertyitselftothepurposesforwhichtheinstitutionisorganized.(LungCenterv.QuezonCity,G.R.No.144104,June29,2004)o"Exclusive"isdefinedaspossessedandenjoyedtotheexclusionofothers;debarredfromparticipationorenjoyment;and"exclusively"isdefined"inamannertoexclude;asenjoyingaprivilegeexclusively."Ifrealpropertyisusedforoneormorecommercialpurposes,itisnotexclusivelyusedfortheexemptedpurposesbutissubjecttotaxation.(LungCenterv.QuezonCity,G.R.No.144104,June29,2004)J9JC9B0MGENERALPRINCIPLESOFTAXATION17ItisnottheuseoftheincomefromtherealpropertythatisOdeterminativeofwhetherthe propertyisusedfortax-exemptpurposes;itistheactualuseoftheproperty.•Hence,whenportionsofahospitalandportionsofthelandareleasedtoprivateentities,thoseportionsarenolongerexemptfromrealpropertytaxesastheactualuseofthepropertyisnolongerforcharitablepurposes.(LungCenterv.QuezonCity,G.R.No.144104,June29,2004)Beforethe1973and1987Constitutions,thephrasedidnotinclude"actual"and"direct";themerequalificationwasfor"exclusive"use.Hence,casesstatedthattheexemptionextendstofacilitieswhichareincidentaltoandreasonablynecessaryfortheaccomplishmentofsaidpurposes.(Herrerav.QuezonCityBoardofAssessmentAppeals,G.R.No.L-15270,September30,1961)Hence,ahospital,aschooldevotedtothehospital,andgarageO
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necessaryfortheschoolwereconsideredexemptfromrealpropertytax.(Herrerav.QuezonCityBoardofAssessmentAppeals,G.R.No.L-15270,September30,1961)Alodginghouseforpeoplewhoparticipateinreligiousoactivitiesandavegetablegardenusedbyapriest,bothofwhichwereadjacenttoachurchwereheldtobeincidentalandnecessaryforreligiouspurposesandwereconsideredexemptfromrealpropertytax.(BishopofNuevaSegoviav.ProvincialBoardofIlocosNorte,G.R.No.L-27588,December31,1927)TheusebytheDirectorofaschoolofafloorforresidentialopurposeswasheldasincidentaltoeducationalpurposes.(AbraValleyCollege,Inc.v.Aquino,G.R.No.L-39086,June15,1988)•However,theleaseofafloorofaschooltoamarketingcompanywasnotIncidentaltoeducationalpurposesand,thus,notexemptfromrealpropertytax.(AbraValleyCollege,Inc.v.Aquino,G.R.No.L-39086,June15,1988)•Note,however,thattheHerrera,NuevaSegovia,andAbracaseswerenotdecidedunderthemorerestrictivewordingofthe1973and1987Constitutions.Abrav.Hernando(G.R.No.L-49336,August31,1981)clarifiedthattheremustnowbeproofofactualanddirectuseoftheland,buildings,andImprovementsforreligious,charitable,oreducationalpurposes.ThiswasreiteratedbyJusticeCallejointheLungCentercase.J9JC9B0MTAXMADELESSTAXING:18AREVIEWERWITHCODALSANDCASES9.ProhibitionAgainstTaxationofNon-stock,Non-profitEducationalInstitutionsArticleXIV,Section4.(3)Allrevenuesandassetsofnon-stock,non-profiteducationalinstitutionsusedactually,directly,andexclusivelyforeducationalpurposesshallbeexemptfromtaxesandduties.Uponthedissolutionorcessationofthe corporateexistenceofsuchinstitutions,theirassetsshallbedisposedofinthemannerprovidedbylaw.
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Proprietaryeducationalinstitutions,includingthosecooperativelyowned,maylikewisebeentitledtosuchexemptions,subjecttothelimitationsprovidedbylav/,includingrestrictionsondividendsandprovisionsforreinvestment.Theconstitutionalprovisioncoversnon-stock,non-profit(NSNP)educationalinstitutionsandexemptsthemfromincometax,realpropertytax,donor'stax,andcustomsdutiesbecausetheprovisionspeaksof"allrevenuesandassets."Revenuesconsistoftheamountsearnedfromtheconductofbusinessoperations.Revenueisthecomponentofthetaxbaseinincometax,OVAT,andlocalbusinesstax.(CIRv.DLSU,G.R.No.196596,November9,2016)•Assetsaretangibleandintangiblepropertiesofthetaxpayer.oThefairmarketvalue(FMV)ofrealpropertyisthetaxbaseforrealpropertytax.(CIRv.DLSU)•Therevenuesandtheassetsmustbeusedactually,directly,andexclusivelyforeducationalpurposes.Thetesttodetermineexemptionistheuseofboththe0revenuesandassets.Hence,whentherevenuesareactually,directly,and0exclusivelyusedforeducationalpurposes,theNSNPeducationalinstitutionshallbeexemptfromincometax,VAT,andlocalbusinesstax.Therevenuesdonotneedtocomefromeducationalactivities,aslongasitisusedforeducationalpurposes.(LaSallianEducationalInnovatorsFoundationv.CIR,G.R.No.202792,February27,2019)Andwhentheassetsareactually,directly,andexclusivelyusedOforeducationalpurposes,theNSNPeducationalinstitutionshallbeexemptfromrealpropertytax.(CIRv.DLSU,wheretheCourtsaidthatifauniversityleasesaportionofaschoolbuildingtoabookstoreorcanteen,theleasedportionisnoJ9JC9B0MGENERALPRINCIPLESOFTAXATION19
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longerusedforeducationalpurposesandthussubjecttorealpropertytax,evenifitcaterstostudents.Idon'tagreeandwouldarguethatabookstoreandcanteenarereasonablycoveredunderaschool's"educationalpurpose.")Incomefromcafeterias,canteensandbookstoresarealsoOexemptiftheyareownedandoperatedbytheeducationalinstitutionandarelocatedwithintheschoolpremises.(RevenueMemorandumCircular[RMC]76-2003)Distinguishfromtaxtreatmentof:Proprietaryeducationalinstitutions(10%underSectionO27[B],NIRC)Governmenteducationalinstitutions(ExemptunderSectionO30,NIRC)SanJuanUniversityisanonstock,non-profiteducationalinstitution.ItownsapieceoflandinCaloocanCityonwhichitsthree2-storeyschoolbuildingsstood.Twoofthebuildingsaredevotedtoclassrooms,laboratories,acanteen,abookstoreandadministrativeoffices.ThethirdbuildingIsreservedasdormitoryforstudentathleteswhoaregrantedscholarshipsforagivenacademicyear.In2017,SanJuanUniversityearnedincomefromtuitionfeesandfromleasingaportionofitspremisestovariousconcessionairesoffood,books,andschoolsupplies.a)CantheCityTreasurerofCaloocanCitycollectrealpropertytaxesonthelandandbuildingofSanJuanUniversity?Explainyouranswer.b)IstheincomeearnedbySanJuanUniversityfortheyear2017subjecttoincometax?Explainyouranswer.(2017BarExam)Suggestedanswer:i■
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J9JC9B0MTheCityTreasurermaynotcollectrealpropertytaxesforthea)non-leasedoutportions.TheConstitutionstatesthatallassetsofnonstock,non-profiteducationalinstitutionsactually,directly,!andexclusivelyusedforeducationalpurposesareexemptfromalltaxes.Inthiscase,SanJuanUniversityisanonstock,non-profiteducationalinstitution.Itslandandtwobuildingsareactually,directly,andexclusivelyusedforeducationalpurposes.However,theportionsleasedouttoconcessionariesmaybesubjecttorealpropertytaxes,astheleaseconstitutescommercialuseandthusarenolongeractually,directly,andexclusivelyusedforeducationalpurposes.Itdepends.IftheIncomeisfactuallyproventobeactually,b)directly,andexclusivelyusedforeducationalpurposes,itwillbeexempt,astheConstitutionstatesthatallrevenuesofnonTAXMADELESSTAXING:20AREVIEWERWITHCODALSANDCASESstock,non-profiteducationalinstitutionsactually,directly,andexclusivelyusedforeducationalpurposesareexemptfromalltaxes.However,ifSJUisnotabletoprovesuch,thentheincomewillbesubjecttoincometax.10.MajorityVoteofCongressforGrantsofTaxExemptionsArticleVI,Section28.(4)NolawgrantinganytaxexemptionshallbepassedwithouttheconcurrenceofamajorityofalltheMembersoftheCongress.•Hence,anexemptiongrantedbyaPresidentialProclamationandnotbylawisinvalid.(JohnHayPeoplesAlternativeCoalitionv.Lim,G.R.No.119775,October24,2003)•Thisincludesthegrantoftaxamnesties.
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Ataxamnesty,beingageneralpardonorintentionalooverlookingbytheStateofitsauthoritytoimposepenaltiesonpersonsotherwiseguiltyofevasionorviolationofarevenueortaxlaw,partakesofanabsoluteforgivenessorwaiverbytheGovernmentofitsrighttocollectwhatotherwisewouldbedueit,andinthissense,prejudicialthereto,particularlytogivetaxevaders,whowishtorelentandarewillingtoreformachancetodosoandtherebybecomeapartofthenewsocietywithacleanslate.(Republicv.IntermediateAppellateCourt,G.R.No.L-69344,April26,1991)11.ProhibitiononUseofTaxLeviedforSpecialPurposeArticleVI,Section29.(3)Allmoneycollectedonanytaxleviedforaspecialpurposeshallbetreatedasaspecialfundandpaidoutforsuchpurposeonly.Ifthepurposeforwhichaspecialfundwascreatedhasbeenfulfilledorabandoned,thebalance,ifany,shallbetransferredtothegeneralfundsoftheGovernment.12.TaxBillsShouldOriginateExclusivelyRepresentativesintheHouseofArticleVI,Section24.Allappropriation,revenueortariffbills,billsauthorizingincreaseofthepublicdebt,billsoflocalapplication,andprivatebillsshalloriginateexclusivelyintheHouseofRepresentatives,buttheSenatemayproposeorconcurwithamendments.J9JC9B0MGENERALPRINCIPLESOFTAXATION2113.President'sVeto PoweronAppropriation,Revenue,andTariffBillsArticleVI,Section27.(2)ThePresidentshallhavethepowertovetoanyparticularitemoritemsinanappropriation,revenue,ortariffbill,butthevetoshallnotaffecttheitemoritemstowhichhedoesnotobject.ThePresidenthasthepowerto"item-veto"whenitcomestoappropriation,revenue,ortariffbills.14.JudicialPowertoReviewLegalityofTax
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ArticleVIII,SectionS.TheSupremeCourtshallhavethefollowingpowers:xxx(2)Review,revise,reverse,modify,oraffirmonappealorcertiorari,asthelawortheRulesofCourtmayprovide,finaljudgmentsandordersoflowercourtsin:xxx(b)Allcasesinvolvingthelegalityofanytax,Impost,assessment,ortoll,oranypenaltyimposedinrelationthereto.15.GrantofPowertotheLocalGovernmentUnitstoCreateItsOwnSourcesofRevenueArticleX,Section5.Eachlocalgovernmentunitshallhavethepowertocreateitsownsourcesofrevenuesandtolevytaxes,feesandchargessubjecttosuchguidelinesandlimitationsastheCongressmayprovide,consistentwiththebasicpolicyoflocalautonomy.Suchtaxes,fees,andchargesshallaccrueexclusivelytothelocalgovernments.NotethatthepoweroflocalgovernmentunitsIssubjecttolimitationsasCongressmayprovide,i.e.,theLocalGovernmentCode.H.DoubleTaxation•Therearetwokindsofdoubletaxation:oDirectdoubletaxation,andoIndirectdoubletaxation.J9JC9B0M122TAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASESItisdirectdoubletaxationwhichisprohibited.Toconstitutedirectdoubletaxation,thefollowingrequisitesmustbepresent:oThesamepropertymustbetaxedtwice;
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Bothtaxesmustbeimposed:0■Onthesamepropertyorsubjectmatter,•Forthesamepurpose,■BythesameState,Government,ortaxingauthority,Withinthesamejurisdiction,Duringthesametaxingperiod,andThetwotaxesareofthesamekindorcharacter.(Villanuevav.CityofIloilo,G.R.No.L-26251,December28,1968)•Impositionofapenaltyandataxononetaxpayerdoesnotamounttodoubletaxation.(RepublicBankv.CourtofTaxAppeals,G.R.No.62554,September2,1992)•Indirectdoubletaxationsimplymeansthattherearetwoormorepecuniaryimpositionsonasubjectmatter.ItisnotprohibitedbytheConstitution.Mr.AlassellsshoesinMakatithrougharetailstore.HepaystheVATIonhisgrosssalestotheSIRandthemunicipallicensetaxbasedonthesamegrosssalestotheCityofMakati.Hecomestoyouforadvicebecausehethinksheisbeingsubjectedtodoubletaxation.(2013BarExam)Suggestedanswer:Sorry,that'snotprohibiteddoubletaxation,Mr.Atas.Bestyoupay,lestincourtyou'llspendyourday.Doubletaxationisallowedwhereonetaxisimposedbythenationalgovernmentandtheotherbythelocalgovernment.(Note:RhyminganswersarenotgivenextracreditintheBarexam)Differentiatebetweendoubletaxationinthestrictsenseandinabroadsenseandgiveanexampleofeach.(2015BarExam)Suggestedanswer:Doubletaxationinthestrictsenseisdirectdoubletaxation.Itmeansthatthesamepropertyorsubjectmatteristaxedtwice,forthesamepurpose,bythesametaxingauthority,withinthesamejurisdiction,duringthesametaxperiod,withthetwotaxesofthesamekindorcharacter.Anexamplewouldbetaxinggrossincometwiceinthesameyear.Thisisprohibited.Doubletaxationinthebroadsenseisindirectdoubletaxation.Itmeanstherearetwoormorepecuniaryimpositionsonasubjectmatter.Forexample,abusinessisrequiredtopayincometaxtothenationalgovernmentandlocalbusinesstaxtothelocalgovernment.Thisisallowed.
