I. General Principles

A. Definition and Concept of Taxation

As a process, it is a means by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of the government. It is merely a way of apportioning the costs of government among those who in some measures are privileged to enjoy its benefits and must bear its burdens. As a power, taxation refers to the inherent power of the state to demand enforced contributions for public purpose or purposes.

Taxation is a symbiotic relationship, whereby in exchange for the protection that the citizens get from the government, taxes are paid.[footnoteRef:1] [1: Commissioner of Internal Revenue vs. Allegre, Inc., et al., L-28896, Feb. 17, 1988]

B. Nature of Taxation

1. It is an inherent attribute of sovereignty2. It is legislative in characterC. Characteristics of Taxation

1. The power of taxation is an incident of sovereignty as it is inherentin the State, belonging as a matter of right to every independent government. It does need constitutional conferment. Constitutional provisions do not give rise to the power to tax but merely impose limitations on what would otherwise be an invincible power. No attribute of sovereignty is more pervading, and at no point does the power of government affect more constantly and intimately all the relations of life than through the exactions made under it.[footnoteRef:2] [2: Churchill and Tait v. Concepcion, 34 Phil 969]

2. The power to tax is inherent in the State, and the State is free to select the object oftaxation, such power being exclusively vested in the legislature, exceptwhere the Constitution provides otherwise.[footnoteRef:3] [3: Art. VI, Sec, 28 (2); Art. X, Sec. 5; Art. VI, Sec. 28. par. 2.]

The Congress may by law authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.

Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments.[footnoteRef:4] [4: Art. X, Sec. 5]

3. It is subject to Constitutional and inherent limitations; hence, it is not an absolute power that can be exercised by the legislature anyway it pleases.

D. Power of Taxation Compared With Other Powers

1. Police Power2. Power of Eminent Domain

Taxation Police Power Eminent Domain

Purpose

Raising revenue

Promote public welfare thru regulations

Taking of property for public use

Amount of exaction

No limit

Limited to the cost of regulations, issuance of the license or surveillanceNo exaction, compensation paid by the government

Benefits received

No special or direct benefits received but the enjoyment of the privileges of living in an organized society

No direct benefits but a healthy economic standard of society or damnum absque injuria is attained

Direct benefit results in the form of just compensation

Non-impairment of contracts

The impairment rule subsistContracts may be impaired

Contracts may be impaired

Transfer of property rights

Taxes paid become part of public funds

No transfer but only restraint on the exercise of property right existsProperty is taken by the govt upon payment of just compensation

Scope

Affects all persons, property and excise

Affects all persons, property, privileges, and even rights

Affects only the particular property comprehended

Basis

Public necessity

Public necessity and the right of the state and the public to self-protection and self-preservation

Public necessity, private property is taken for public use

Authority which exercises the power

Only by the government or its political subdivisionsOnly by the government or its political subdivisionsMay be granted to public service, companies, or public utilities

E. Purpose of Taxation

1. Revenue-raising

To provide funds or property with which the State promotes the general welfare and protection of its citizens.

2. Non-revenue/special or regulatory

Promotion of General WelfareTaxation may be used as an implement of police power in order to promote the general welfare of the people.[footnoteRef:5] [5: see Lutz vs. Araneta, 98 Phil 148 and Osmea vs. Orbos, G.R. No. 99886, Mar. 31, 1993]

RegulationAs in the case of taxes levied on excises and privileges like those imposed in tobacco or alcoholic products or amusement places like night clubs, cabarets, cockpits, etc.[footnoteRef:6] [6: In the case of Caltex Phils. Inc. vs. COA (G.R. No. 92585, May 8, 1992), it was held that taxes may also be imposed for a regulatory purpose as, for instance, in the rehabilitation and stabilization of a threatened industry which is affected with public industry like the oil industry.]

Reduction of Social InequalityThis is made possible through the progressive system of taxation where the objective is to prevent the under-concentration of wealth in the hands of few individuals.

Encourage Economic GrowthIn the realm of tax exemptions and tax reliefs, for instance, the purpose is to grant incentives or exemptions in order to encourage investments and thereby promote the countrys economic growth.

e. ProtectionismIn some important sectors of the economy, as in the case of foreign importations, taxes sometimes provide protection to local industries like protective tariffs and customs

F. Principles of Sound Tax System

1. Fiscal Adequacy

The sources of tax revenue should coincide with, and approximate the needs of government expenditure. Neither an excess nor a deficiency of revenue vis--vis the needs of government would be in keeping with the principle.

2. Administrative Feasibility

Tax laws should be capable of convenient, just and effective administration

3. Theoretical Justice

The tax burden should be in proportion to the taxpayers ability to pay[footnoteRef:7]. The 1987 Constitution requires taxation to be equitable and uniform. [7: ability-to-pay principle]

G. Theory and Basis of Taxation

1. Lifeblood Theory

Taxes are the lifeblood of the government, being such, their prompt and certain availability is an imperious need.[footnoteRef:8] Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. [8: Collector of Internal Revenue vs. Goodrich International Rubber Co., Sept. 6, 1965]

2. Necessity Theory

Taxes proceed upon the theory that the existence of the government is a necessity; that it cannot continue without the means to pay its expenses; and that for those means, it has the right to compel all citizens and properties within its limits to contribute. [footnoteRef:9] [9: In a case, the Supreme Court held that: Taxation is a power emanating from necessity. It is a necessary burden to preserve the States sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come with the States territory and facilities, and protection which a government is supposed to provide (Phil. Guaranty Co., Inc. vs Commissioner of Internal Revenue, 13 SCRA 775)]

3. Benefits-Protection Theory[footnoteRef:10] [10: Symbiotic Relationship]

The basis of taxation is the reciprocal duty of protection between the state and its inhabitants. In return for the contributions, the taxpayer receives the general advantages and protection which the government affords the taxpayer and his property.

4. Jurisdiction over subject and objects Rules:

a) Tax laws cannot operate beyond a States territorial limits.b) The government cannot tax a particular object of taxation which is not within its territorial jurisdiction.c) Property outside ones jurisdiction does not receive any protection of the State.d) If a law is passed by Congress, it must always see to it that the object or subject of taxation is within the territorial jurisdiction of the taxing authority.

H. Doctrines in Taxation

1. Prospectivity of tax laws

General Rule Exception

Taxes must only be imposed prospectively.

The language of the statute clearly demands or express that it shall have a retroactive effect.

2. Imprescriptibility

General Rule Exception

Taxes are imprescriptible.

When provided otherwise by the tax law itself.[footnoteRef:11] [11: Example: NIRC provides for statutes of limitation in the assessment and collection of taxes therein imposed. The law on prescription, being a remedial measure, should be liberally construed to afford protection as a corollary, the exceptions to the law on prescription be strictly construed. (CIR vs CA. G.R. No. 104171, Feb. 24, 1999)]

3. Double taxation

a. Strict sense

Referred to as direct duplicate taxation, it means:

1. Taxing twice;2. by the same taxing authority;3. within the same jurisdiction or taxing district;4. for the same purpose;5. in the same year or taxing period;6. some of the property in the territoryb. Broad sense

Referred to as indirect double taxation, it is taxation other than direct duplicate taxation. It extends to all cases in which there is a burden of two or more impositions.

c. Constitutionality of double taxation

Unlike in the United States Constitution, our Constitution does not prohibit double taxation.

However, while it is not forbidden, it is something not favored. Such taxation should, whenever possible, be avoided and prevented.

In addition, where there is direct double taxation, there may be a violation of the constitutional precepts of equal protection and uniformity in taxation.[footnoteRef:12] [12: The argument against double taxation may not be invoked where one tax is imposed by the State and the other is imposed by the city, it being widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the same occupation, calling, or activity by both the State and a political subdivision thereof. And where the statute or ordinance in question, there is no infringement of the rule on equality (City of Baguio v. De Leon, 25 SCRA 938)]

d. Modes of eliminating double taxation

Two (2) methods of relief:[footnoteRef:13] [13: A tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief on order to avoid double taxation.]