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J9JC9B0MGENERALPRINCIPLESOFTAXATION23Uponhisretirement,AlfredotransferredhissavingsderivedfromhissalaryasamarketingassistanttoatimedepositwithAABBank.Thebankregularlydeducted20%finalwithholdingtaxontheinterestincomefromthetimedeposit.Alfredocontendsthatthe20%finaltaxontheinterestincomeconstituteddoubletaxationbecausehissalaryhadbeenalreadysubjectedtowithholdingtax.IsAlfredo'scontentioncorrect?Explainyouranswer.(2017BarExam)Suggestedanswer:Alfredo'swrong.There'snodoubletaxationherebecausetwodistinctsubjectmattersareactuallybeingtaxed—Alfredo'ssalaryandAlfredo'sinterestincomefromhistimedeposit.Asthereisnoidentityinsubjectmatter,thenthisdoesnotconstitutedirectdoubletaxation.I.FormsofEscapefromTaxationTaxavoidanceandtaxevasionarethecommondeviceswhereinthetaxpayercanescapetheeffectsoftaxation.Taxavoidanceislegal.Itinvolvessavingontaxesusinglegalmeans.Estateplanningisalegalmannertominimizetaxes.(DelpherOTradesCorporationv.IntermediateAppellateCourt,G.R.No.L-69259,January26,1988)Taxevasionisillegalandcanlandyouinjail.ItInvolvestheuseofforbiddenandillegaldevicestolessenandminimizetax.Itconnotestheintegrationofthreefactors:O•Theendtobeachieved,i.e.,paymentoflessthanthatknownbythetaxpayertobelegallydue,orthenonpaymentoftaxwhenitisshownthatataxisdue,•Stateofmindwhichis"evil,"in"badfaith,""willful,"or"deliberateandnotaccidental,"and•Courseofactionorfailureofactionthatisunlawful.(CIRv.EstateofBenignoToda,G.R.No.147188,September14,2004)Willfulblindnessdoctrine:Ataxpayercannolongerraisethedefense
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thattheerrorsontheirtaxreturnsarenottheirresponsibilityorthatitisthefaultoftheaccountantstheyhired.ooJ9JC9B0MIntenttodefraudneednotbeshownforaconvictionoftaxevasion.Theonlythingthatneedstobeprovenisthatthetaxpayerwasawareofhisobligationtofilethetaxreturnbutheneverthelessvoluntarily,knowingly,andintentionallyfailed24TAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASEStofiletherequiredreturns.(Peoplev.Kintanar,C.T.A.E.B.No.006,December3,2010,affirmedbytheSupremeCourtinG.R.No.196340)PriortotheVATlaw,salesofcarsweresubjecttoasalestaxbutthetaxappliedonlytotheoriginalorthefirstsale;thesecondandsubsequentsales werenotsubjecttotax.DeltoidMotors,Inc.(Deltoid)hitontheideaofsettingupawholly-ownedsubsidiary,GonmadMotors,Inc.(Gonmad),andofsellingitsassembledcarstoGonmadatalowpricesoitwouldpayalowertaxonthefirstsale.Gonmadwouldthensellthecarstothepublicatahigherpricewithoutpayinganysalestaxonthissubsequentsale.Characterizethearrangement.(2013BarExam)Suggestedanswer:TheplanisimproperandsimilartothecaseofBenignoToda;theveilofcorporatefictioncanbepiercedsothatthetwotransactionscanbecollapsedandtaxedaccordingly.YouaretheretainedtaxcounselofABCCorp.YourclientinformedyouthattheyhavebeendirectlyapproachedwithaproposalbyaBIRinsider(i.e.,amiddlerankBIRofficial)onthetaxmattertheyhavereferredtoyouforhandling.TheBIRinsider'sproposalistosettlethematterbysignificandyreducingtheassessment,buthewillget50%ofthesavingsarisingfromthereducedassessment.(2012BarExam)Whattax,criminalandethicalconsiderationswillyoutakeintoaccountIngivingyouradvice?Explaintherelevanceofeachoftheseconsiderations.
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Suggestedanswer:IwilladvisemyclientnottoaccepttheBIRinsider'sproposal.Don'tdoit!!!Eveniftheassessmentissignificantlyreduced,thiswillopenmyclienttotheriskoftaxevasionandsurcharges.Therewillbetaxevasionasthereisanintenttodefraudthegovernmentcoupledwithanactthatreducesthetaxliability.Moreover,asalawyer,Iamdutyboundtoupholdthelaw—toallowmyclienttogo“underthetable"willbeaterrible(yetsadlycommon)affronttotheConstitutionandthelawsthatIsworetoupholdandprotect.OnAugust31,2014,HaeltonCorporation(HC),thruitsauthorizedrepresentativeMs.Pares,solda16-storeycommercialbuildingknownasHaeltownBuildingtoMr.BellyforPl00million.Mr.Belly,inturn,soldthesamepropertyonthesamedaytoBellGates,Inc.(BGI)forP200million.Thesetwo(2)transactionswereevidencedbytwo(2)separateDeedsofAbsoluteSalenotarizedonthesamedaybythesamenotarypublic.InvestigationsbytheBureauofInternalRevenue(BIR)showedthat:(1)theDeedofAbsoluteSalebetweenMr.BellyandBGIwasnotarizedaheadofthesalebetweenHCandMr.Belly;(2)asearlyJ9JC9B0MGENERALPRINCIPLESOFTAXATION25asMay17,2014,HCreceivedP40millionfromBGI,andnotfromMr.Belly;(3)thesaidpaymentofP40millionwasrecordedbyBGIinitsbooksasofJune30,2014asinvestmentinHaeltownBuilding;and(4)thesubstantialportionofP40millionwaswithdrawnbyMs.Paresthroughthedeclarationofcashdividendstoall itsstockholders.Basedontheforegoing,theBIRsentHaeltownCorporationaNoticeofAssessmentfordeficiencyincometaxarisingfromanallegedsimulatedsaleoftheaforesaidcommercialbuildingtoescapethehighercorporateincometaxrateofthirtypercent(30%).WhatistheliabilityofHaeltownCorporation,ifany?(2014BarExam)Suggestedanswer:HaeltownCorporationisliablefortaxevasionandthepenaltyshallbeimposedonthecompanyofficeroremployeeresponsiblefortheviolation.Taxevasionistheuseofillegalmeanstoevadethepaymentoftaxes.Itinvolvestheendtobeachieved(lesstaxes),an"evil"stateofmind,andtheunlawfulcourseofaction.Thiscase,similartotheschemeintheBenignoTodacase,hasallthreeelementsoftaxevasion.Aschemewasemployedtoescapethehighercorporateincometaxrate.
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LuckyVCorporation(Lucky)ownsa10-storeybuildingona2,000squaremeterlotintheCityofMakati.ItsoldthelotandbuildingtoRainierforP80million.Onemonthafter.RainiersoldthelotandbuildingtoHealthySmokeCompany(HSC)forP200million.LuckyfileditsannualtaxreturnanddeclareditsgainfromthesaleofthelotandbuildingintheamountofP750,000.00.AninvestigationconductedbytheBIRrevealedthattwomonthspriortothesaleofthepropertiestoRainier,LuckyreceivedP40millionfromHSCandnotfromRainier.SaidamountofP40millionwasdebitedbyHSCandreflectedinitstrialbalanceas"otherinv.-LuckyBldg.“Themonthafter,anotherP40millionwasreflectedInHSC'strialbalanceas“otherinv.—LuckyBldg.“TheBIRconcludedthatthereistaxevasionsincetherealbuyerofthepropertiesofLuckyisHSCandnotRainier.ItissuedanassessmentfordeficiencyincometaxintheamountofP79millionagainstLucky.Luckyarguesthatitresortedtotaxavoidanceorataxsavingdevice,whichIsallowedbytheNIRCandBIRrulessinceItpaidthecorrecttaxesbasedonitssaletoRainier.Ontheotherhand,RainierandHSCalsopaidtheprescribedtaxesarisingfromthesalebyRainiertoHSC.IstheBIRcorrectinassessingtaxesonLucky?Explain.(2016BarExam)Suggestedanswer:TheBIRIscorrect.ThepartieshereusedIllegalmeanstopaylesstaxesthanwhatwasactuallydue.ItusedaruseInordertoreflectasimulatedtransaction—thesaletoandfromRainier.Thisistaxevasion;therewasanendtobeachieved(lowertaxes),astateofmindthatwasfraughtwithbadfaith,andtheuseofacourseofactiontoachievetheend.Again,thisIsliketheBenignoTodacase,wheretheSupremeCourtcollapsedthetransactionstoreflectthetruetransactionandthepropertaxliability.IJ9JC9B0M26TAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASESJ-ExemptionfromTaxation•Theessenceoftaxexemptionistheimmunityorfreedomfromachargeorburdentowhichothersaresubjected.Itisawaiverofthegovernmentsrighttocollectwhatwouldhavebeenotherwisecollectible.(SecretaryofFinancev.Lazatin,G.R.No210588,November29,2016)oItisthefreedomfromtheimpositionandpaymentofaparticulartax.