Exemption method

The income or capital which is taxable at the state of source or situs is exempted at the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayers remaining income or capital

Credit methodAlthough the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is on the income or capital, whereas the credit method focuses upon the tax.

4. Escape from taxation

a. Shifting of tax burden[footnoteRef:14] [14: The transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or imposed to someone else. Process by which such tax burden is transferred from statutory taxpayer to another without violating the law. What is transferred is not the payment of the tax, but the burden of the tax]

1) Ways of shifting the tax burden

a. Forward shifting

When the burden of the tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer.[footnoteRef:15] [15: Example: Manufacturer or producer may shift tax assessed to wholesaler, who in turn shifts it to the retailer, who also shifts it to the final purchaser or consumer]

b. Backward shifting

When the burden of the tax is transferred from the consumer or purchaser through the factors of distribution to the factors of production.[footnoteRef:16] [16: Example: Consumer or purchaser may shift tax imposed on him to retailer by purchasing only after the price is reduced, and from the latter to the wholesaler, or finally to the manufacturer or producer]

c. Onward shifting

When the tax is shifted two or more times either forward or backward.[footnoteRef:17] [17: Example: Thus, a transfer from the seller to the purchaser involves one shift; from the producer to the wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to the purchaser by the retailer, we have three shifts in all.]

2) Taxes that can be shifted

Only indirect taxes may be shifted;[footnoteRef:18] direct taxes[footnoteRef:19] cannot be shifted. [18: e.g. VAT] [19: e.g. Income tax]

3) Meaning of impact and incidence of taxation

Impact of taxation Incidence of taxation

The point on which a tax is originally imposed. In so far as the law is concerned, the taxpayer is the person who must pay the tax to the government. He is also termed as the statutory taxpayer-the one on whom the tax is formally assessed. He is the subject of the tax.

The point on which the tax burden finally rests or settle down. It takes place when shifting has been effected from the statutory taxpayer to another.

b. Tax avoidance[footnoteRef:20] [20: also known as tax minimization; it is not punished by law]

The exploitation of the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income in order to avoid or reduce tax liabilit

c. Tax evasion[footnoteRef:21] [21: also known as tax dodging; it is punishable by law Elements of tax evasion: 1. The end to be achieved, i.e. payment of less than that known by the taxpayer to be legally due, or paying no tax when it is shown that tax is due 2. An accompanying state of mind which is described as being evil, in bad faith, willful, or deliberate and not accidental 3. A course of action (or failure of action) which is unlawful Indicia of fraud in tax evasion: 1. Failure to declare for taxation purposes true and actual income derived from business for two (2) consecutive years; or 2. Substantial under declaration of income tax returns of the taxpayer for four (4) consecutive years coupled with unintentional overstatement of deductions Evidence to prove tax evasion: Since fraud is a state of mind, it need not be proved by direct evidence but may be proved from the circumstances of the case. Failure of the taxpayer to declare for taxation purposes his true and actual income derived from his business for two (2) consecutive years is an indication of his fraudulent intent to cheat the government of its due taxes. (Republic vs. Gonzales, 13 SCRA 638)]

The use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of tax.

5. Exemption from taxation

a. Meaning of exemption from taxationIt is the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay. It is an immunity or privilege; it is freedom from a financial charge or burden to which others are subjected.[footnoteRef:22] [22: Exemption is allowed only if there is a clear provision therefor. It is not necessarily discriminatory as long as there is a reasonable foundation or rational basis. Exemptions are not presumed, but when public property is involved, exemption is the rule and taxation is the exemption.]

b. Nature of tax exemption1) It is a mere personal privilege of the grantee.2) It is generally revocable by the government unless the exemption is founded on a contract which is contract which is protected from impairment.3) It implies a waiver on the part of the government of its right to collect what otherwise would be due to it, and so is prejudicial thereto.4) It is not necessarily discriminatory so long as the exemption has a reasonable foundation or rational basis.5) It is not transferable except if the law expressly provides so. c. Kinds of tax exemption

1) Express[footnoteRef:23] [23: or affirmative exemption]

When certain persons, property or transactions are, by express provision, exempted from all certain taxes, either entirely or in part.

2) Implied[footnoteRef:24] [24: or exemption by omission No tax exemption by implication It must be expressed in clear and unmistakable language]

When a tax is levied on certain classes of persons, properties, or transactions without mentioning the other classes.[footnoteRef:25] [25: Every tax statute makes exemptions because of omissions.]

3) Contractual

Agreed to by the taxing authority in contracts lawfully entered into by them under enabling laws.

d. Rationale/grounds for exemption

Rationale for granting tax exemptionsGrounds for granting tax exemptions

Its avowed purpose is some public benefit or interests which the lawmaking body considers sufficient to offset the monetary loss entailed in the grant of the exemption.The theory behind the grant of tax exemptions is that such act will benefit the body of the people. It is not based on the idea of lessening the burden of the individual owners of property.

1) May be based on contract.[footnoteRef:26] [26: In such a case, the public, which is represented by the government is supposed to receive a full equivalent therefor, i.e. charter of a corporation.]

2) May be based on some ground of public policy.[footnoteRef:27] [27: i.e., to encourage new industries or to foster charitable institutions. Here, the government need not receive any consideration in return for the tax exemption.]

3) May be based on grounds of reciprocity or to lessen the rigors of international double or multiple taxation.[footnoteRef:28] [28: Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear provision therefor.]

e. Revocation of tax exemption

It is an act of liberality which could be taken back by the government unless there are restrictions. Since taxation is the rule and taxation therefrom is the exception, the exemption may be withdrawn by the taxing authority.[footnoteRef:29] [29: Mactan Cebu International Airport Authority vs., Marcos, 261 SCRA 667.]

6. Compensation and Set-off[footnoteRef:30] [30: Requisites of Compensation in taxation 1. The tax assessed and the claim against the government be fully liquidated. 2. The tax assessed and the claim against the government is due and demandable, and 3. The government had already appropriated funds for the payment of the claim (Domingo v. Garlitos, L-18904, June 29, 1963)]

General Rule Exception

Taxes are not subject to set-off or legal compensation. The government and the taxpayer are not creditors and debtors or each other. Obligations in the nature of debts are due to the government in its corporate capacity, while taxes are due to the government in its sovereign capacity.[footnoteRef:31] [31: Philex Mining Corp. vs. CIR, 294 SCRA 687; Republic vs. Mambulao Lumber Co., 6 SCRA 622]

Where both the claims of the government and the taxpayer against each other have already become due and demandable as well as fully liquated.[footnoteRef:32] [32: see Domingo vs. Garlitos, supra]

7. Compromise

A contract whereby the parties, by reciprocal concessions, avoid litigation or put an end to one already commenced.[footnoteRef:33] [33: Art. 2028, New Civil Code Requisites: 1. Taxpayer must have a tax liability. 2. There must be an offer by taxpayer or CIR, of an amount to be paid by taxpayer. 3. There must be acceptance of the offer in settlement of the original claim. When taxes may be compromised: 1. A reasonable doubt as to the validity if the claim against the taxpayer exists; 2. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. 3. Criminal violations, except: a. Those already filed in court b. Those involving fraud.]

8. Tax amnesty

a. Definition

A general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue to collect what otherwise would be due it and, in this sense, prejudicial thereto.[footnoteRef:34] [34: Tax amnesty, like tax exemption, is never favored nor presumed in law and if granted by statute must be construed strictly against the taxpayer, who must show compliance with the law. The government is not estopped from questioning the tax liability even if amnesty tax payments were already received Erroneous application and enforcement of the law by public officers do not block subsequent correct application of the statute. The government is never estopped by mistakes or errors by its agents.]

b. Distinguished from tax exemption

Tax amnesty Tax exemption

Partakes of an absolute forgiveness or waiver by the Government of its right to collect what otherwise would be due it and, in this sense, prejudicial thereto, particularly to tax evaders who wish to relent and are willing to reform are given a chance to do so and therefore become a part of the society with a clean slate.

The grant of immunity to particular persons or corporations of a particular class from a tax of which persons and corporations generally within the same state or taxing district are obliged to pay.

Immunity from all criminal, civil and administrative liabilities arising from non-payment of taxes

Immunity from civil liability only

Applies only to past tax periods, hence retroactive application

Prospective application

There is revenue loss since there was actuallytaxes due but collection was waived by thegovernment.

None, because there was no actual taxes due as the person or transaction is protected by tax exemption.

Never favored nor presumed in law, and is granted by statute. The terms of the amnesty or exemption must be strictly construed against the taxpayer and liberally in favor of the government.

9. Construction and Interpretation of:

a. Tax laws

General Rule Exception

Tax laws are liberally interpreted in favor of the taxpayer and strictly against the government.

Liberal interpretation does not apply to tax exemptions which should be construed in strictissimi juris against the taxpayer.[footnoteRef:35] [35: Reason: Lifeblood doctrine]

b. Tax exemption and exclusion

General Rule Exceptions

In the construction of tax statutes, exemptions are not favored and are construed strictissimi juris against the taxpayer.[footnoteRef:36] The fundamental theory is that all taxable property should bear its share in the cost and expense of the government. [36: Strict interpretation does not apply to the government and its agencies Petitioner cannot invoke the rule ofstrictissimi juris with respect to the interpretation of statutes granting tax exemptions to the NPC. The rule on strict interpretation does not apply in the case of exemptions in favor of a political subdivision or instrumentality of the government [Maceda v. Macaraig]]

Taxation is the rule and exemption. He who claims exemption must be able to justify his claim or right thereto by a grant express in terms too plain to be mistaken and too categorical to be misinterpreted.If not expressly mentioned in the law, it must be at least within its purview by clear legislative intent.

1. The law itself expressly provides for a liberal construction thereof.

2. In cases of exemptions granted to religious, charitable and educational institutions or to the government or its agencies or to public property because the general rule is that they are exempted from tax.

c. Tax rules and regulations

1) General rule only

They shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers.[footnoteRef:37] [37: Sec. 246]

d. Penal provisions of tax laws

Tax laws are civil and not penal in nature, although there are penalties provided for their violation.

The purpose of tax laws in imposing penalties for delinquencies is to compel the timely payment of taxes or to punish evasion or neglect of duty in respect thereof.

e. Non-retroactive application to taxpayers

1) Exceptions

A statute may operate retroactively provided it is expressly declared or is clearly the legislative intent. But a tax law should not be given retroactive application when it would be harsh and oppressive.

I. Scope and Limitation of Taxation

1. Inherent Limitations

a. Public Purpose[footnoteRef:38] [38: Test in determining Public Purposes in tax: a. Duty Test whether the thing to be threatened by the appropriation of public revenue is something which is the duty of the State, as a government. b. Promotion of General Welfare Test whether the law providing the tax directly promotes the welfare of the community in equal measure.]

The tax must be used: 1) for the support of the state or2) for some recognized objects of governments or 3) directly to promote the welfare of the community[footnoteRef:39] [39: The term public purpose is synonymous with governmental purpose; a purpose affecting the inhabitants of the state or taxing district as a community and not merely as individuals. A tax levied for a private purpose constitutes a taking of property without due process of law. The purposes to be accomplished by taxation need not be exclusively public. Although private individuals are directly benefited, the tax would still be valid provided such benefit is only incidental. The test is not as to who receives the money, but the character of the purpose for which it is expended; not the immediate result of the expenditure but rather the ultimate. In the imposition of taxes, public purpose is presumed. taxation as an implement of police power]

b. Inherently Legislative

1) General Rule

Taxation is purely legislative, Congress cannot delegate the power to others. This limitation arises from the doctrine of separation of powers among the three branches of government.

2) Exceptions

a) Delegation to local governments[footnoteRef:40] [40: Art. X. Sec. 5]

The power of local government units to impose taxes and fees is always subject to the limitations which the Congress may provide, the former having no inherent power to tax.[footnoteRef:41] [41: Basco v. PAGCOR]

The power to tax is primarily vested in the Congress, however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation but pursuant to direct authority conferred by Section 5,[footnoteRef:42] Article X of the1987 Constitution, subject to guidelines and limitations which Congress may provide which must be consistent with the basic policy of local autonomy.[footnoteRef:43] [42: Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments.] [43: MCIAA v. Marcos, 261 SCRA 667]

b) Delegation to the President[footnoteRef:44] [44: Art.VI, Sec. 28(2)]

The power granted to Congress under this constitutional provision to authorize the President to fix within specified limits and subject to such limitations and restrictions as it may impose, tariff rates and other duties and imposts include tariffs rates even for revenue purposes only. Customs duties which are assessed at the prescribed tariff rates are very much like taxes which are frequently imposed for both revenue-raising and regulatory purposes.[footnoteRef:45] [45: Garcia vs. Executive Secretary, et. al., G.R. No. 101273, July 3, 1992]

c) Delegation to administrative agencies

With respect to aspects of taxation not legislative in character.[footnoteRef:46] [46: Example: assessment and collection Certain aspects of the taxing process that are not really legislative in nature are vested in administrative agencies. In these cases, there really is no delegation, to wit: a) power to value property b) power to assess and collect taxes c) power to perform details of computation, appraisement or adjustments. For the delegation to be constitutionally valid, the law must be complete in itself and must set forth sufficient standards.]

c. Territorial

1) Situs of Taxation[footnoteRef:47] [47: It is an inherent mandate that taxation shall only be exercised on persons, properties, and excise within the territory of the taxing power because: 1. Tax laws do not operate beyond a countrys territorial limit. 2. Property which is wholly and exclusively within the jurisdiction of another state receives none of the protection for which a tax is supposed to be compensation. However, the fundamental basis of the right to tax is the capacity of the government to provide benefits and protection to the object of the tax. A person may be taxed, even if he is outside the taxing state, where there is between him and the taxing state, a privity of relationship justifying the levy.]

a) Meaning

Literally means the place of taxation.

The place or the authority that has the right to impose and collect taxes.[footnoteRef:48] It is premised upon the symbiotic relation between the taxpayer and the State. [48: Commissioner vs. Marubeni, G.R. No. 137377, Dec.18, 2001]

b) Situs of Income Tax

1) From sources within the Philippines2) From sources without the Philippines

Determined by the nationality, residence of the taxpayer and source of income.[footnoteRef:49] [49: Sec. 42 Theories: 1. Domicillary theory - the location where the income earner resides is the situs of taxation 2. Nationality theory - the country where the income earner is a citizen is the situs of taxation 3. Source rule - the country which is the source of the income or where the activity that produced the income took place is the situs of taxation.]

3) Income partly within and partly without the Philippines

Allocated or apportioned to sources within or without the Philippines.[footnoteRef:50] [50: For the purpose of computing the taxable income therefrom, where items of gross income are separately allocated to sources within the Philippines, there shall be deducted: (a) the expenses, losses and other deductions properly apportioned or allocated thereto, and (b) a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be included in full as taxable income from sources within the Philippines.]

c) Situs of Property Taxes

(1) Taxes on Real Property

The place where the property is located. The applicable concept is lex situs or lex rei sitae.[footnoteRef:51] [51: We can only impose property tax on the properties of a person whose residence is in the Philippines.]