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Hence,aRevenueRegulationthatrequirestax-exemptentitiestopaytaxeswiththepossibilityofasubsequentrefundisinvalid.Thetax-exemptentitiesshouldn'tberequiredto payinthefirstplace.(SecretaryofFinancev.*c*airnf°rtaxexemptionshouldbestrictlyconstruedagainstthetaxpayer.fLuzonStevedoringCorp.v.CourtofTaxAppeals,G.R.No.L-30232,July29,1988)oHewhoclaimsanexemptionmustbeabletopointtosomepositiveandspecificprovisionoflawcreatingsuchright;itcannotbeallowedtoexistuponamerevagueimplicationorinference.(ManilaElectricCorporationv.Vera,G.R.No.L-29987,October22,1975)Hence,ifthereisnothinginalawthatpointsthatthewordexemption"referstotaxes,theimplicationwouldbethatthetermwouldbean“exemption"ofsomethingelse,suchasregulatoryorreportingrequirements.(PLDTv.CityofDavao,G.R.No.143867,August22,2001)Oncethetaxpayerprovesheisentitledtothetaxexemption,thenthetaxexemptionmustnecessarily^CIRV'Robertson‘GR-No-70116,August12,TaxrefundsareinthenatureoftaxexemptionsandareOlikewisestrictlyconstruedagainstthetaxpayer.(DavaoGulfLumberCorp.v.C1R,G.R.No.117359,July23,1998)Taxexclusions(removalofotherwisetaxableitemsfromtheO^ac°^axa^,on)arelikewisestrictlyconstruedagainstthetaxpayerfSmartCommun/cat/ons,Inc.v.CityofDavao,G.R.No.155491,September16,2008)•Notethefollowingrulesonconstruction:oAtaxcannotbeimposedunlessitissupportedbytheclear^c5Xp,\esslanguageofastatute.Ataxstatuteisstrictlyconstruedagainstthegovernment.IJ9JC9B0M
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GENERALPRINCIPLESOFTAXATIONT7■Hence,itistheburdenoftheStatetofirstprovethatataxpayerisinfactcoveredbyataxstatute.(CIRv.CourtofAppealsandAteneodeManilaUniversity,G.R.No.115349,April18,1997)•Ifanentityisnotcoveredbyataximpositioninthefirstplace,itisillogicalforittoproveitsentitlementtotaxexemptionbeforefullyenjoyingthesame.(SecretaryofFinancev.Lazatin,G.R.No.210588,November29,2016,wheretheSCinvalidatedaR.R.thatimposedanadministrativerequirementontaxexemptentitiesinorderforthemtogetarefundfortaxestheyweren'tsupposedtopayinthefirstplace)•Moreover,theStateisestoppedfromcollectingthedifferencebetweenthedeficiencytaxassessmentandtheamountalreadypaidbythetaxpayerpursuanttoataxamnesty.(Republicv.IntermediateAppellateCourt,G.R.No.L-69344,April26,1991)•However,oncethetaxisfoundtocoverthetaxpayer,aclaimofexemptionmustbestrictlyconstruedagainstthetaxpayer.Theburdenthenshiftstothetaxpayertoprovethatheisexempt.(DavaoGulfLumberCorp.v.CIR,G.R.No.117359,July23,1998)Thestrictconstructionagainsttaxexemptionsalsomandateswithholdingagentstostrictlyobservetheproperproceduretowithholdtaxwhenobligatedtodoso.(NationalDevelopmentCompanyv.CIR,G.R.No.L-53961,June30,1987)Certainfranchisesweregiventaxincentiveswhereinthefranchiseswereobligatedtopayaspecialtaxrate"Inlieuofalltaxes."Whatdoesthisphrasemean?Doesitapplytoalltaxes?The"inlieuofalltaxes"clauseonlyappliestonationaltaxesOanddoesnotapplytolocaltaxes.(SmartCommunications,Inc.v.CityofDavao,G.R.No.155491,September16,2008)Forindirecttaxes,thetax exemptionofthebuyer(orwhoevertheburdenoftaxfallsto)doesnot exempthimfromthepaymentofindirecttaxes,becausesuchpersonisnottheonestatutorilyliableforthepaymentofthetax(that'stheseller)inthefirstplace.(PhilippineAcetyleneCo.,Inc.v.CIR,G.R.No.L-19707,August17,1967)EXCEPT:o•Whenthebuyer(whoevertheburdenoftaxfallsto)isspecifically
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exemptedfromthepaymentof"indirectJ9JC9B0MTAXMADELESSTAXING:28AREVIEWERWITHCODALSANDCASEStaxes."(CIRv.Gotamco&Sons,Inc.,G.R.No.L-31092,February27,1987,wheretheWorldHealthOrganization,thepurchaser,washeldexemptfromindirecttaxesaswell)•Ifthebuyerisexemptfromindirecttaxes,whobearstheeconomicburdenofthetax(sinceitcannotbepassedontothemanymore)?ThesellerwillhavetoabsorbtheeconomicOburdenofthetax.(Macedav.Macaraig,G.R.No.88291,June8,1993)•Canthesellerclaimarefund?•Ifthereareinternationallawandpublicpolicyconsiderations,itseemsthesellercanclaimforarefund.(CIRv.PilipinasShellPetroleumCorporation,G.R.No.188497,February19,2014,whichinvolvedexcisetaxesonpetroleumproducts;seealsotheSeparateOpinionofJusticeBersamin)•Forindirecttaxes,theproperpartytoquestionorseekarefundisthestatutorytaxpayer,thepersononwhomthetaxisimposedbylawandwhopaidthesameevenifheshiftstheburdenthereoftoanother.(Silkair[Singapore]Ptd.Ltd.v.CIR,G.R.No.173594,February6,2008)•Hence,thebuyerisnottheproperpartytoseekarefundasthebuyerisnotthestatutorytaxpayer;hemerelyabsorbstheburdenofthetax.(Silkair[Singapore]Ptd.Ltd.v.CIR,G.R.No.173594,February6,2008)EXCEPT:0■Whenthelawclearlygrantsthepartytowhichtheeconomicburdenisshiftedanexemptionfrombothdirectandindirecttaxes.Inthesecases,thebuyerisdeemedaproperpartytoseekarefund.(PhilippineAirlines,Inc.v.CIR,G.R.No.198759,July1,2013;comparedtoSilkair,PALwasgrantedalegislative
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franchisewhichexempteditfromdirectandindirecttaxes)PursuanttoSec.11ofthe"HostAgreement"betweentheUnitedNationsandthePhilippinegovernment,itwasprovidedthattheWorldHealthOrganization(WHO),“itsassets,incomeandotherpropertiesshallbe:a)exemptfromalldirectandindirecttaxes.“PrecisionConstructionCorporation(PCC)washiredtoconstructtheJ9JC9B0MGENERALPRINCIPLESOFTAXATION29WHOMedicalCenterinManila.Uponcompletionofthebuilding,theBIRassesseda12%VATonthegrossreceiptsofPCCderivedfromtheconstructionoftheWHObuilding.TheBIRcontendsthatthe12%VATisnotadirectnoranindirecttaxontheWHObutataxthatisprimarilyduefromthecontractorandisthereforenotcoveredbytheHostAgreement.TheWHOarguesthattheVATisdeemedanindirecttaxasPCCcanshiftthetaxburdentoit.IstheBIRcorrect?Explain.(2016BarExam)Suggestedanswer:TheBIRisw-r-o-n-g.VATisanindirecttax,astheliabilityforthepaymentofthetaxfallsononeperson,buttheburdenthereofcanbeshiftedorpassedontoanother.Inthiscase,theliabilitytopayVATiswithPCC,withtheeconomicburdenfallingontheshouldersofWHO.ButwithWHOexplicitlyexemptfrombothdirectandindirecttaxes,itshouldnotshouldertheburdenoftheVAT.K.OtherDoctrinesProspectivityoftaxlaws•Taxlawsmustbeappliedprospectively,exceptbyexpressprovisionoflaw.•Accordingly,exemptionstatutesarenotretroactive.(Pansacolav.CIR,G.R.No.159991,November16,2006)Non-retroactivityofrulingsNIRC,Sec.246.Non-retroactivityofrulings.—Anyrevocation,modification,orreversalofanyrulesandregulationspromulgatedInaccordancewiththeprecedingsectionoranyoftherulingsorcircularspromulgatedbytheCommissionerofInternalRevenueshallnotbegivenretroactiveapplicationiftherevocation,modification,orreversalwillbeprejudicialtothetaxpayersexceptinthefollowingcases:a)wherethetaxpayerdeliberatelymisstatesoromitsmaterialfactsfromhis
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returnorinanydocumentrequiredofhimbytheBureauofInternalRevenue;b)wherethefactssubsequentlygatheredbytheBureauofInternalRevenuearemateriallydifferentfromthefactsonwhichtherulingIsbased;orwherethetaxpayeractedinbadfaith.c)Rulings,circulars,rulesandregulationspromulgatedbytheCommissionerofInternalRevenueshouldhavenoretroactiveapplicationifapplyingthemwouldprejudicethetaxpayers.(CIRv.CourtofAppeals,G.R.No.117982,February6,1997)J9JC9B0M■30TAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASESHowever,whentheruling,circular,orrulesandregulationsowasnullifiedbyacourt(andnotbytheCIR),thenthenon-retroactivityruledoesnotapply.{PhilippineBankofCommunicationsv.CIR,G.R.No.112024,January28,1999,whereintheSCdeclaredthatataxpayercannotrelyonaRMCwhichextendedtheperiodtoclaimarefundbeyondtheperiodgivenbylawandwhichwassubsequentlydeclaredinvalidbythelowercourts)•AgeneralinterpretativeruleissuedbytheCIRmayberelieduponbytaxpayersfromthetimetheruleisissueduptoitsreversalbytheCommissionerorthisCourt.{CIRv.SanRoque,G.R.No.187485,February12,2013,whereaBIRRulingissueduponinquiryoftheDepartmentofFinancewasheldtobeageneralinterpretativerule)Set-offoftaxesTherecanbenooff-settingoftaxesagainsttheclaimsthatthetaxpayermayhaveagainstthegovernment.A
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personcannotrefusetopayataxonthegroundthattheogovernmentoweshimanamountequaltoorgreaterthanetaxbeingcollected.Thecollectionofataxcannotawaiteresultsofalawsuitagainstthegovernment.(Franciav.1aoa'?ed‘ateAPPellateCourt,G.R.No.L-67649,June28,1JOOjTaxesarenotinthenatureofcontractsbetweenthepartyand0egovernment;taxesgrowoutofadutytothegovernment.axes►,positlveactsofthegovernment;thepersonallnc*,v*<^ua*taxpayersisnotrequiredforthemakingenorcementoftaxes.(Republicv.MambulaoLumberCompany,G.R.No.L-17725,February28,1962)^Xpayercannottakethe“lav/intoitsownhands,"andocmF°Tpensationbecauseithasapendingrefundwiththe28,1993jeXMln'n9C°rP‘V’C1R'G.R.No.125704,AugustNote,however,thatwhenboththeclaimsoftheAiroeLnrri5ntandthetaxpayeragainsteachotherhaveAnd3t-/°ecomedue,demandableandfullyliquidated,ann6amountduethetaxpayerhasalreadybeennri=>\?.P/^tedbylaw'compensationwillfollowbyoperation1963)(D°mingov-Garlitos,G.R.No.L-18994,June29,Asarule,taxescannotbesubjecttocompensationbecausethegovernmentandthetaxpayerarenotcreditorsanddebtorsofJ9JC9B0MGENERALPRINCIPLESOFTAXATION31eachother.However,therearesomecaseswherethecourthasallowedthedeterminationofataxpayer'sliabilityinacaseforrefund,therebyallowingtheoffsettingoftaxes.Notethattheseareallrefundcaseswherethecourtallowedtheoffsettingoftaxes,becauseitwouldhavebeenabsurdtograntarefundafterfindingoutthatthetaxpayerowedthegovernmentinthefirstplace.Inthesecases,theCourtallowedoffsettingonlybecausetheO
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determinationofthetaxpayer'sliabilityisintertwinedwiththeresolutionoftheclaimfortaxrefundoferroneouslyorillegallycollectedtaxesunderSection229,NIRC.Also,theoffsettingwillnotbeallowediftheperiodtoassessodeficiencytaxesintheexcessoftheamountclaimedforrefundhasalreadyprescribed.(CIRv.ToledoPowerCompany,G.R.No.196415,December2,2015)Taxpayersuit•Toconstituteataxpayer'ssuit,thefollowingrequisitesmustbepresent:Publicfundsaredisbursedbyapoliticalsubdivisionoroinstrumentality,andindoingso,alawisviolatedorirregularitycommitted,andThepetitionerIsdirectlyaffectedbytheact.(Anti-GraftoLeagueofthePhilippinesv.SanJuan,G.R.No.97787,August1,1996)•Hence,whenthedispositionisofallegedpublicproperty(likepaintingsandsilverwareoftheMarcoses)andnotofpublicfunds,ataxpayer'ssuitisimproper.(Joyav.PresidentialCommissiononGoodGovernment,G.R.No.96541,August24,1993)•Similarly,whennopublicfundsweredisbursedorspent (suchaswhenSpecialElectionswerenotheld,andthus,nothingwasspent),ataxpayer'ssuitisimproper.(Lozadav.COMELEC,G.R.No.L-59068,January27,1983)•ButwhenwhatisquestionedisacontractenteredIntobyagovernment-ownedor-controlledcorporation(GOCC)whereinpublicfundswillbeused,thenataxpayer'ssuitisproper.(Abayav.Ebdane,G.R.No.167919,February14,2007)J9JC9B0M
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INCOMETAXA.IncomeTaxSystems•Therearethreekindsofincometaxsystems:oGlobal(unitary)taxsystem•Here,allitemsofgrossincome,deductions,personalandadditionalexemptionsarereportedinoneincometaxreturn(ITR)andasingletaxisimposedonallincomereceivedorearned,regardlessoftheactivitieswhichproducedtheincome.•Itisakintoputtingallincomeintoonebasketandtaxingtheentirebasket.oo
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J9JC9B0M
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Schedulartaxsystem•Here,differenttypesofactivitiesaresubjectedtodifferenttypesoftaxrates.Thetaxratesdependontheclassificationofthetaxableincomeandtheactivitieswhichproducedtheincome.Semi-global,semi-schedularsystem■Certainpassiveincomeandcapitalgainsaresubjecttofinaltaxeswhileotherincomeareaddedtoarriveatthegrossincome(wheredeductionsareusedtoarriveatthetaxableincome).■Wefollowthesemi-global/semi-schedularsysteminthePhilippines.■Schedularcanalsomeanthattaxrateswilldifferbasedonthetaxbase.•Forinstance,globalisusuallyappliedtocorporations,ascorporationsaretaxedatasinglerate,regardlessofthetaxbase;whiletheschedularsystemisappliedtoindividualsastheyaresubjectedtodifferenttaxratesbasedontheirtaxbracket.