(2) Taxes on Personal Property

Tangible personal property Intangible personal property

Where the property is physically located although the owner resides in another jurisdiction.[footnoteRef:52] [52: 51 Am Jur. 467]

The place where the owner is located. The applicable concept is mobilia sequuntur personam.[footnoteRef:53] [53: movables follow the owner or domicile of the owner Exceptions: 1. When the property has acquired a business situs in another jurisdiction; 2. When an express provision of the statute provide for another rule.]

d) Situs of Excise Tax

(1) Estate Tax(2) Donors Tax

Determined by the nationality and residence of the taxpayer and the place where the property is located.

e) Situs of Business Tax

The place where the act or business is performed or occupation is engaged in.[footnoteRef:54] [54: where the transaction is performed because it is that place that gives protection The power to levy an excise upon the performance of an act or the engaging in an occupation does not depend upon the domicile of the person subject to the exercise, nor upon the physical location of the property or in connection with the act or occupation taxed, but depends upon the place on which the act is performed or occupation engaged in. Thus, the gauge of taxability does not depend on the location of the office, but attaches upon the place where the respective transaction is perfected and consummated (Hopewell vs. Com. of Customs)]

(1) Sale of Real Property

The place or location of the real property.[footnoteRef:55] [55: So, if the property sold is situated within the Phils., the income derived from such sale is considered as income within.]

(2) Sale of Personal Property

The place of sale.

(3) VATWhere the goods, property or services are destined, used or consumed.

d. International Comity[footnoteRef:56] [56: Comity is the respect accorded to other sovereign nations.]

The property of a foreign state or government may not be taxed by another.[footnoteRef:57] [57: The grounds for the above are: 1. sovereign equality among states 2. usage among states that when one enter into the territory of another, there is an implied understanding that the power does not intend to degrade its dignity by placing itself under the jurisdiction of the latter 3. foreign government may not be sued without its consent so that it is useless to assess the tax since it cannot be collected 4. reciprocity among states]

f. Exemption of Government Entities, Agencies, and Instrumentalities

i. Agencies performing governmental functions - tax exempt[footnoteRef:58] [58: The exemption applies only to governmental entities through which the government immediately and directly exercises its sovereign powers. Tax exemption of property owned by the Republic of the Philippines refers to the property owned by the government and its agencies which do not have separate and distinct personality (NDC vs. Cebu City) Those created by special charter (incorporated agencies) are not covered by the exemption]

ii. Agencies performing proprietary functions - subject to tax.

2. Constitutional Limitations

a. Provisions Directly Affecting Taxation

1) Prohibition against imprisonment for non-payment of poll tax

No person shall be imprisoned for debt or non-payment of poll tax.[footnoteRef:59] [59: Sec. 20, Art. III The only penalty for delinquency in payment is the payment of surcharge in the form of interest at the rate of 24% per annum which shall be added to the unpaid amount from due date until it is paid. (Sec. 161, LGC) The prohibition is against imprisonment for non-payment of poll tax. Thus, a person is subject to imprisonment for violation of the community tax law other than for non-payment of the tax and for non-payment of other taxes as prescribed by law. The non-imprisonment rule applies to non-payment of poll tax which is punishable only by a surcharge, but not to other violations like falsification of community tax certificate or non-payment of other taxes.]

2) Uniformity and equality of taxation

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.[footnoteRef:60] [60: Sec. 28(1), Art. VI Uniformity (equality or equal protection of the laws) means all taxable articles or kinds or property of the same class shall be taxed at the same rate. A tax is uniform when the same force and effect in every place where the subject of it is found. Equitable means fair, just, reasonable and proportionate to ones ability to pay. Progressive system of Taxation places stress on direct rather than indirect taxes, or on the taxpayers ability to pay Inequality which results in singling out one particular class for taxation or exemption infringes no constitutional limitation. (see Commissioner vs. Lingayen Gulf Electric, 164 SCRA 27) The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable.]

3) Grant by Congress of authority to the President to impose tariff rates

The Congress may, by law, authorize the President to fix tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the government.[footnoteRef:61] [61: Art. 28 (2), Art. VI]

4) Prohibition against taxation of religious, charitable entities, and educational entities

Subject to the conditions prescribed by law, all grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes shall be exempt from tax.[footnoteRef:62] [62: Sec. 4(4), Art. XIV. The exemption granted to non-stock, non-profit educational institution covers income, property, and donors taxes, and custom duties. To be exempt from tax or duty, the revenue, assets, property or donation must be used actually, directly and exclusively for educational purpose. In the case or religious and charitable entities and non-profit cemeteries, the exemption is limited to property tax. The said constitutional provision granting tax exemption to non-stock, non-profit educational institution is self-executing. Tax exemptions, however, of proprietary (for profit) educational institutions require prior legislative implementation. Their tax exemption is not self-executing. Lands, Buildings, and improvements actually, directly, and exclusively used for educational purposed are exempt from property tax, whether the educational institution is proprietary or non-profit]

5) Prohibition against taxation of non-stock, non-profit institutions All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties.[footnoteRef:63] [63: Sec. 4 (3), Art. XIV Proceeds of the sale of real property by the Roman Catholic church is exempt from income tax because the transaction was an isolated one (Manila Polo Club vs. CTA) Income derived from the hospital pharmacy, dormitory and canteen was exempt from income tax because the operation of those entities was merely incidental to the primary purpose of the exempt corporation (St. Paul Hospital of Iloilo vs. CIR) Where the educational institution is private and non-profit (but a stock corporation), it is subject to income tax but at the preferential rate of ten percent (10%)]

6) Majority vote of Congress for grant of tax exemption

No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of the Congress.[footnoteRef:64] [64: Sec. 28(4), Art. VI The provision requires the concurrence of a majority, not of attendees constituting a quorum, but of all members of the Congress.]

7) Prohibition on use of tax levied for special purpose

All money collected or any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned the balance, if any, shall be transferred to the general funds of the government.[footnoteRef:65] [65: Sec. 29(3), Art. VI An example is the Oil Price Stabilization Fund created under P.D. 1956 to stabilize the prices of imported crude oil. In a decide case, it was held that where under an executive order of the President, this special fund is transferred from the general fund to a trust liability account, the constitutional mandate is not violated. The OPSF, according to the court, remains as a special fund subject to COA audit (Osmea vs Orbos, et al., G.R. No. 99886, Mar. 31, 1993)]

8) Presidents veto power on appropriation, revenue, tariff billsThe President shall have the power to veto any particular item or items in an Appropriation, Revenue or Tariff bill but the veto shall not affect the item or items to which he does not object.[footnoteRef:66] [66: Sec. 27(2), Art. VI]

9) Non-impairment of jurisdiction of the Supreme Court

The Congress shall have the power to define, prescribe, and apportion the jurisdiction of the various courts but may not deprive the Supreme Court of its jurisdiction over cases enumerated in Sec. 5[footnoteRef:67] hereof. [67: The Supreme Court shall have the following powers: 1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers and consuls, and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus. 2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final judgments and orders of lower courts in: a. All cases in which the constitutionality or validity of any treaty, international or executive agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question. b. All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto. c. All cases in which the jurisdiction of any lower court is in issue. d. All criminal cases in which the penalty imposed is reclusion perpetua or higher. e. All cases in which only an error or question of law is involved. 3. Assign temporarily judges of lower courts to other stations as public interest may require. Such temporary assignment shall not exceed six months without the consent of the judge concerned. 4. Order a change of venue or place of trial to avoid a miscarriage of justice. 5. Promulgate rules concerning the protection and enforcement of constitutional rights, pleading, practice, and procedure in all courts, the admission to the practice of law, the integrated bar, and legal assistance to the under-privileged. Such rules shall provide a simplified and inexpensive procedure for the speedy disposition of cases, shall be uniform for all courts of the same grade, and shall not diminish, increase, or modify substantive rights. Rules of procedure of special courts and quasi-judicial bodies shall remain effective unless disapproved by the Supreme Court. 6. Appoint all officials and employees of the Judiciary in accordance with the Civil Service Law. (Art. VIII)]