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321INCOMETAX33B.Income,InGeneralTaxableIncome•Theessentialdifferencebetweencapitalandincomeisthatcapitalisafundandincomeisaflow.Capitaliswealth,whileincomeistheserviceofwealth.Propertyisatree,incomeisthefruit.Laborisatree,incomeoisthefruit.Capitalisatree,incomeisthefruit.Incomemeansprofitsorgains.(Madrigalv.Rafferty,G.R.ONo.L-12287,August7,1918)Incomemaybedefinedastheamountofmoneycomingtoapersonorcorporationwithinaspecifiedtime,whetheraspaymentforservices,interestorprofitfrominvestment.oAmereadvanceinthevalueofpropertyofapersonoracorporationinnosenseconstitutesthe"income"specifiedinthelaw.Suchadvanceconstitutesandcanbetreatedmerelyasanincreaseincapital.•Hence,cashdividendsaretaxedasincomebecausetheyhavebeenrealized/received,whilestockdividendsarenottaxedasincomebecausetheyaremerelyinchoateastheyaremereanticipationofincome(theybecome incomeonceyouselltheshares).•Cashdividendsareactualreceiptofprofits;stockdividendsarethereceiptofarepresentationoftheincreasedvalueoftheassetsofacorporation.(Fisherv.Trinidad,G.R.No.L-17518,October30,1922)Forincometobetaxable,thefollowingrequisitesmustbemet:Theremustbegain,oThegainmustberealizedorreceived,ando
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Thegainmustnotbeexcludedbylawortreatyfromtaxation.o(CIRv.Benedicto,G.R.No.191999,July30,2014,wheretheunfreezingofdepositswasnotconsideredincomebecausetherewasnogainrealizedandwasnothingmorethanareturnofcapital)Whendealingwithmoneyorproperty,thequestionsyoushouldaskare:ooJ9JC9B0MIsthiscapitaloristhisincome?Hasitbeenrealized/receivedorisitmerelyinchoate?TAXMADELESSTAXING:34AREVIEWERWITHCODALSANDCASESSomehelpfulprinciplestodetermineifmoneyorpropertycanbeconsideredincome:1.RealizationPrincipleIncomeisrecognizedwhenbothofthefollowingconditionsaremet:Theearningiscompleteorvirtuallycomplete;and0Anexchangehastakenplace.0I2.3.ClaimofRightDoctrineIfthetaxpayerreceivesearningsunderaclaimofrightandwithoutrestrictionastoitsdisposition,suchearningsareconsideredincome.EconomicBenefitTheoryAnythingthatbenefitsapersonmateriallyoreconomicallyinwhateverwayistaxableunderthelaw.However,notethatunderthisjurisdiction,mereincreaseointhevalueofpropertywithoutactualrealization(suchasthroughsaleordisposition)isnottaxable.4.SeveranceTestTheory
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•Incomeisrecognizedwhenthereisseparationofsomethingwhichisofexchangeablevalue.oHence,theincreaseinthevalueofanassetisnotincomeasithasnotyetbeenexchangedortransferredforsomethingelse.Oncetheassetisexchanged,thenaseveranceofthegainfromitsoriginalvaluetakesplace,resultingintotaxableincome.5.All-EventsTest•Theaccrualofincomeandexpensesispermittedwhenthefollowingaremet:Fixingofarighttoincomeorliabilitytopay;oTheavailabilityofthereasonableaccuratedeterminationofosuchincomeorliability.Mr.JoseCastilloisaresidentFilipinoCitizen.HepurchasedaparceloflandinMakatiCityin 1970ataconsiderationofPlMillion.In2011,theland,whichremainedundevelopedandidle,hadafairmarketvalueofP20Million.Mr.AntonioAyala,anotherFilipinoJ9JC9B0MINCOMETAX35citizen,isverymuchinterestedinthepropertyandheofferedtobuythesameforP20Million.TheAssessorofMakatiCityre-assessedin2011thepropertyatPIOMillion.IsMr.Castilloliableforincometaxin2011basedontheoffertobuybyMr.Ayala?Explainyouranswer.(2012BarExam)Suggestedanswer:NO!Therewasnorealizationofincomeyet.Theofferisnothingbutanoffer.Therehasyettobeanexchangeorsalewhichproducesanyprofit;hence,noincomeyet.C.GeneralPrinciplesofIncomeTaxationSec.23.1GeneralPrinciplesofIncomeTaxationinthePhilippines.—ExceptwhenotherwiseprovidedinthisCode:(A)AcitizenofthePhilippinesresidingthereinistaxableonallincomederived
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fromsourceswithinandwithoutthePhilippines;(B)AnonresidentcitizenistaxableonlyonincomederivedfromsourceswithinthePhilippines;(C)AnindividualcitizenofthePhilippineswhoisworkingandderivingincomefromabroadasanoverseascontractworkeristaxableonlyonincomederivedfromsourceswithinthePhilippines:Provided,ThataseamanwhoisacitizenofthePhilippinesandwhoreceivescompensationforservicesrenderedabroadasamemberofthecomplementofavesselengagedexclusivelyininternationaltradeshallbetreatedasanoverseascontractworker;(D)Analienindividual,whetheraresidentornotofthePhilippines,IstaxableonlyonincomederivedfromsourceswithinthePhilippines;(E)AdomesticcorporationistaxableonallincomederivedfromsourceswithinandwithoutthePhilippines;and(F)Aforeigncorporation,whetherengagedornotIntradeorbusinessinthePhilippines,istaxableonlyonincomederivedfromsourceswithinthePhilippines.Whoaretaxableonincomederivedfromallsources,whetherwithinoroutsidethePhilippines?(Taxedfromsourcesworldwide!)1.Residentcitizens.2.Domesticcorporations.TheotherkindsoftaxpayersaresubjecttotaxonlyonincomederivedfromPhilippinesources.‘Unlessotherwiseindicated,codalsrefertotheNationalInternalRevenueCode(NIRC),asamended.J9JC9B0MTAXMADELESSTAXING:36AREVIEWERWITHCODALSANDCASESTaxableIncomeTaxableIncomeCitizenship&ResidencyResidentCitizenNonresidentCitizen_______OverseasContractWorkerResidentAlien_____________NonresidentAlien_________DomesticCorp.____________ForeignCorp.InsideRPYesYesYesYesYes
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YesYesOutsideRPYesNoNoNoNoYesNoPatrickisasuccessfulbusinessmanintheUnitedStatesandheisasoleproprietorofasupermarketwhichhasagrosssalesof$l0millionandanannualincomeof$3million.HewenttothePhilippinesonavisitand,inaparty,hesawAtty.Agatonwhoboastsofbeingataxexpert.PatrickasksAtty.Agaton:ifhe(Patrick)decidestoreacquirehisPhilippinecitizenshipunderRA9225,establishresidenceinthiscountry,andopen asupermarketinMakatiCity,willtheBIRtaxhimontheincomeheearnsfromhisU.S.business?IfyouwereAtty.Agaton,whatadvicewillyougivePatrick?(2016BarExam)Suggestedanswer:IfIwereAtty.Agaton,Iwilltellhimnotto.IfPatrickreacquireshisPhilippinecitizenshipandestablishesresidencehere,hewillbetaxedforhisincomefromhisUSbusiness.TheTaxCodestatesthatresidentcitizensaretaxableforincomefromsourcesworldwide.ThiswillexposePatricktomoretaxliability.Likewise,ifIwereAtty.Agaton,Iwouldn'tboastbeingataxexpert,aspridecomesbeforethefall.••D.SitusofTaxationNowthatweknowthatonlyresidentcitizensanddomesticcorporationsaretaxedfromincomesourcesworldwide,itIsimportanttodeterminewhethersuchincomeisrealizedinthePhilippinesorabroad.ThisbringsustoSection42.Sec.42.IncomefromSourcesWithinthePhilippines.—(A)GrossIncomeFromSourcesWithinthePhilippines.—ThefollowingitemsofgrossincomeshallbetreatedasgrossincomefromsourceswithinthePhilippines:(1)Interests.—InterestsderivedfromsourceswithinthePhilippines,andinterestsonbonds,notesorotherinterest-bearingobligationofresidents,corporateorotherwise;(2)Dividends.—Theamountreceivedasdividends:(a)fromadomesticcorporation;andJ9JC9B0MINCOMETAX37
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(b)fromaforeigncorporation,unlesslessthanfiftypercent(50%)ofthegrossincomeofsuchforeigncorporationforthethreeyearperiodendingwiththecloseofitstaxableyearprecedingthedeclarationofsuchdividends(orforsuchpartofsuchperiodasthecorporationhasbeeninexistence)wasderivedfromsourceswithinthePhilippinesasdeterminedundertheprovisionsofthisSection;butonlyinanamountwhichbearsthesamerationtosuchdividendsasthegrossincomeofthecorporationforsuchperiodderivedfromsourceswithinthePhilippinesbearstoitsgrossincomefromallsources.(3)Services.—CompensationforlabororpersonalservicesperformedinthePhilippines;(4)RentalsandRoyalties.—RentalsandroyaltiesfrompropertylocatedinthePhilippinesorfromanyinterestinsuchproperty,includingrentalsorroyaltiesfor-(a)Theuseofortherightorprivilegetouse inthePhilippinesanycopyright,patent,designormodel,plan,secretformulaorprocess,goodwill,trademark,tradebrandorotherlikepropertyorright;(b)Theuseof,ortherighttouseinthePhilippinesanyindustrial,commercialorscientificequipment;(c)Thesupplyofscientific,technical,industrialorcommercialknowledgeorinformation;(d)Thesupplyofanyassistancethatisancillaryandsubsidiaryto,andIsfurnishedasameansofenablingtheapplicationorenjoymentof,anysuchpropertyorrightasismentionedinparagraph(a),anysuchequipmentasismentionedinparagraph(b)oranysuchknowledgeorinformationasismentionedInparagraph(c);(e)ThesupplyofservicesbyanonresidentpersonorhisemployeeInconnectionwiththeuseofpropertyorrightsbelongingto,ortheinstallationoroperationofanybrand,machineryorotherapparatuspurchasedfromsuchnonresidentperson;(f)Technicaladvice,assistanceorservicesrenderedInconnectionwithtechnicalmanagementoradministrationofanyscientific,industrialorcommercialundertaking,venture,projectorscheme;and(g)Theuseofortherighttouse:(i)Motionpicturefilms;(ii)Filmsorvideotapesforuseinconnectionwithtelevision;and(iii)Tapesforuseinconnectionwithradiobroadcasting.(5)SaleofRealProperty.—Gains,profitsandincomefromthesaleofrealpropertylocatedinthePhilippines;and
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J9JC9B0M38TAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASES(6)SaleofPersonalProperty.—Gains;profitsandincomefromthesaleofpersonalproperty,asdeterminedinSubsection(E)ofthisSection.(B)TaxableIncomefromSourcesWithinthePhilippines.—(1)GeneralRule.—FromtheitemsofgrossincomespecifiedinSubsection(A)ofthisSection,thereshallbedeductedtheexpenses,lossesandotherdeductionsproperlyallocatedtheretoandaratablepartofexpenses,interests,lossesandotherdeductionseffectivelyconnectedwiththebusinessortradeconductedexclusivelywithinthePhilippineswhichcannotdefinitelybeallocatedtosomeitemsorclassofgrossincome:Provided,Thatsuchitemsofdeductionsshallbeallowedonlyiffullysubstantiatedbyalltheinformationnecessaryforitscalculation.Theremainder,ifany,shallbetreatedinfullastaxable incomefromsourceswithinthePhilippines.(2)Exception.—Nodeductionsforinterestpaidorincurredabroadshallbeallowedfromtheitemofgrossincomespecifiedinsubsection(A)unlessindebtednesswasactuallyincurredtoprovidefundsforuseinconnectionwiththeconductoroperationoftradeorbusinessInthePhilippines.•ThissectionIsNOTrelevanttodomesticcorporationsandresidentcitizensbecausetheyaretaxedworldwideanyway.ThissectioncomesintoplaywhenitcomestoproblemsrelatedtotheincomesourcesoftaxpayerswhoareonlytaxedforincomesourcedwithinthePhilippines.•ThefollowingaretreatedasgrossincomefromsourceswithinthePhilippines(Sections152-165,RevenueRegulationsNo.[“R.R.“]2-1940):1.Interests—includinginterestsonbonds,notesandotherinterestbearingobligations:a.TheloanwasusedhereinthePhilippines,orb.ThedebtorisinthePhilippines2.Dividends—a.fromadomesticcorporation;andb.aforeigncorporation,unlesslessthan50%ofthegross
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incomeoftheforeigncorporationwasderivedfromthePhilippinesforthethree-yearperiodendingwiththecloseofitstaxableyearprecedingthedeclarationofsuchdividends(theamountwillbebasedonthesameratiotodividendsasthegrossincomeforsuchperiodderivedfromsourceswithinPhilippinestoitsgrossincomefromallsources).J9JC9B0MINCOMETAX39Forexample,SugaStans,Inc.aKoreancorporation,i.derivesmorethan50%ofitsgrossincomeinthePhilippinesfromthesaleofBTSmerchandiseforthepastthreeyears.IfitdeclaresdividendstoanonresidentFilipino,thedividendincomewillbeconsideredsourcedwithinthePhilippines.Services—compensationforlabororpersonalservices3.performedinthePhilinninp^.4.intheRentalsandRoyalties—frompropertylocatedPhilippinesorfromanyinterestinsuchpropertyfor:theuseofanycopyright,patent,designormodel,plan,a.secretformulaorprocess,goodwill,trademark,tradebrandorothersimilarstufftheuseofanyindustrial,commercialorscientificb.equipmentthesupplyofscientific,technical,industrialorcommercialc.knowledgeorinfod.thesupplyofservicesbyanonresidentpersoninconnectionwiththoseofpropertyorrights,ortheinstallationoroperationofanybrand,machinery,orotherapparatuspurchasedfromsuchnonresidentpersontechnicaladvice,assistanceorservicesrenderedin
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e.connectionwithtechnicalmanagementofanyscientific,industrialorcommercialundertakingtheuseofmotionpicturefilms,filmsforTV,tapesforf.radiobroadcastSaleofrealproperty—thegains,profitsandincomefrom5.saleofrealpropertylocatedinthePhilippines.Saleofpersonalproperty—gains,profitsandIncomefrom6.saleofpersonalproperty,determinedbysubsection(E).TheplaceofthesigningofacontractisNEVERanissueorafactorfordeterminingthesourceofincome.Donotforgetthe"turnkeycontract"caseofCIRv.Marubeni(G.R.No.137377,December18,2001),whenitcomestositusproblems.ExpensesofamultinationalcorporationdirectlyrelatedtotheproductionofPhilippine-derivedincomecanbedeductedfromgrossincomeinthePhilippineswithoutneedofapportionment,butoverheadexpensesofitsparentcompanybelongtoadifferentcategory.J9JC9B0M400TAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASESTheseareitemsthatcannotbedefinitelyallocatedoridentifiedwiththeoperationsofthePhilippinebranch.So,thecompanycanclaimasitsdeductiblesharearatablepartofsuchexpensesbasedupontheratioofthelocalbranch'sgrossincometothetotalgrossincome,worldwide,ofthemultinationalcorporation.(CIRv.CTAandSmithKHne&FrenchOverseasCo.,G.R.No.L-54108,January17,1984)•Thesourceofincomeistheproperty,activity,orservicethatproducedtheincome.ItistheplaceofactivitycreatingtheincomewhichisOcontrolling,andnottheplaceofbusinessorresidenceofacorporation.