10) Grant of power to the local government units to create its own sources of revenue

Each local government unit has the power to create its own revenue and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide.[footnoteRef:68] [68: Sec 5, Art. X Local government units have no power to further delegate said constitutional grant to raise revenue, because what is delegated is not the enactment or the imposition of a tax, it is the administrative implementation. The power of local government units to impose taxes and fees is always subject to the limitations which Congress may provide, the former having no inherent power to tax. Municipal corporations are mere creatures of Congress which has the power to create and abolish municipal corporations. Congress therefore has the power to control over local government units. If Congress can grant to a municipal corporation the power to tax certain matters, it can also provide for exemptions or even take back the power (Basco vs. PAGCOR)]

11) Flexible tariff clauseThis clause provides the authority given to the President to adjust tariff rates under Section 401[footnoteRef:69] of the Tariff and Customs Code.[footnoteRef:70] [69: In the interest of national economy, general welfare and/or national security, the President upon the recommendation of the National Economic and Development Authority is empowered: 1) To increase, reduce or remove existing protective rates of import duty, provided that the increase should not be higher than 100% ad valorem 2) To establish import quota or to ban imports of any commodity 3) To impose additional duty on all imports not exceeding 10% ad valorem.] [70: Garcia v. Executive Secretary, G.R. No. 101273, July 3, 1992)]

12) Exemption from real property taxes

Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, building, and improvements actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation.[footnoteRef:71] [71: Sec. 28(3), Art. VI Lest of the tax exemption: the use and not ownership of the property To be tax-exempt, the property must be actually, directly and exclusively used for the purposes mentioned. The word exclusively means primarily. The exemption is not limited to property actually indispensable but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes. The constitutional exemption applies only to property tax. However, it would seem that under existing law, gifts made in favor or religious charitable and educational organizations would nevertheless qualify for donors gift tax exemption. (Sec. 101(9)(3), NIRC) The constitutional tax exemptions refer only to real property that are actually, directly and exclusively used for religious, charitable or educational purposes, and that the only constitutionally recognized exemption from taxation of revenues are those earned by non-profit, non-stock educational institutions which are actually, directly and exclusively used for educational purposes. (Commissioner of Internal Revenue v. Court of Appeals, et al., 298 SCRA 83)]

13) No appropriation or use of public money for religious purposes

No public money or property shall be appropriated, applied, paid or employed, directly or indirectly for the use, benefit, support of any sect, church, denomination, sectarian institution, or system of religion or of any priest, preacher, minister, or other religious teacher or dignitary as such except when such priest, preacher, minister or dignitary is assigned to the armed forces or to any penal institution, or government orphanage or leprosarium.[footnoteRef:72] [72: Sec. 29(2), Art. VI Public property may be leased to a religious group provided that the lease will be totally under the same conditions as that to private persons (amount of rent). Congress is without power to appropriate funds for a private purpose.]

b. Provisions Indirectly Affecting Taxation

1) Due process

No person shall be deprived of life, liberty or property without due process of law[footnoteRef:73] x x x. [73: Sec. 1, Art. III]

2) Equal protection

xxx nor shall any person be denied the equal protection of the laws.[footnoteRef:74] [74: Ibid.]

3) Religious freedom

No law shall be made respecting an establishment of religion or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall be forever allowed. [footnoteRef:75] [75: Sec. 5 Art. III License fees/taxes would constitute a restraint on the freedom of worship as they are actually in the nature of a condition or permit of the exercise of the right. However, the Constitution or the Free Exercise of Religion clause does not prohibit imposing a generally applicable sales and use tax on the sale of religious materials by a religious organization. (see Tolentino vs Secretary of Finance, 235 SCRA 630)]

4) Non-impairment of obligations of contractsNo law impairing the obligation of contract shall be passed.[footnoteRef:76] [76: Sec. 10, Art. III A law which changes the terms of the contract by making new conditions, or changing those in the contract, or dispenses with those expressed, impairs the obligation. The non-impairment rule, however, does not apply to public utility franchise since a franchise is subject to amendment, alteration or repeal by the Congress when the public interest so requires.]

J. Stages of Taxation

1. Levy

Determination of the persons, property or excises to be taxed, the sum or sums to be raised, the due date thereof and the time and manner of levying and collecting taxes.

2. Assessment and Collection

The manner of enforcement of the obligation on the part of those who are taxed.[footnoteRef:77] [77: This includes payment by the taxpayer and is referred to as tax administration]

The two processes together constitute the taxation system.3. PaymentThe act of compliance by the taxpayer, including such options, schemes or remedies as may be legally available.

4. Refund

The recovery of any tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively, or in any manner wrongfully collected. K. Definition, Nature, and Characteristics of TaxesDefinition

Taxes are the enforced proportional contributions from persons and property levied by the law-making body of the State by virtue of its sovereignty for the support of government and for public needs.

Nature

They are not arbitrary exactions but contributions levied by authority of law, and by some rule of proportion which is intended to ensure uniformity of contribution and a just apportionment of the burdens of government.

Characteristics1. It is levied by the law-making body of the State.[footnoteRef:78] [78: The power to tax is a legislative power which under the Constitution only Congress can exercise through the enactment of laws. Accordingly, the obligation to pay taxes is a statutory liability.]

2. It is an enforced contribution.[footnoteRef:79] [79: A tax is not a voluntary payment or donation. It is not dependent on the will or contractual assent, express or implied, of the person taxed. Taxes are not contracts but positive acts of the government.]

3. It is generally payable in money.[footnoteRef:80] [80: Tax is a pecuniary burden an exaction to be discharged alone in the form of money which must be in legal tender, unless qualified by law, such as R.A. 304 which allows backpay certificates as payment of taxes.]

4. It is proportionate in character.[footnoteRef:81] [81: It is ordinarily based on the taxpayers ability to pay.]

5. It is levied on persons or property.[footnoteRef:82] [82: A tax may also be imposed on acts, transactions, rights or privileges.]

6. It is levied for public purpose or purposes.[footnoteRef:83] [83: Taxation involves, and a tax constitutes, a burden to provide income for public purposes.]

7. It is levied by the State which has jurisdiction over the persons or property.[footnoteRef:84] [84: The persons, property or service to be taxed must be subject to the jurisdiction of the taxing state.]

L. Requisites of a valid tax

1) It should be for a public purpose2) The rule of taxation should be uniform3) Either the person or property taxed be within the jurisdiction of the taxing authority4) The assessment and collection be in consonance with the due process clause5) The tax must not infringe on the inherent and constitutional limitations of the power of taxation.[footnoteRef:85] [85: Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. But their collection should not be tainted with arbitrariness]

M. Tax as distinguished from other forms of exactions

1. Tariff

May be used in three (3) senses:

a. A book of rates drawn usually in alphabetical order containing the names of several kinds of merchandise with the corresponding duties to be paid for the same.b. Duties payable on goods imported or exported.[footnoteRef:86] [86: P.D. No. 230]

c. The system or principle of imposing duties on the importation/exportation of goods.2. TollSum of money for the use of something, generally applied to the consideration which is paid for the use of a road, bridge of the like, of a public nature.