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■Hence,reinsurancepremiumscededtoforeignreinsurersareconsideredincomefromPhilippinesources.(Howden&Co.,Ltd.V.CIR,G.R.No.L-19392,April14,1965)•Also,thesaleofairlineticketsthroughageneralsalesagentinthePhilippinesisconsideredincomefromPhilippinesources,eveniftheticketspertaintoanairlinecompanywhichdoesnotmaintainanyflightstoandfromthePhilippines.(CIRv.BritishOverseasAirwaysCorporation[BOAC],G.R.No.L-65773,April30,1987,whereintheCourtconsideredthesaleoftheticketsasthesourceofincome,andnottheactivityofactuallytransportingpassengers)■WhenthesaleisconsummatedwithinthePhilippines(asInthetitletothepropertywastransferredinthecountry),thesitusofthesaleisinthePhilippinesandisthereforetaxablehere.(A.SorianoYCiav.CIR,G.R.No.L-5896,August31,1955)J9JC9B0M___________IncomeInterestIncomeDividendIncome:1)Fromdomesticcorporation2)FromforeigncorporationServiceIncome
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!TestofSourceofIncomeResidenceofDEBTORIncomewithinIncomewithin,if50%ormoreofthegrossincomeoftheforeigncompany(forthepast3years)wasderivedfromsourceswithinthePhilippinesIncomewithout,iflessthan50%ofthegrossincomeoftheforeigncompany(forthepast3years)wasderivedfromsourceswithinthePhilippinesPlaceofperformanceRentincomeRoyaltyincomeGainonsaleofrealpropertyINCOMETAX41LocationofpropertyPlaceofuseofintangibleLocationofpropertyGainonsaleofpersonalpropertyGainonsaleofdomesticsharesofstockPlaceofsaleIncomewithin|
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J9JC9B0MABC,adomesticcorporation,enteredintoasoftwarelicenseagreementwithXYZ,anon-residentforeigncorporationbasedintheU.S.UndertheagreementwhichthepartiesforgedintheU.S.,XYZgrantedABCtherighttouseacomputersystemprogramandtoavailoftechnicalknow-howrelativetosuchprogram.Inconsiderationforsuchrights,ABCagreedtopayS°/ooftherevenuesitreceivesfromcustomerswhowilluseandapplytheprograminthePhilippines.Discussthetaximplicationofthetransaction.(2010BarExam)Suggestedanswer:ThetransactionwillsubjectXYZCorporationtoincometaxliabilityinthePhilippines.TheTaxCodestatesthattheincomederivedfromtheuseoftechnicalknowledgeorknow-howwithinthePhilippines(royalties)isconsidered incomesourcedwithinthePhilippines.Further,theTaxCodeimposesa30°/oIncometaxon anon-residentforeigncorporation'sgrossincomefromsourceswithinthePhilippines.Inthiscase,theuseofthetechnicalknow-howiswithinthePhilippines;theplaceoftheexecutionofthecontractisirrelevant.Hence,XYZCorporationwillhavetopay30°/oincometaxonitsroyaltyincomefromABC.TripleStar,adomesticcorporation,enteredIntoaManagementServiceContractwithSingleStar,anon-residentforeigncorporationwithnopropertyinthePhilippines.Underthecontract,SingleStarshallprovidemanagerialservicesforTripleStar'sHongKongbranch.Allsaid servicesshallbeperformedinHongKong.
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IsthecompensationfortheservicesofSingleStartaxableasIncomefromsourceswithinthePhilippines?Explain.(2014BarExam)Suggestedanswer:No,thecompensationforservicesarenottaxableinthePhilippines.AccordingtoourtrustyTaxCode,thetesttodeterminethesitusoftaxationforservicesiswheretheservicesareperformed.IftheservicesareperformedinthePhilippines,thentheincomeistaxableinthePhilippines;ifperformedabroad,thentheincomeisnottaxableinthePhilippines.Inthiscase,theservicesareperformedinHongKongandthereforenottaxableInthePhilippines.42TAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASESMs.C,aresidentcitizen,boughtready-to-weargoodsfromMs.B,anonresidentcitizen.a)IfthegoodswereproducedfromMs.B'sfactoryinthePhilippines,isMs.B'sincomefromthesaletoMs.CtaxableinthePhilippines?Explain.b)IfMs.BisanalienindividualandthegoodswereproducedinherfactoryinChina,isMs.B'sincomefromthesaleofthegoodstoMs.CtaxableinthePhilippines?Explain.(2015BarExam)Suggestedanswer:a)AssumingthegoodsaresoldinthePhilippines,Ms.B'sincomewillbefullytaxableinthePhilippines.AstheproductionandthesaleofthegoodsarecompletelyinthePhilippines,thenthesitusofthesalearewithinthePhilippinesandthustaxableinthePhilippines.b)AssumingthegoodsaresoldinthePhilippines,Ms.B'sincomewillbepartlytaxableinthePhilippines.IncomefromthesateofpersonalpropertyproducedabroadbutsoldwithinthePhilippinesaretreatedasderivedpartlyfromsourceswithinandpartlyfromsourcesoutsidethePhilippines.Hence,Ms.B,anon-residentcitizen,willbetaxedpartlyforthesatetoMsCSureArrivalAirways(SAA)isaforeigncorporation,organizedunderthelawsoftheRepublicofNigeria.ItscommercialairplanesdonotoperatewithinPhilippineterritory,orservicepassengersembarkingfromPhilippineairports.ThefirmisrepresentedinthePhilippinesbyItsgeneralagent,Narotel.SAAsellsairplaneticketsthroughNarotel,andtheseticketsareservicedbySAAairplanesoutsidethePhilippines.ThetotalsalesofairplaneticketstransactedbyNarotelforSAAtn2012amountedtoPIO,000,000.00.TheCommissionerofInternalRevenue(C1R)assessedSAAdeficiencyincometaxesattherateof30u/oonitstaxableIncome,findingthatSAA'sairlineticketsalesconstitutedincomederivedfromsourceswithinthePhilippines.SAAfiledaprotestonthegroundthattheallegeddeficiencyincometaxesshouldbeconsideredasincomederivedexclusivelyfrom
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sourcesoutsidethePhilippinessinceSAAonlyservicedpassengersoutsidePhilippineterritory.It,thus,assertedthattheimpositionofsuchincometaxesviolatedtheprincipleofterritorialityintaxation.IsthetheoryofSAAtenable?Explain.(2016BarExam)Suggestedanswer:ThetheoryofSAAisuntenable.TheSupremeCourthaspreviouslyheldthatthesaleofairlineticketsthroughageneralsalesagentinthePhilippinesisconsideredincomefromPhilippinesources,evenifanairlinecompanyonlyservicespassengersoutsidePhilippineterritory.1J9JC9B0MINCOMETAX43XYZAir,a100°/oforeign-ownedairlinecompanybasedandregisteredinNetherlands,isengagedintheinternationalairlinebusinessandisamembersignatoryoftheInternationalAirTransportAssociation.ItscommercialairplanesneitheroperatewithinthePhilippineterritorynorareitsservicepassengersembarkingfromPhilippineairports.Nevertheless,XYZAirisabletosellitsairplaneticketsinthePhilippinesthroughABCAgency,itsgeneralagentinthePhilippines.AsXYZAir'sticketsales,soldthroughABCAgencyfortheyear2013,amountedtoP5,000,000.00,theBureauofInternalRevenue(BIR)assessedXYZAirdeficiencyincometaxesonthegroundthattheincomefromthesaidsalesconstitutedincomederivedfromsourceswithinthePhilippines.Aggrieved,XYZAirfiledaprotest,arguingthat,asanon-residentforeigncorporation,itshouldonlybetaxedforincomederivedfromsourceswithinthePhilippines.However,sinceitonlyservicedpassengersoutsidethePhilippineterritory,thesitusoftheincomefromitsticketsalesshouldbeconsideredoutsidethePhilippines.Hence,noincometaxshouldbeimposedonthesame.IsXYZAir'sprotestmeritorious?Explain.(2019BarExam)Suggestedanswer:Theprotestisnotmeritorious.TheSupremeCourthaspreviouslyheldthatthesaleofairlineticketsthroughageneralsalesagentinthePhilippinesisconsideredincomefromPhilippinesources,evenifanairlinecompanyonlyservicespassengersoutsidePhilippineterritory.(ThisiseerilysimilartotheBOACcase.CueTwilightZone,X-FUes,orUnsolvedMysteriestheme,dependingonyouragebracket.)Grossincomefromsourcesoutside(without)thePhilippinesSec.42.(C)GrossIncomeFromSourcesWithoutthePhilippines.—The
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followingitemsofgrossincomeshallbetreatedasincomefromsourceswithoutthePhilippines:(1)InterestsotherthanthosederivedfromsourceswithinthePhilippinesasprovidedinparagraph(1)ofSubsection(A)ofthisSection;(2)DividendsotherthanthosederivedfromsourceswithinthePhilippinesasprovidedinparagraph(2)ofSubsection(A)ofthisSection;(3)CompensationforlabororpersonalservicesperformedwithoutthePhilippines;(4)RentalsorroyaltiesfrompropertylocatedwithoutthePhilippinesorfromanyinterestinsuchpropertyincludingrentalsorroyaltiesfortheuseoforfortheprivilegeofusingwithoutthePhilippines,patents,copyrights,secretprocessesandformulas,goodwill,trademarks,tradebrands,franchisesandotherlikeproperties;and(5)Gains,profitsandIncomefromthesaleofrealpropertylocatedwithoutthePhilippines.J9JC9B0M44TAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASES1.InterestsotherthanthosederivedfromsourceswithinDividendsotherthanthosederivedfromsourceswithin2.Compensationforlabororpersonalservicesperformedoutside3.thePhilippinesRentalsorroyaltiesfrompropertylocatedoutsidethePhilippines4.oranyinterestinsuchpropertyGains,profits,incomefromsaleofrealpropertylocatedoutside5.thePhilippines
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IncomefromsourcespartlywithinandpartlywithoutthePhilippinesSec.42.(D)TaxableIncomeFromSourcesWithoutthePhilippines.—FromtheitemsofgrossincomespecifiedinSubsection(C)ofthisSectionthereshallbedeductedtheexpenses,losses,andotherdeductionsproperlyapportionedorallocatedtheretoandaratablepartofanyexpense,lossorotherdeductionwhichcannotdefinitelybeallocatedtosomeitemsorclassesofgrossincome.Theremainder,ifany,shallbetreatedinfullastaxableincomefromsourceswithoutthePhilippines.
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(E)IncomeFromSourcesPartlyWithinandPartlyWithoutthePhilippines.—Itemsofgrossincome,expenses,lossesanddeductions,otherthanthosespecifiedinSubsections(A)and(C)ofthisSection,shallbeallocatedorapportionedtosourceswithinorwithoutthePhilippines,undertherulesandregulationsprescribedbytheSecretaryofFinance,uponrecommendationoftheCommissioner.WhereitemsofgrossincomeareseparatelyallocatedtosourceswithinthePhilippines,thereshallbededucted(forthepurposeofcomputingthetaxableincometherefrom)theexpenses,lossesandotherdeductionsproperlyapportionedorallocatedtheretoandaratablepartofotherexpenses,lossesorotherdeductionswhichcannotdefinitelybeallocatedtosomeitemsorclassesofgrossincome.Theremainder,ifany,shallbeincludedinfullastaxable incomefromsourceswithinthePhilippines.InthecaseofgrossincomederivedfromsourcespartlywithinandpartlywithoutthePhilippines,thetaxableincomemayfirstbecomputedbydeductingtheexpenses,lossesorotherdeductionsapportionedorallocatedtheretoandaratablepartofanyexpense,lossorotherdeductionwhichcannotdefinitelybeallocatedtosomeitemsorclassesofgrossincome;andtheportionofsuchtaxableincomeattributabletosourceswithinthePhilippinesmaybedeterminedbyprocessesorformulasofgeneralapportionmentprescribedbytheSecretaryofFinance.Gains,profitsandincomefromthesaleofpersonalpropertyproduced(inwholeorinpart)bythetaxpayerwithinandsoldwithoutthePhilippines,orproduced(inwholeorinpart)bythetaxpayerwithoutandsoldwithinthePhilippines,shallbetreatedasderivedpartlyfromsourceswithinandpartlyfromsourceswithoutthePhilippines.■J9JC9B0MINCOMETAX45Gains,profitsandincomederivedfromthepurchaseofpersonalpropertywithinanditssalewithoutthePhilippines,orfromthepurchaseofpersonalpropertywithoutanditssalewithinthePhilippinesshallbetreatedasderivedentirelyfromsourceswithinthecountryinwhichsold:Provided,however,ThatgainfromthesaleofsharesofstockinadomesticcorporationshallbetreatedasderivedentirelyfromsourceswithinthePhilippinesregardlessofwherethesaidsharesaresold.Thetransferbyanonresidentalienoraforeigncorporationtoanyoneofanyshareofstockissuedbyadomesticcorporationshallnotbeeffectedormadeinitsbookunless:(1)thetransferorhasfiledwiththeCommissionerabondconditioneduponthefuturepaymentbyhimofanyincometaxthatmaybedueonthegainsderivedfromsuchtransfer,or(2)theCommissionerhascertifiedthatthetaxes,ifany,imposedinthisTitleanddueonthegainrealizedfromsuchsaleortransferhavebeenpaid.Itshallbethedutyofthetransferorandthecorporationthesharesof
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whicharesoldortransferred,toadvisethetransfereeofthisrequirement.(F)Definitions.—AsusedinthisSectionthewords"sale"or"sold"include"exchange"or"exchanged";andtheword"produced"Includes"created,""fabricated,""manufactured,""extracted,""processed,""cured"or"aged."ForthegrossincomeitemsallocatedtosourcespartlywithinandpartlywithoutthePhilippines,thereshallbedeductedtheexpenses,lossesandotherOdeductionsproperlyapportioned,andaratablepartofotherexpenses,lossesanddeductionswhichocannotproperlybeallocatedtosomeitemofgrossincome.Ifthereisanyremainder,itshallbeincludedInfullastaxableincomefromsourceswithinthePhilippinesSitusofsaleofpersonalproperty•Gains,profitsandincomederivedfrompurchaseofpersonalpropertywithinandsoldwithout,orfrompurchasewithoutandsalewithin,aretreatedasderivedentirelyfromsourceswiththecountryinwhichitisSOLD.Situsofsaleofstocksinadomesticcorporation•GainsfromsaleofsharesofstockinadomesticcorporationaretreatedasDERIVEDENTIRELYfromsourceswithinthePhilippinesregardlessofwherethesaidsharesaresold.J9JC9B0MTAXMADELESSTAXING:46AREVIEWERWITHCODALSANDCASESIncomeTaxonIndividualsE.Nowthatweknowhowtodeterminewhereincomeissourced,itistimetofocusonthedifferentkindsoftaxpayers.Letusbeginwithindividualtaxpayers.Individualtaxpayersareclassifiedinto:
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Citizens,whoaredividedinto:1.•Residentcitizens—thosecitizenswhoseresidenceiswithinthePhilippines;and•Nonresidentcitizens—thosecitizenswhoseresidenceisnotwithinthePhilippines.2.Aliens,whoaredividedinto:•Residentaliens—thoseindividualswhoseresidenceiswithinthePhilippinesandarenotcitizensthereof;and•Nonresidentaliens—thoseindividualswhoseresidenceisnotwithinthePhilippinesbutaretemporarilyinthecountryandarenotcitizensthereof.Theyare:•ThoseengagedintradeorbusinesswithinthePhilippines;and■Thosewhoarenotsoengaged.(SeeN1RC,Sections23-25)ItIsImportanttoknowthedefinitionofeachkindofindividualtaxpayerbecausethetaxliabilityofeachdiffers(asweshallseelater).NonresidentcitizensSec.22.(£)Theterm"nonresidentcitizen"means:(1)AcitizenofthePhilippineswhoestablishestothesatisfactionoftheCommissionerthefactofhisphysicalpresenceabroadwithadefiniteintentiontoresidetherein.(2)AcitizenofthePhilippineswholeavesthePhilippinesduringthetaxableyeartoresideabroad,eitherasanimmigrantorforemploymentonapermanentbasis.(3)AcitizenofthePhilippineswhoworksandderivesincomefromabroadandwhoseemploymentthereatrequireshimtobephysicallypresentabroadmostofthetimeduringthetaxableyear.(4)AcitizenwhohasbeenpreviouslyconsideredasnonresidentcitizenandwhoarrivesinthePhilippinesatanytimeduringthetaxableyeartoresidepermanentlyinthePhilippinesshalllikewisebetreatedasanonresidentcitizenforthetaxableyearinwhichhearrivesinthePhilippineswithrespecttohisincomederivedfromsourcesabroaduntilthedateofhisarrivalinthePhilippines.J9JC9B0MINCOMETAX47
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(5)Thetaxpayershallsubmitproofto theCommissionertoshowhisintentionofleavingthePhilippinestoresidepermanentlyabroadortoreturntoandresideinthePhilippinesasthecasemaybeforpurposeofthisSection.Meaningofnonresidentcitizen:CitizenwhoestablishestothesatisfactionoftheCommissioner1.thefactofhisphysicalpresenceabroadwithadefiniteintentiontoresidetherein;CitizenwholeavesthePhilippinesduringthetaxableyearto2.resideabroad,eitherasanimmigrantorforemploymentonapermanentbasis;Citizenwhoworksandderivesfromabroadandwhose3.employmentthereatrequireshimtobephysicallypresentabroadmostofthetimeduringthe taxableyear;4.CitizenwhohasbeenpreviouslyconsideredasnonresidentcitizenandwhoarrivesinthePhilippinesatanytimeduringthetaxableyeartoresidepermanentlyinthePhilippinesshalllikewisebetreatedasanonresidentcitizenforthetaxableyearinwhichhearrivesinthePhilippineswithrespecttohisincomederivedfromsourcesabroaduntilthedateofhisarrivalinthePhilippines.Whoarenonresidentcitizens?(R.R.1-1979)Immigrant—onewholeavesthePhilippinestoresideabroad1.asanimmigrantforwhichaforeignvisahasbeensecured.Permanent employee—onewholeavesthePhilippinesto2.resideabroadforemploymentonamoreorlesspermanentbasis.Contractworker—onewholeavesthePhilippinesonaccount3.ofacontractofemploymentwhichisrenewedfromtimetotimeundersuchcircumstanceastorequirehimtobephysicallypresentabroadmostofthetime(notlessthan183days).NonresidentcitizenswhoareexemptfromtaxwithrespecttoincomederivedfromsourcesoutsidethePhilippinesshallnolongerberequired
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tofileinformationreturnsfromsourcesoutsidethePhilippinesbeginning2001.(R.R.5-2001)Thephrase"mostofthetime"shallmeanthatthesaidcitizenshallhavestayedabroadforatleast183daysinataxableyear.J9JC9B0M48OTAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASESHowever,citizenswhoworkoutsideofthePhilippinesforatleast183daysinataxableyearduetoacontractofemploymentwithaPhilippineemployer(suchasemployeessecondedtoaforeigncountry)arenotconsiderednonresidentcitizensbecausetheyarenotconsideredemployedabroad.TheydonotfallwithinSection22(E)(3)becausetheiremploymentremainswiththePhilippineemployer.(BIRRuling116-12)ThewageorincomeofanOFW/OCWwhichisearnedfromoutsidethePhilippinesisexemptfromincometax.AnOCWisaFilipinocitizenwho:O-holdsajoboutsidethePhilippines;-isphysicallypresentinthatforeigncountry wherethejobis;•isregisteredwiththePOEA;•hasavalidoverseasemploymentcertificate;■theirsalariesandwagesarepaidbyanemployerabroadandisnotbornebyanyentityorpersoninthePhilippines.(R.R.1-2011)
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j{J9JC9B0MJKL-PhiHppinesIsadomesticcorporationaffiliatedwithJKL-Japan,aJapan-basedinformationtechnologycompanywithaffiliatesacrosstheworld.Mr.FisaFilipinoengineeremployedbyJKL-Phitippines.In2018,Mr.FwassenttotheTokyobranchofJKL-Japanbasedonacontractenteredintobetweenthetwo(2)companies.Underthesaidcontract,Mr.FwouldbecompensatedbyJKL-PhiiippinesforthemonthsspentinthePhilippines,andbyJKL-JapanformonthsspentinJapan.Fortheentiretyof2018,Mr.Fspentten(1O)monthsintheTokyobranch.Ontheotherhand,Mr.J,aJapaneseengineeremployedbyJKLJapan,wassenttoManilatoworkwithJKL-Phiiippinesasatechnicalconsultant.Basedonthecontractbetweenthetwo(2)companies,Mr.J'sannualcompensationwouldstillbepaidbyJKL-Japan.However,hewouldbepaidadditionalcompensationbyJKL-Phiiippinestorthemonthsspentworkingasaconsultant.For2018,Mr.JstayedinthePhilippinesforfive(5)months.In2019,theBureauofInternalRevenue(BIR)assessedJKLPhiiippinesfordeficiencywithholdingtaxesforbothMr.FandMr.Jfortheyear2018.AstoMr.F,theBIRarguedthatheisaresidentcitizen;hence,hisincometaxshouldbebasedonhisworldwideincome.AstoMr.J,theBIRargued
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thatheisaresidentalien;hence,hisincometaxshouldbebasedonhisincomefromsourceswithinthePhilippinesattheschedulerrateunderSection24(A)(2)oftheTaxCode,asamendedbyRepublicActNo.10963,orthe“TaxReformforAccelerationandInclusion"Law.INCOMETAX49a)IstheBIRcorrectinbasingitsincometaxassessmentonMr.F'sworldwideincome?Explain.b)IstheBIRcorrectinbasingitsincometaxassessmentonMr.J'sincomewithinthePhilippinesattheschedularrate?Explain.(2019BarExam)Suggestedanswer:TheBIRiscorrect.UndertheTaxCode,anon-residentcitizenisa)onewhoworksandderivesfromabroadandwhoseemploymentthereatrequireshimtobephysicallypresentabroadmostofthetimeduringthetaxableyear.Mr.Fisnotanon-residentcitizenbecauseheisstillemployedbyaPhilippinefirm(JKL-Philippines)Iandisthereforenot"employedthereat"(abroad).Hence,heisaIresidentcitizenwhoistaxablebasedonhisworldwideincome.TheBIRiscorrect.Mr.Jisaresidentalienashisworkasab)technicalconsultantinthePhilippinesdoesnotmakehimameretransientorsojourner.Therefore,undertheTaxCodeandjurisprudence,heisaresidentalien.AsresidentaliensaretaxedinasimilarmannerasresidentcitizensfortheirincomeearnedwithinthePhilippines,Mr.JwillalsobesubjecttotheschedularratesunderTRAIN.ResidentaliensSec.22.(F)Theterm“residentalien"meansanIndividualwhoseresidenceiswithinthePhilippinesandwhoIsnotacitizenthereof.Aresidentalienisanindividual:1.WhoseresidenceiswithinthePhilippines,and2.WhoisnotacitizenMerephysicalorbodypresenceIsenough,notIntentiontomakethecountryone'sabode.(Garrisonv.CA,G.R.No.L-44501,July19,1990)AnalienactuallypresentinthePhilippineswhoisnotameretransientor
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sojournerisaresidentofthePhilippinesforpurposesofincometax.Whetherheisatransientornotisdeterminedbyhisintentionswithregardtothelengthandnatureofhisstay.ooJ9JC9B0MAmerefloatingintentionindefiniteastotime,toreturntoanothercountryisnotsufficienttoconstitutehimatransient.IfhelivesinthePhilippinesand hasnodefiniteintentionastohisstay,heisaresident.OnewhocomestothePhilippines150TAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASESforadefinitepurposewhichinitsnaturemaybepromptlyaccomplishedisatransient.ButifhispurposeisofsuchanaturethatanextendedstayOmaybenecessaryforitsaccomplishment,andtothatendthealienmakeshishometemporarilyinthePhilippines,hebecomesaresident,thoughitmaybehisintentionatalltimestoreturntohisdomicileabroadwhenthepurposeforwhichhecamehasbeenconsummatedorabandoned.(R.R.2-1940)TheBIRhasruledthatthereisintentiononthepartofanalientostayinthePhilippinesindefinitelywhenthealien:HadaSpecialResidentRetiree'sVisa;OAcquiredrealpropertyandisactuallypresentmostoftheotimeinthePhilippines;andRegisteredasataxpayerwiththeBIR.(BIRRuling252-11)oNonresidentaliensengagedinbusinessinthePhilippinesSec.22.(G)Theterm"nonresidentalien'meansanindividualwhose
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residenceisnotwithinthePhilippinesandwhoisnotacitizenthereof.Whoarenonresidentaliens?AnindividualwhoseresidenceisnotwithinthePhilippines,1.and2.NotacitizenofthePhilippinesOnewhocomestothePhilippinesforadefinitepurposewhichinitsnaturemaybepromptlyaccomplishedisatransientornonresident.(R.R.2-1940)Nonresidentaliensareeither:Engagedintradeorbusiness,suchas:o■OnewhoactuallyderivesincomeinthePhilippines,or•StaysinthePhilippinesformorethan180daysduringanycalendaryear(deemedtobeanonresidentalienengagedinthePhilippines,Section25[AJ)Notengagedintradeorbusiness.oLossofresidencebyalienoJ9JC9B0MAnalienwhohasacquiredresidenceinthePhilippinesretainshisstatusuntilheabandonsthesameandactuallydepartsfromthePhilippines.INCOMETAX51AmereintentiontochangehisresidencedoesnotchangeOhisstatusfromresidentalientononresidentalien.AnalienwhohasacquiredaresidenceistaxableasaresidentfortheremainderofhisstayinthePhilippines.(Section6,R.R.2-1940)MinimumwageearnerSec.22.(GG)Theterm'statutoryminimumwage'earnershallrefertoratefixedbytheRegionalTripartiteWageandProductivityBoard,asdefinedbytheBureauofLaborandEmploymentStatistics(BLES)oftheDOLE.