Tax Toll

Demand of sovereigntyDemand of proprietorship

Paid for the support of the governmentPaid for the use of anothers property

Generally, no limit as to amount imposedAmount depends on the cost of construction or maintenance of the public improvement used

Imposed only by the governmentImposed by the government or private individuals or entities

3. License fee

A charge imposed under the police power for the purposes of regulation.[footnoteRef:87] [87: Three kinds of licenses are recognized in the law: 1. Licenses for the regulation of useful occupations. 2. Licenses for the regulation or restriction of non-useful occupations or enterprises 3. Licenses for revenue only Importance of the distinctions between tax and license fee: 1. Some limitations apply only to one and not to the other, and that exemption from taxes may not include exemption from license fees. 2. The power to regulate as an exercise of police power does not include the power to impose fees for revenue purposes. (see American Mail Line vs City of Butuan, L-12647, May 31, 1967 and related cases) 3. An extraction, however, maybe considered both a tax and a license fee. 4. But a tax may have only a regulatory purpose. 5. The general rule is that the imposition is a tax if its primary purpose is to generate revenue and regulation is merely incidental; but if regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition of a tax. (see Progressive Development Corp. vs Quezon City, 172 SCRA 629)]

Tax License/Permit Fee

Enforced contribution assessed by sovereign authority to defray public expenses

Legal compensation or reward of an officer for specific purposes

For revenue purposesFor regulation purposes

An exercise of the taxing powerAn exercise of the police power

Generally no limit in the amount of tax to be paidAmount is limited to the necessary expenses of inspection and regulation

Imposed also on persons and propertyImposed on the right to exercise privilege

4. Special assessment

An enforced proportional contribution from owners of lands especially or peculiarly benefited by public improvements.[footnoteRef:88] [88: Since special assessments are not taxes within the constitutional or statutory provisions on tax exemptions, it follows that the exemption under Sec. 28(3), Art. VI of the Constitution does not apply to special assessments. However, in view of the exempting proviso in Sec. 234 of the Local Government Code, properties which are actually, directly and exclusively used for religious, charitable and educational purposes are not exactly exempt from real property taxes but are exempt from the imposition of special assessments as well. (see Aban) The general rule is that an exemption from taxation does not include exemption from special assessment.]

Tax Special Assessment

Imposed on persons, property and exciseLevied only on land

Personal liability of the person assessedNot a personal liability of the person assessed, i.e. his liability is limited only to the land involved

Based on necessity as well as on benefits received

Based wholly on benefits

General application[footnoteRef:89] [89: see Apostolic Prefect vs Treas. Of Baguio, 71 Phil 547]

Exceptional both as time and place

5. Debt

Debt is based upon juridical tie, created by law, contracts, delicts or quasi-delicts between parties for their private interest or resulting from their own acts or omissions.

Tax Debt

Based on lawBased on contracts, express or implied

Generally, cannot be assignedAssignable

Generally payable in moneyMay be paid in kind

Generally not subject to set-off or compensationMay be subject to set-off or compensation

Imprisonment is a sanction for non-payment of tax except poll tax

No imprisonment for non-payment of debt

Governed by special prescriptive periods provided for in the Tax Code

Governed by the ordinary periods of prescriptions

Does not draw interest except only when delinquentDraws interest when so stipulated, or in case of default

N. Kinds of Taxes

1. As to object

Personal, capitation, or poll tax Property tax Privilege tax

Tax of a fixed amount imposed on persons residing within a specified territory, whether citizens or not, without regard to their property or the occupation or business in which they may be engaged.[footnoteRef:90] [90: i.e. community tax.]

Tax imposed on property, real or personal, in proportion to its value or in accordance with some other reasonable method of apportionment.A charge imposed upon the performance of an act, the enjoyment of privilege, or the engaging in an occupation.

2. As to burden or incidence

Direct Indirect

Demanded from the person who also shoulders the burden of the tax. It is a tax which the taxpayer is directly or primarily liable and which he or she cannot shift to another. Demanded from a person in the expectation and intention that he or she shall indemnify himself or herself at the expense of another, falling finally upon the ultimate purchaser or consumer. A tax which the taxpayer can shift to another.

3. As to tax rates

Specific Ad valorem Mixed

The computation of the tax or the rates of the tax is already provided for by law.

Tax upon the value of the article or thing subject to taxation; the intervention of another party is needed for the computation of the tax.

Tax rates are partly progressive and partly regressive.

4. As to purposes

General or fiscal Special, regulatory, or sumptuary

Imposed for the purpose of raising public funds for the service of the government.

Imposed primarily for the regulation of useful or non-useful occupation or enterprises and secondarily only for the purpose of raising public funds.

5. As to scope or authority to impose

National internal revenue taxesLocal real property tax, municipal tax

Imposed by the National Government.

Imposed by the municipal corporations or local government units.

6. As to graduation

Progressive Regressive Proportionate

Rate or amount of tax increases as the amount of the income or earning to be taxed increases.

Tax rate decreases as the amount of income to be taxed increases.

Tax based on a fixed percentage of the amount of the property receipts or other basis to be taxed.[footnoteRef:91] [91: Example: real estate tax.]

II. National Internal Revenue Code of 1997 as amended (NIRC)

A. Income Taxation

1. Income Tax Systems

a. Global Tax System

All income received by the taxpayer are grouped together, without any distinction as to the type or nature of the income, and after deducting therefrom expenses and other allowable deductions, are subjected to tax at a fixed rate.

b. Schedular Tax System

The various types or items of income[footnoteRef:92] are classified accordingly and are accorded different tax treatments, in accordance with schedules characterized by graduated tax rates. Since these types of income are treated separately, the allowable deductions shall likewise vary for each type of income. [92: compensation, business or professional income]

Schedular system Global system

There are different tax ratesThere is a single tax rate

There are different categories of taxable incomeThere is no need for classification as all taxpayers are subjected to a single tax rate.

Usually used in the income taxation of individuals

Usually applied to corporations.

c. Semi-schedular or semi-global tax system[footnoteRef:93] [93: approach used in the Philippines]

A system where the compensation, business or professional income, capital gain and passive income not subject to final tax, and other income are added together to arrive at the gross income, and after deducting the sum of allowable deductions from business or professional income, capital gain and passive income not subject to final tax, and other income, in the case of corporations, as well as personal and additional exemptions, in the case of individual taxpayers, the taxable income is subjected to one set of graduated tax rates; method of taxation under the law.

2. Features of the Philippine Income Tax Law

Direct tax ProgressiveComprehensiveSemi-schedular or semi-global tax system[footnoteRef:94] [94: supra]

One assessed upon the property, person, business income, etc. of those who pay them.

The tax rates increase as the tax base increases. In certain cases, however, final taxes are imposed on passive income.[footnoteRef:95] [95: The individual income tax system, in the main, is progressive in nature]

The Philippine Income tax law adopted the so-called comprehensive tax situs comprehensive in the sense that it practically applies all possible rules of tax situs.

3. Criteria in Imposing Philippine Income Tax

Citizenship Principle Residence Principle Source Principle

A citizen of the Philippines is subject to Philippine income tax

(a) on his worldwide income, if he resides in the Philippines, or

(b) only on his income from sources within the Philippines, if he qualifies as nonresident citizen.

A resident alien is liable to pay income tax on his income from sources within the Philippines but exempt from tax on his income from sources outside the Philippines.

An alien is subject to Philippine income tax because he derives income from sources within the Philippines. Thus, a nonresident alien is liable to pay Philippine income tax on his income from sources within the Philippines[footnoteRef:96] despite the fact that he has not set foot in the Philippines. [96: such as dividend, interest, rent, or royalty]

4. Types of Philippine Income Tax

Presumptive Income Tax Composite Tax Unitary Income Tax

A scale of income taxes is imposed in relation to a group of persons actual expenditure and the presumed income.

A tax consisting of a series of separate quasi-personal taxes, assessed on the particular source of income with a superimposed personal tax on the income as a whole.

Incomes are arranged according to source. The separate items are added together and the rate applied to the resulting total income.

5. Taxable Period

Calendar Period Fiscal Period Short Period

A period of twelve (12) months commencing from January 1 and ending December 31.

An accounting period of 12 months ending on the last day of any month other than December.[footnoteRef:97] [97: ex. Feb. 1 to Jan. 31]

A period of less than twelve (12) months.