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(HH)Theterm'minimumwageearner'shallrefertoaworkerintheprivatesectorpaidthestatutoryminimumwage;ortoanemployeeinthepublicsectorwithcompensationincomeofnotmorethanthestatutoryminimumwageinthenon-agriculturalsectorwherehe/sheisassigned.TheminimumwageisfixedbytheRegionalTripartiteWageandProductivityBoard.Minimumwageearner:Privatesector—paidthestatutoryminimumwageoPublicsector—notmorethanthestatutoryminimumwageointhenon-agriculturalsector wherehe/sheisassignedSeniorcitizensSeniorcitizensareResidentcitizensofthePhilippines,andoWhoareatleast60yearsoldo•Theyarenotexemptfromincometaxesunlesstheyareconsideredminimumwageearners.(R.A.9994)Senioraselectcitizensaregranteda20%discountfromestablishments.SalesofgoodsandservicesbyselectestablishmentstoseniorocitizensarealsoexemptfromVAT.(R.R.7-2010)Discountsforseniorcitizensarenowtreatedastaxdeductionsforbusinesses,asperTheExpandedSeniorCitizensActof2003(R.A.9257).Thiscanbeverybadforthetaxpayerbecausehedoesn'tgetthe"pesoforpeso"benefitwhichhewouldhavegottenifitwereconsideredataxcreditasbefore.(ManilaMemorialPark,Inc.v.SecretaryofDepartmentofSocialWelfareandDevelopment,G.R.No.175356,December3,2013)J9JC9B0M1
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52TAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASESPersonswithdisability•Personswithdisability(PWD)are:Individualssufferingfromrestrictionordifferentabilities,OAsaresultofmental,physicalorsensoryimpairmentto0performanactivityinamannerorwithintherangeconsiderednormalforhumanbeings.PWDaregranteda20%discountfromselectedestablishments.Thesediscountscanlikewisebeclaimedasadeductionfor0businesses.(R.R.1-2009)ThegrantofdiscountandthecorrespondingdeductionforObusinesseshavebeenheldasvalidandconstitutionalasaproperexerciseofpolicepower.(DrugstoresAssociationofthePhilippinesv.NationalCouncilofDisabilityAffairs,C.R.No.194561,September14,2016)Nationalathletesandcoaches•NationalathletesareFilipinoathletes(includingPWDs)whoare:Membersofthenationaltrainingpool,and0RecognizedandaccreditedbythePhilippineOlympicOCommittee(POC)andthePhilippineSportsCommission(PSC)(forathleteswithdisabilities,theyshouldbeaccreditedbytheNationalParalympicsCommittee[NPC]andthePSC).NationalcoachesareFilipinocoacheswhoare:Coachesofnationalathletes,OMembersofthenationalcoachestrainingpool,andORecognizedandaccreditedbythePOCandthePSC,ortheoNPCandthePSC,asthecasemaybe.Nationalathletesandcoachesaregranteda20%discountfromselectedestablishmentsunderRA10699.
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Thesediscountscanlikewisebeclaimedasadeductionforobusinesses.(R.R.13-2020)Congressissuedalawallowinga20%discountonthepurchasesofseniorcitizensfrom,amongothers,recreation centers.This20%discountcanthenbeusedbythesellersasa“taxcredit."AttheinitiativeofBIR,however,RepublicActNo.(RA)9257wasenactedamendingthetreatmentofthe20%discountasa"taxdeduction."EquityCinemafiledapetitionwiththeRTCclaimingthatRA9257isJ9JC9B0MINCOMETAX53unconstitutionalasitforciblydeprivessellersapartofthepricewithoutJustcompensation.a)Whatistheeffectofconvertingthe20°/odiscountfroma"taxcredit"toa"taxdeduction"?b)Ifyouarethejudge,howwillyoudecidethecase?Brieflyexplainyouranswer.(2016BarExam)Suggestedanswer:a)Theeffectofconvertingthe20°/odiscountfromtaxcredittoataxdeductionisthattaxpayerswhodealwithseniorcitizenswon'tgetthe"pesoforpeso"benefit.Sincetheyarenowtreatedasdeductions,theyonlybenefittotheextentof30°/o(thecorporateincometaxrate).Theyarenowusedtodeterminetaxableincome,whichwillbesubjecttothecorporatetaxrate,ascomparedtobeforewhenthecreditcanbeusedtodecreasetheactualtaxliabilityofthecorporation.b)IfIwerethecourt.I'ddismissthecase.TheSupremeCourthaspreviouslyheldthatRA9257wasavalidexerciseofpolicepowertoimprovethewelfareofseniorcitizens;it'snotanexerciseofeminentdomain.Theshiftfromacreditsystemtoadeductionsystemisnotdiscriminatory,arbitrary,orconfiscatory.KindsofincomeandincometaxofindividualsBeforewegetintothesmallestdetailsofthetaxliabilitiesofeachkindofindividual,let'ssetdownsomebasicruleswhichwillbehelpfultoremember:•Onlyresidentcitizens(anddomesticcorporationsasweshallseelater)aretaxedonincomederivedfromabroad.Worldwidetaxable!
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•ForincomereceivedfromsourceswithinthePhilippinesandwhicharenotsubjecttofinalwithholdingtax (likepassiveincometobediscussedbelow),aresidentcitizen,anonresidentcitizen,aresidentalien,andanonresidentalienindividualengagedintradeorbusinessinthePhilippinesareallsubjecttothegraduatedincometaxratesinSection24.OJ9JC9B0MButwhataboutnonresidentaliensnotengagedIntradeorbusiness?•Fornonresidentaliensnotsoengaged,thetaxrateis:•25%oftheentireorgrossincomereceivedfromsourceswithinthePhilippinesor•Forspecialaliens(likethoseemployedbyregionalheadquarters[RHQs],offshorebankingunits[OBUs],orforeignpetroleumservicecontractors),theBIRhasstatedthatthepreferentialincometaxrateisno154TAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASESlongerapplicablebecauseofTRAIN,withoutprejudicetopreferentialratesunderexistingtaxtreaties.So,asitstands,thesespecialaliensarenowsubjecttotheregularincometaxrate.(R.R.8-2018)IncometaxformulaforindividualsItisimportant tonotethebasicformulatodeterminethetaxableincomeofanindividual.Thinkofitasaroadmapwherethedifferentprovisionsofthecodewillpluginto.Thebasicformulatodeterminethetaxableincomeofanindividualisasfollows:
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GrossIncomeLess:Deductions(eitheritemizedoroptionalstandarddeduction)TaxableIncomexTaxRateTaxDueDeductions•Individuals,exceptthosewhoearnpurelycompensationincome,canclaimdeductionsintwoways:oItemizeddeductions(whichwewill discussinmoredetail),orObelo'w)90ptl0nalstar,darddeduction(whichisdiscussedOptionalStandardDeductiondPd,’,?pWena/s^dardDeduction(OSD).—InlieuofthesiihiaC<IO?Sa^owedundertheprecedingSubsections,anindividualmavC|ttaXun<^erSection24,otherthananonresidentalien,nercf?t'fAnostanbarddeductioninanamountnotexceedingforty
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beirTth40/o)°fh,s9rosssalesorgrossreceipts,asthecasemayand2R(A\fC^e-°facorPorat*onsubjecttotaxunderSections27(A)Avrnodr'maye*ectstandarddeductioninanamountnotSer-tinn"1??eXPercent(40%)ofitsgrossincomeasdefinedinhisinr°'^'S(*obe-UnlessthetaxpayersignifiesinhisreturnrnnciHenl°ne*ecttheoptionalstandarddeduction,heshallbethpnra^ri-aSbavin9availedhimselfofthedeductionsallowedinch11.celn9Subsections.SuchelectionwhenmadeinthereturnPrni/iH«JrrTK°^ablefOrthetaxableyearforwhichthereturnismade:nriH_.i'aatanindividualwhoisentitledtoandclaimedfortheoptfonalstandarddeductionshallnotberequiredtosubmitwithhisrHfinanc*alstatementsotherwiserequiredunderthistaxreturnsuchfinancialthe^u^er'ThatageneralprofessionalpartnershipandpnerscomprisingsuchpartnershipmayavailoftheoptionalJ9JC9B0MINCOMETAX55standarddeductiononlyonce,eitherbythegeneralprofessionalpartnershiporthepartnerscomprisingthepartnership:Provided,finally,ThatexceptwhentheCommissionerotherwisepermits,thesaidindividualshallkeepsuchrecordspertainingtohisgrosssalesorgrossreceipts,orthesaidcorporationshallkeepsuchrecordspertainingtohisgrossincomeasdefinedinSection32ofthisCodeduringthetaxableyear,asmayberequiredbytherulesandregulationspromulgatedbytheSecretaryofFinance,uponrecommendationoftheCommissioner.(AmendedbyTRAIN)Optionalstandarddeductionisthedeductionwhichanindividualotherthananonresidentalien,subjecttoincometax,mayelectinanamountnotexceeding40%ofhisgrosssalesorgrossreceipts,asthecasemaybe,oracorporation,inanamountnotexceeding40%ofitsgrossincome,inlieuoftakingitemizeddeductions.Notethatthecodalstatesthatageneralprofessionalpartnership(GPP)(likealawfirm)andthepartnerscomprisingsuchpartnershipmayonlyuseOSDonce,eitherbytheGPPitselfor thepartnerscomprisingthepartnership.(ReconcilethiswithR.R.8-2018)MoreonOSDinthesectionofDeductions.Persona!andadditionalexemptionsandpremiumpaymentsonhealthand/orhospitalizationinsurance
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•Ifyou'rewonderingwhathappenedtopersonalexemptionsandhealth/hospitalizationinsurance,well,they'vegonethewayofthedodoandaregonenow.TRAINrepealedSection35,NIRC,whichgrantedpersonalexemptionsfortaxpayersandadditionalexemptionsfortheirdependents,andSection34(M),whichalloweddeductionsforhealthandhospitalizationpremiums.NowthatwehaveaworkingIdeaofhowtoarriveatanindividual'staxableincome,let'sfocusonthedifferenttaxratesperindividualandthetreatmentoftheirpassiveIncome.Citizens(residentandnonresident)andresidentaliensSec.24.IncomeTaxRates.—(A)RatesofIncomeTaxonIndividualCitizenandIndividualResidentAlienofthePhilippines.—(1)Anincometaxisherebyimposed:(a)OnthetaxableincomedefinedInSection31ofthisCode,otherthanincomesubjecttotaxunderSubsections(B),(C),andJ9JC9B0MTAXMADELESSTAXING:56AREVIEWERWITHCODALSANDCASES(D)ofthisSection,derivedforeachtaxableyearfromallsourceswithinandwithoutthePhilippinesbyeveryindividualcitizenofthePhilippinesresidingtherein;(b)OnthetaxableincomedefinedinSection31ofthisCode,otherthanincomesubjecttotaxunderSubsections(B),(C),and(D)ofthisSection,derivedforeachtaxableyearfromallsourceswithinthePhilippinesbyanindividualcitizenofthePhilippineswhoisresidingoutsideofthePhilippinesincludingoverseascontractworkersreferredtoinSubsection(C)ofSection23hereof;and(c)OnthetaxableincomedefinedinSection31ofthisCode,otherthanincomesubjecttotaxunderSubsections(B),(C),and(D)ofthisSection,derivedforeachtaxableyearfromallsourceswithinthePhilippinesbyanindividualalienwhoisaresidentofthePhilippines.(2)RatesofTaxonTaxableIncomeofIndividuals.—Thetaxshallbecomputedinaccordancewithandattheratesestablishedinthefollowingschedule:(a)TaxScheduleEffectiveJanuary2022:NotoverP250,000
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OverP250,000but notoverP400,000OverP400,000butnotoverP800.000OverP800,000butnotoverP2,000,000OverP2,000,000butnotoverP8,000,000OverP8,000,0001,2018untilDecember31,0%20%oftheexcessoverP250,000P30,000+25%oftheexcessoverP400,000P130.000+30%oftheexcessoverP800.000P490,000+32%oftheexcessoverP2,000,000P2,410,000+35%oftheexcessoverP8,000,000TaxScheduleEffectiveJanuary1,2023andonwards:NotoverP250,000OverP250,000butnotoverP400,000OverP400,000butnotoverP800,000OverP800,000butnotoverP2,000,000OverP2,000,000butnotoverP8,000,000OverP8,000,000J9JC9B0M0%15%oftheexcessoverP250,000P22,500+20%oftheexcessoverP400,000P102,500+25%oftheexcessoverP800,000P402,500+30%oftheexcessoverP2,000,000P2,202,500+35%oftheexcessoverP8,000,000INCOMETAX57Formarriedindividuals,thehusbandandwife,subjecttotheprovisionofSection51(D)hereof,shallcomputeseparatelytheirindividualincometaxbasedontheirrespectivetotaltaxableincome:Provided,Thatifanyincomecannotbedefinitelyattributedtooridentifiedasincomeexclusivelyearnedorrealizedbyeither ofthespouses,thesameshallbedivided equallybetweenthespousesfor
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thepurposeofdeterminingtheirrespectivetaxableincome.Provided,ThatminimumwageearnersasdefinedinSection22(HH)ofthisCodeshallbeexemptfromthepaymentofincometaxontheirtaxableincome:Provided,further.Thattheholidaypay,overtimepay,nightshiftdifferentialpayandhazardpayreceivedbysuchminimumwageearnersshalllikewisebeexemptfromincometax.(b)RateofTaxonIncomeofPurelySelf-employedIndividualsand/orProfessionalsWhoseGrossSalesorGrossReceiptsandOtherNon-operatingIncomeDoesNotExceedtheValue-addedTax(VAT)ThresholdasProvidedinSection109(BB).—Self-employedindividualsand/orprofessionalsshallhavetheoptiontoavailofaneightpercent(8%)taxongrosssalesorgrossreceiptsandothernon-operatingincomeinexcessofTwohundredfiftythousandpesos(P250,000)inlieuofthegraduatedincometaxratesunderSubsection(A)(2)(a)ofthisSectionandthepercentagetaxunderSection116ofthisCode.(c)RateofTaxforMixedIncomeEarners.—Taxpayersearningbothcompensationincomeandincomefrombusinessorpracticeofprofessionshallbesubjecttothefollowingtaxes:(1)AllIncomefromCompensation—TheratesprescribedunderSubsection(A)(2)(a)ofthisSection.(2)AllIncomefromBusinessorPracticeofProfession—(a)IfTotalGrossSalesand/orGrossReceiptsandOtherNonoperatingIncomeDoNotExceedtheVATThresholdasProvidedInSection109(BB)ofthisCode.—TheratesprescribedunderSubsection(A)(2)(a)ofthisSectionontaxableincome,oreightpercent(8%)incometaxbasedongrosssalesorgrossreceiptsandothernonoperatingincomeinlieuofthegraduatedincometaxratesunderSubsection(A)(2)(a)ofthisSectionandthepercentagetaxunderSection116ofthisCode.(b)IfTotalGrossSalesand/orGrossReceiptsandOtherNonoperatingIncomeExceedstheVATThresholdasProvidedinSection109(BB)ofthisCode.—TheratesprescribedunderSubsection(A)(2)(a)orthisSection.Incometaxisimposedupontaxablecompensationoremploymentincome,businessincome,andincomederivedfromthepracticeofprofessionsderivedbycitizensandresidentaliens.MarriedindividualsshallcomputeseparatelytheirIndividualincometaxbasedontheirrespectivetotaltaxableincome.J9JC9B0M58
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OTAXMADELESSTAXING:AREVIEWERWITHCODALSANDCASESIfanyincomecannotbedefinitelyattributedto,oridentifiedasincomeexclusivelyearnedorrealizedbyeitherofthespouses,thesameshallbedividedequallybetweenthemforthepurposeofdeterminingtheirrespectivetaxableincome.Minimumwageearners areexemptfromthepaymentofincometaxontheirtaxableincome.Holidaypay,overtimepay,nightshiftdifferentialpay,andhazardpayreceivedbythemarelikewiseexemptfromincometax.TheSChasdeclaredR.R.10-2008unconstitutional.TheR.R.ostatedthataminimumwageearner(MWE)loseshis/herexemptstatusandisthustaxableonhis/herentireincomeiftheMWEreceivesotherbenefitsinexcessofthestatutorylimit(inthiscase,thepreviousP30,000limitunderexclusionsformgrossincome).(Sorianov.SecretaryofFinance,G.R.No.184450,January24,2017)•TheR.R.addedarequirementnotfoundinR.A.9504.IteffectivelychangedthedefinitionofaMWE.AR.R.cannotexpandalaw.Infact,thisparticularR.R.didn'tevenclarifythelaw.•Hence,theproperrulesareasfollows:•AMWEwhoreceivestaxableincomeinexcessoftheminimumwagewillbetaxedontheexcess,buttheMWEwillnotlosehis/herstatusassuch.WorkerswhoreceivethestatutoryminimumwageastheirbasicpayremainMWEs.•Also,thereceiptofotherincomeduringtheyeardoesnotdisqualifythemasMWEs.ButthetaxableincometheyreceiveotherthanasMWEsmaybesubjectedtoappropriatetaxes.•Hence,bonusesandotherbenefitsreceivedabovethepresentstatutorylimit(nowP90,000becauseofTRAIN)aretaxable.(Sorianov.SecretaryofFinance)TheamendmenttoSection24(A)isoneofthebiggestchangesroughtbyTRAIN.Insummary,itchangedthefollowing:
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J9JC9B0MOOJThetaxbracketsforindividuals,mostnotablymakingP250,000thecut-offfor0%incometax;andThetaxtreatmentofthefollowingtaxpayers:Individualsearningpurelycompensationincome;Self-employedindividualsearningincomepurelyfromself-employmentorpracticeofprofession;andINCOMETAX59■Mixedincomeearners,orthoseindividualswhoearnincomebothfromcompensationandself-employmentorpracticeofprofession.Let'sgothroughtherulesofeachkindofindividualtaxpayerandhowTRAINtaxeseach.Individualsearningpurelycompensationincome:taxedOunderthegraduatedrates•First,compensationincomeisallremunerationforservicesperformedbyanemployeeforhisemployerunderanemployer-employeerelationship.
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•Thisincludessalaries,wages,emoluments,andhonoraria,allowances,commissions,director'sfeeswherethedirectorisalsoanemployee.(R.R.8-2018)•So,aslongasthere'sanemployer-employeerelationship,remunerationarisingfromitwillbeconsideredcompensationincome.•Ifanindividualearnspurelycompensationincome,thenheorshewillbetaxedaccordingtohisorhertaxableincomeandtaxbracket,i.e.,thegraduatedrates.•Taxableincomeistheindividual'sgrosscompensationincomelessnon-taxableincome/benefitslike13th-monthpayandotherbenefitslikedeminimisbenefitsandemployee'sshareintheSocialSecuritySystem(SSS),GovernmentServiceInsuranceSystem(GSIS),PhilippineHealthInsuranceCorporation(PHIC),Pag-IBIGcontributionsanduniondues.(R.R.8-2018)Self-employedindividualsearningincomepurelyfromselfoemploymentorpracticeofprofessionwhosegrosssales/receiptsandothernon-operatingIncomedonotexceedP3,000,000,a.k.a.theVATthreshold:giventwochoices—eithera)underthegraduatedratesorb)8%incometaxrate•Aself-employedindividualisasoleproprietororanindependentcontractorwhoreportsincomeearnedfromself-employment.•Aprofessionalisapersonformallycertifiedbyaprofessionalbodybelongingtoaspecificprofession(likealawyeroradoctor).Italsoreferstoapersonwhoengagesinsomeartorsportformoneyasameansoflivelihood,ratherthanasahobby(likeaprofessionalboxeroraprofessionalartist).Aninsuranceagent,managementJ9JC9B0MTAXMADELESSTAXING:60AREVIEWERWITHCODALSANDCASESandtechnicalconsultant,andrecipientsofprofessionalandtalentfeesarealsoconsideredprofessionals.(R.R.8-2018)
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So,self-employedindividualsandprofessionalshaveachoicetoavailof:•Thegraduatedrates;or•An8%taxongrosssales/receiptsandothernonoperatingincomeinexcessofP250,000inlieuofthegraduatedincometaxratesandthepercentagetaxunderSection116,NIRC.Rulesonavailingthe8%taxrate:•ThefirstP250,000isnotsubjecttotax,sincewhatistaxedisanythinginexcessofP250,000.NotethatthisP250,000"bonus"isnotavailable0tomixedincomeearners(thethirdkindofindividualtaxpayer)•Ifyouchoosethe8%taxrate,thenyouwon'tbeliableforthe3%percentagetaxunderSection116becausethe 8%taxrateisinlieuofsaid3%percentagetax.•Thetaxpayermustsignifyhisorherintentiontousethe8%taxrateinthe1stquarterofthepercentage/incometaxreturn.Ifnot,heorsheisdeemedconsideredtohavechosenthegraduatedrates.•The8%taxrateoptionisnotavailabletothefollowing:Purelycompensationincomeearners(sincetheyohavetousethegraduatedrates);VAT-registeredtaxpayers,regardlessoftheirogrosssales/receiptsandotherincome;Non-VATtaxpayerswhosegrossoandothernon-operatingincomeP3,000,000VATthreshold;non-operatingsales/receiptsexceededtheTaxpayerssubjecttoOtherPercentageTaxeso(exceptthoseunderSection116,NIRC);PartnersofageneralprofessionalpartnershiposincetheirdistributivesharefromtheGPPisalreadynetofcostsandexpenses;and
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J9JC9B0MINCOMETAX61Individualsenjoyingincometaxexemption(likeOthoseregisteredasBarangayMicroBusinessEnterprises).(RMC50-2018)•Whathappensifyourgrosssales/receiptsandothernonoperatingincomeexceedtheP3,000,000VATthreshold?•Youareautomaticallysubjecttothegraduatedratesandcannolongerusethe8%incometaxrate.•Youwillalsobesubjecttootherbusinesstaxes,ifany.■Takenoteofthedifferenttaxbaseforcomputingthegraduatedratesandthe8%incometaxrate.•Graduatedrates:taxableincome•8%incometaxrate:grosssales/receiptsandothernon-operatingincometobereducedbyP250,000oGrossreceiptsincludeallkindsofdeposits.However,returnabledepositsordepositsheldintrustandrecordedasliabilityareexcluded.(RMC50-2018)Mixedincomeearners,orthosewhoearnIncomefrombothocompensationandfromself-employment:taxedunderthegraduatedratesfortheircompensationincomeandfortheirself-employmentincome,itwilldependonVATthreshold•Thetreatmentofmixedincomeearnersmayseemcomplicated,butit'sbasicallyjustacombinationoftherules.Mixedincomeearnersaretaxedinthisway:•Forcompensationincome,straightoutusethegraduatedrates;•Forincomefrombusinessorpracticeofprofession,It'lldependwhethertheirgrosssales/receiptsandothernon-operatingincomeexceedtheVATthreshold:
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ooJ9JC9B0MIfitexceedstheVATthreshold,thenstraightoutusethegraduatedratesforthattoo.IfitdoesnotexceedtheVATthreshold,thenthetaxpayerhasachoicetouseeither:•thegraduatedrates;or•8%incometaxbasedongrosssales/receiptsandothernon-operatingincomeinlieuofthe
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