6. Kinds of Taxpayers

a. Individual Taxpayers

1) Citizens

a) Resident citizens[footnoteRef:98] [98: Taxable for income derived from all sources based on taxable (i.e., net) income]

Citizens of the Philippines who are residing therein.

b) Non-resident citizens[footnoteRef:99] [99: Taxable for income derived within the Philippines based on taxable (i.e., net) income]

1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner of Internal Revenue (CIR) the fact of his physical presence abroad with a definite intention to reside therein.

2. A citizen of the Phils. who leaves the country during the taxable year to reside abroad, either as immigrant or for employment or on permanent basis.

3. A citizen of the Phils. who works and derives from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.

4. A citizen who has been previously considered as non-resident citizen and who arrives in the Phils. at any time during the taxable year to reside permanently in the country.[footnoteRef:100] [100: He shall be considered a NRC for the taxable year in which he arrives in the Phils. with respect to his income derived from sources abroad until the date of his arrival in the Phils.]

5. A citizen who shall have stayed outside the Phils. for 183 days or more by the end of the year.[footnoteRef:101] [101: Sec. 22 (E) The continuity of residence abroad is not essential. If physical presence is established, such physical presence for the calendar year is not interrupted by reasons of travels to the Phils. (Rev. Regs. No. 9-73, November 26, 1973) An overseas contract worker is taxable only on income from sources within the Philippines. (Sec. 23 (c). A seaman who is a Filipino citizen and who receives compensation for services rendered abroad as member of the complement of a vessel engaged exclusively in international trade is treated as an overseas contract worker. Length of stay is indicative of intention. A citizen of the Philippines who shall have stayed outside the Philippines for 183 days or more by the end of the year is a non-resident citizen. His presence abroad, however, need not be continuous. [RR1-79]]

2) Aliens[footnoteRef:102] [102: What makes an alien a resident or non-resident alien is his intention with regard to the length and nature of his stay. Thus: a. One who comes to the Philippines for a definite purpose which in its very nature maybe promptly accomplished is not a resident citizen. b. One who comes to the Philippines for a definite purpose which in its very nature would require an extended stay, and to that end, makes his home temporarily in the Philippines, becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. (Sec. 5, RR 2) Length of stay is indicative of intention. An alien who shall have stayed in the Philippines for more than one (1) year by the end of the taxable year is a resident alien An alien who shall come to the Philippines and stay for an aggregate period of more than one hundred eighty (180) days during a calendar year shall be considered a non-resident alien in business, or in the practice of profession, in the Philippines. [Sec. 25(A)(1)] Thus, if an alien stays in the Philippines for 180 days or less during the calendar year, he shall be deemed a non-resident alien not doing business in the Philippines, regardless of whether he owns 1. Stock in trade of the taxpayer, or other property of a kind which would properly be included in an inventory of a taxpayer if on hand at the end of the taxable year (example: Raw Materials Inventory, Work in Process Inventory, Office Supplies Inventory) 2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business (example: Merchandise Inventory) 3. Property used in the trade or business which is subject to the allowance for depreciation (example: Office Equipment) actually engages in trade or business therein. (Mamalateo)]

a) Resident aliens

Those whose residence are within the Philippines but who are not citizens thereof.[footnoteRef:103] [103: Sec. 22 [F], NIRC A mere floating intention, indefinite as to time, to return to another country is not sufficient to constitute him a transient. For tax purposes, a resident alien is; 1. An alien who lives in the Phils. with no definite intention to stay as a resident. 2. One who comes in the Phils. for definite purposes which in its very nature would require an extended stay and to that end, makes his home temporarily in the Phils. 3. An alien who stay within the Phils. for more than 12 months from the date of his arrival in the Phils.]

b) Non-resident alien[footnoteRef:104] [104: A non-resident alien individual who came to the Phils. and stayed therein for an aggregate period of more than 180 days during any calendar year shall be deemed a NRA doing business in the Phils.]

Those not residing in the Phils. and who are not citizens thereof.[footnoteRef:105] [105: Sec. 22 (G), id.]

(1) Engaged in trade or business

An alien who stays in the Philippines for more than 180 days.[footnoteRef:106] [106: Sec. 25 [A], NIRC]

(2) Not engaged in trade or businessAn alien who stays in the Philippines for 180 days or less.[footnoteRef:107] [107: Sec. 25 [B], id. It is the length of stay in the Philippines that determines whether or not he is engaged in trade or business. The number of transaction he entered into is immaterial.]

(3) Special Class of Individual Employees

a) Minimum wage earner

A worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned.[footnoteRef:108] [108: Sec. 22 (HH), id. as amended by R.A. 9504]

By virtue of the passage of R.A. 9504, minimum wage earners are exempted from the payment of the net income tax.[footnoteRef:109] [109: They are not required to file an income tax return Thus: xxx, That minimum wage earners shall be exempt from the payment of income tax on their taxable income: Provided, further, that the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.]

b) Corporations[footnoteRef:110] [110: The term shall include partnership, no matter how created or organized, joint stock companies, joint accounts, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to operating or consortium agreement under a service contract with the government. (Sec. 24(b), id)]

1) Domestic corporations

Created or organized in the Phils. or under its laws.[footnoteRef:111] [111: liable for income from sources within and without the Philippines (Sec 22[C], id.)]

2) Foreign corporations

Created, organized or existing under any laws other than those of the Phils.

(1) Resident

Engaged in trade or business[footnoteRef:112] within the Phils. [112: The term implies a continuity of commercial dealings and arrangements and contemplates to that extent, the performance of acts or works or the exercise of some of the functions normally insistent to and in the progressive prosecution of commercial gain or for the purpose and the object of the business organization (Comm. vs. British Overseas Airways Corporation BOAC case 149 SCRA 395)]

(2) Non-resident

Not engaged in trade or business within the Phils.

c. Partnerships[footnoteRef:113] [113: An ordinary business partnership is considered as a corporation and is thus subject to tax as such.Partners are considered stockholders and, therefore, profits distributed to them by the partnership are considered as dividends.]

Partnership is a contract whereby two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves.[footnoteRef:114] [114: Partnerships, no matter how created or organized, including joint ventures or consortiums, are taxable.]

d. General Professional Partnerships

Formed by persons for the role purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade & business.[footnoteRef:115] [115: What are taxable unregistered partnerships? The SC in Evangelista v. CIR 102, Phil 140, held that Sec. 24 covered unregistered partnerships and even associations or joint accounts which have no legal personalities apart from their individual members. Accordingly, a pool of individual real property owners dealing in real estate business was considered a corporation for tax purposes [Afisco Insurance Corporation v. CA, 302 SCRA 1] Sec. 22 (b) e. g. Law firm General professional partnerships are not taxable but partners are taxed on their share of partnership profits actually or constructively paid during the year.]

e. Estates and Trusts Estate Trust

The mass of property, rights and obligations left behind by the decedent upon his death.[footnoteRef:116] [116: Estates may be classified as follows: 1. Estates not under judicial settlement - are subject to income tax generally as mere co-ownership. - The tax liability on income of the co-ownership levied directly on the co-owners. Thus, the heirs shall include in their respective returns their distributive shares of the net income of the estate. 2. Estates under judicial settlement - are subject to income tax in the same manner as individual. - Income received during the settlement of the estate is taxable to the fiduciary (guardian, executor, trustee, and administrator). - The return should be filed by executor or administrator of the trust.]

An arrangement created by will or co-agreement under which title to property is passed to another for conservation or investment with the income therefrom and ultimately the corpus[footnoteRef:117] to be distributed in accordance with the directions of the creator as expressed in the governing instrument.[footnoteRef:118] [117: principal] [118: Two (2) Kinds of Trust : 1. Irrevocable Trust - is considered as a separate taxpayer. 2. Revocable Trust - is one where at anytime the power to revest the title to any part of the corpus of the trust is vested: (a) in the grantor (creator of the trust) either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom; or (b) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom. The tax shall be imposed on taxable income of the grantor.]

f. Co-ownerships[footnoteRef:119] [119: General rule: Co-ownership is exempt from income tax because the activities of the co-owners are usually limited to the preservation of the properties owned in common and the collection of the income therefrom. Exceptions: (When co-ownership is subject to tax). (1) When the income of the co-ownership is invested by the co-owners in other income-producing properties or income-producing activities, and (2) When there is no attempt to divide inherited property for more than ten (10) years and the said property was not under any administration proceedings nor held in trust, an unregistered partnership is deemed to exist. Tax liability of co-owners: The co-owners in exempt co-ownership shall be liable for income tax only in their separate and individual capacity. Filing of return: The owners shall report and include in their respective personal income tax returns their shares of the net income of the co-ownership. Test to determine whether co-ownership is a taxable unregistered partnership: Find out whether the heirs have made substantial improvements on the inherited property. If so, the implication is that they will engage in business for profit (Evangelista Doctrine). If that happens, the co-ownership will be taxed as an unregistered partnership.]

It is created whenever the ownership of an undivided thing or right belongs to different persons.

7. Income Taxation

a. Definition

A tax on all yearly profits arising from property, profession, trade or business, or a tax on persons income, emoluments, profits and the like.[footnoteRef:120] [120: Fisher v. Trinidad, GR L-19030, Oct. 20, 1922]

b. Nature

It is generally regarded as an excise tax. It is not levied upon persons, property, funds or profits but on the privilege of receiving said income or profit.

c. General principles

1. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines.

2. A non-resident citizen is taxable only on income derived from sources within the Philippines.

3. An individual citizen of the Philippines, who is working and deriving income from abroad as an overseas contract worker, is taxable only on income derived from sources within the Philippines. Provided, that a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker.

4. An alien individual, whether or not a resident of the Philippines, is taxable only on income derived from sources within the Philippines.

5. A domestic corporation is taxable on all income derived from sources within and without the Philippines.

6. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.

8. Income

a. DefinitionIt means cash or its equivalent coming to a person within a specified period, whether as payment for services, interest or profit from investment. It covers gain derived from capital, from labor, or from both combined, including gain from sale or conversion of capital assets.[footnoteRef:121] [121: It denotes the amount of money or property received by a person or corporation within a specified time, whether as payment for services, interests, or profits from investments (Fisher vs. Trinidad, 43 Phil 973) Income is not merely increase in value of property; but a gain, a profit in excess of capital as a result of exchange transactions.]

b. Nature

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

It is an amount of money coming to a person/corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as a flow of the fruits of one's labor.[footnoteRef:122] [122: Conwi v. Court of Tax Appeals]

Income includes earnings, lawfully or unlawfully acquired, without consensualrecognition, express or implied, of an obligation to repay and without restriction as their disposition.

c. When income is taxable

1) Existence of income

There must be gain a value received in the form of cash or its equivalent as a result of rendition of service or earnings in excess of capital invested.[footnoteRef:123] [123: A mere expectation of profits is not an income A transaction whereby nothing of exchangeable value comes to or is received by the taxpayer does not give rise to or create taxable income. Items or amounts received which do not add to the taxpayers net worth or redound to his benefits such as amounts merely deposited or entrusted to him are not considered as gains (CIR vs. Tours Specialist, 183 SCRA 402). Gain need not be necessarily in cash. It may be in form of payment, reduction or cancellation of Ts indebtedness, or gain from exchange of property.]

2) Realization of income

a) Tests of Realization

Unless income is deemed realized, then there is no taxable income.

Revenue is generally recognized when both conditions are met:

a. The earning process is complete or virtually complete; andb. An exchange has taken place.[footnoteRef:124] [124: Manila Mandarin Hotels, Inc. v. CIR]

b) Actual vis--vis Constructive receipt

Actual receipt Constructive receipt

Income may be actual receipt or physical receipt.

When money consideration or its equivalent is placed at the control of the person whorendered the service without restrictionby the payor.[footnoteRef:125] [125: Sec. 4.108-A, RR 16-2005 Examples of income constructively received: a. Deposit in banks which are made available to the seller of services without restrictions b. Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by theseller as payment for services rendered c. Transfer of the amounts retained by the payor to the account of the contractor d. Interest coupons that have matured and are payable but have not been encashed e. Undistributed share of a partner in the profits of a general partnership]

3) Recognition of income

a. There is income, gain or profitb. The income, gain or profit is received or realized during the taxable yearc. The income gain or profit is not exempt from income tax

4) Methods of accounting

a) Cash method vis--vis Accrual method

Cash method Accrual method

Recognition of income and expense dependent on inflow or outflow of cash.[footnoteRef:126] [126: meaning, you recognize the income when you actually receive the cash payment for the sale, and you recognize the expense when you actually pay cash for the expense]

Gains and profits are included in gross income when earned whether received or not, and expenses are allowed as deductions when incurred, although not yet paid. It is the right to receive and not the actual receipt that determines the inclusion of the amount in gross income

b) Installment payment vis--vis Deferred payment vis-vis Percentage completion[footnoteRef:127] [127: in long term contracts]

Installment payment Deferred payment Percentage completion

Appropriate when collections extend over relatively long periods oftime and there is a strong possibility that full collection will not be made.

Initial payments exceed 25% of the gross selling price and such transaction shall be treated as cash sale which makes the entire selling pricetaxable in the month of sale.

Persons whose gross income is derived from long-term contracts shall report such income upon the basis of percentage of completion.

d. Tests in determining whether income is earned for tax purposes

1) Realization test

No taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income.[footnoteRef:128] [128: There must be separation from capital of something of exchangeable value (e.g., sale of asset)]

2) Claim of right doctrine or Doctrine of ownership, command, or control

A taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the absence of a definite unconditional obligation to return or repay.

The power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the payment of income to another is the enjoyment and hence, the realization of the income by him who exercises it. The dominant purpose of the revenue laws is the taxation of income to those who earn or otherwise create the right to receive it and enjoy the benefit of it when paid.

3) Economic benefit test, Doctrine of proprietary interest

Income realized is taxable only to the extent that the taxpayer is economically benefited.

Any economic benefit to the employee that increases his net worth is taxable.

4) Severance test

There is no taxable income until there is a separation from capital of something which is of exchangeable value[footnoteRef:129] thereby supplying the realization or transmutation which would result in the receipt of income. Thus, income is not taxable unless separated or severed from the capital or labor that bore it. [129: Eisner vs. Macomer, 252 US 189]

9. Gross Income

a. Definition

All income derived during a taxable year by a taxpayer from whatever source, whether legal or illegal,[footnoteRef:130] including the following items: [130: As such, income includes the following, among others: 1. Treasure found; 2. Punitive damages representing profit lost; 3. Amount received by mistake; 4. Cancellation of the taxpayer indebtedness; 5. Receipt of usurious interest; 6. Illegal gains; 7. Taxes paid and claimed as deduction subsequently refunded; 8. Bad debt recovery. ]

1. Gross income derived from the conduct of trade or business or the exercise of a profession.2. Rents3. Interests4. Prizes and winnings5. Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items6. Annuities7. Royalties8. Dividends9. Gains derived from dealings in property 10. Pensions 11. Partner's distributive share from the net income of the general professional partnership.[footnoteRef:131] [131: The above enumeration can be simplified into five (5) categories: 1. Compensation Income - income derived from rendering of services under an employer-employee relationship. 2. Professional Income - fees derived from engaging in an endeavor requiring special training as professional as a means of livelihood, which includes, but not limited to, the fees of CPAs, lawyers, engineers and the like. 3. Business Income - gains or profits derived from rendering services, selling merchandise, manufacturing products, farming and long-term contracts. 4. Passive Income - income in which the taxpayer merely waits for the amount to come in, which includes, but not limited to interest income, roy