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TAXATION LAW REVIEW NOTES - ATTY. FRANCIS J. SABABAN -

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COVERAGE OF TAXATION LAW REVIEW

I. Basic Principles of Constitutional

Limitations

a) Due process clause which

could be either substantive

due process and

procedural due process

clause

b) Equal protection clause

Read:

Ormoc Sugar Central vs.

City Treasurer 22 SCRA

603

Tiu vs. CA 301 SCRA 178

c) Article III sec. 1 of the

1987 Constitution – non-

impairment clause

d) Article III sec. 5 – freedom

of religion

e) Article III sec. 20 – non-

payment of poll tax

f) Article VI sec. 28 par. 2 –

flexible tariff clause

g) Article VI sec. 28 par. 3 –

exemption from real

property tax

Read:

Herrera vs. Quezon City 3

SCRA 186

Abra vs. Hernando 107 SCRA

104

Abra Valley vs. Aquino 52

SCRA 106

Philippine Lung Center vs.

Quezon City 433 SCRA 119

h) Article VI sec. 28 par. 4 –

qualified majority in tax

exemption

i) International double

taxation

CIR vs. Johnson 309 SCRA

87

j) Doctrine of equitable recoupment

k) Doctrine of Set-off or compensation in

taxation

Republic vs. Mambulao 4 SCRA 622

Domingo vs. Garlitos 8 SCRA 443

Francia vs. IAC 162 SCRA 753

Caltex vs. COA 208 SCRA 726

Philex vs. CIR 294 SCRA 687

II. Income Tax Law

Section 22-26 of the National Internal

Revenue Code

a) Read in the commentaries or magic

notes the different kinds of:

1. Income Taxpayers

2. Income Taxes

3. Sources of Income sec. 42 of NIRC

- Income Taxpayers

a) Individuals

b) Corporation

c) Estates and Trusts –

-Individuals are classified

Resident Citizens sec. 23 (A), sec

24 (A) (a)

Non-Resident Citizens sec 23 (B),

24 (A) (b) 22 (E)

Overseas Contract Workers Sec.

23 (C), 24 (A) (b)

Resident Aliens Rev. Reg. sec 5,

23 (D), 24 (A) (c)

Non-Resident Aliens Engaged in

trade or business sections 25 (A)

(1)

Non-Resident Aliens Not Engaged

in trade or business sec. 25 (B)

Aliens Employed in Multi-

National Corporations sec. 25 (C)

and Rev. Reg. 12-2001

Aliens Employed in Offshore

Banking Units sec 25 (D)

Aliens Employed in petroleum

Service Contractors &

Subcontractors sec. 25 (E)

-Corporate Income Taxpayers

Domestic Corporations sec. 23 (E),

and sec 27 of NIRC

Resident Foreign Corporations sec. 22

(H) and (28)A

Non-Resident Foreign Corporations

sec. 22 (1) and 28 (B)

-Estates and Trusts sec. 60-66 of NIRC

Different Kinds of Income Tax

1. Net Income Tax secs. 24 (A), 25

(A) (1), 26, 27 (A) (B) (C), 28 (A) up

to 3rd

par. 31 and 32 (A)

2. Gross Income Tax secs. 25 (B) first

part and 28 (B) (1)

3. Final Income Taxes sec. 57 (A)

4. Minimum Corporate Income Tax

of 2% of the Gross Income secs.

27 (E), 28 (A) (2)


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5. Improperly Accumulated Earnings

Tax of 10% of its taxable income

sec. 29 NIRC Rev. Reg. 2-2001

Optional Corporate Income Tax of

15% of its gross income sections

27 (A) 4th

to 10th

par. And 28 A(1)

but only up to the 4th

paragraph

-Proceed to section 42 and 23 of the

NIRC

NDC vs. Comm 151 SCRA 472

Comm. Vs. IAC 127 SCRA 9

-Then go to sec. 39 of NIRC

Calazans vs. Comm. 144 SCRA

664 RR 7-2003

-Then proceed to sec. 24 (A), 25 (A)

(1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1),

28 (A) (6) and sec 51 (D)

-Then continue to sec 24 B 1, 25

B,C,D,E; 27 (D) (1)

-Then go to se. 24 (B) (2) sec. 73

Comm. Vs. Manning 66 SCRA 14

Anscor vs. Comm. 301 SCRA 152

-Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D) (4);

28 (A) (7) (D); 32 B (7) (a)

- Then you go to sec. 24 C, 25A (3); 25 B,

C, D, E, 27 D (2); 28 (A) (7) (C); 28 B (5)

(C) RA 7717 sec. 127 NIRC

- Then you go to sec. 24 D (1); 25 (A) (3);

25 (B) last par. 27 (D) (5)

China Bank vs. Court of Appeals 336

SCRA ___; RR 7-2003

-Upon reading sec. 24 (D) (2) read RR 13-

1999

-Upon reading sec. 27 (A) go to sec. 22 (B)

Batangas vs. Collector 102 Phil. 822

Evangelista vs. Collector 102 Phil 140

Reyes vs. Comm. 24 SCRA 198

Ona vs. Bautista 45 SCRA 74

Obillos vs. Comm 139 SCRA 436

Pascua vs. Comm. 166 SCRA 560

Afisco vs. Comm. 302 SCRA 1

-Upon reading sec. 27 (C) of NIRC see RA

9337 then go to sec. 32 (B) (7) (b) of NIRC,

sec. 133 par (o) of LGC, sec. 154 of the LGC.

Pagcor vs. Basco 197 SCRA 52

Mactan vs. Cebu 261 SCRA 667

LRT vs. City of Manila 342 SCRA 692

-Proceed to sections 27 (D) (1), 27 (D) (2),

27 (D) (5) read RA 9337, 28 (A) (7) (b), 28 (B)

(5) (C), 27 (D) (4), (28) (A) (7) (d), 28 (B) (5)

(b)

Marubeni vs. CIR 177 SCRA 500

Proctor & Gamble vs. Comm 160 SCRA

560

Same case Proctor and Gamble on the

Motion for Reconsideration 204 SCRA

377

Wonder vs. Comm 160 SCRA 573

-Proceed to sec. 27(D) (5)

then sections 27 (E) and 28 (A) (2)

-Go to sec. 28 (A) (3) read RR 15-2002

-Go to sec. 28 (A) (4) see RA 9337

-Then see sec 28 (A) (5) see Marubeni vs.

Comm 177 SCRA 500

-Proceed to sec. 28(B) (5) (a) and sec 32 (B)

(7) (a)

Read Mitsubishi vs. Comm 181 SCRA

214

-Then go to sec. 29 and Rev. Reg. 2-2001

-Upon reading sec. 32 (B) 1 and 2, read sec.

85 par (e), sec. 108A and sec. 123 of the

NIRC

-Proceed to sec. 33 read Rev. Reg. 3-98

-then go to sec. 34 (A) (1) (a) see Aguinaldo

vs. Comm. 112 SCRA 136, RR 10-2002

-Under Sec. 34 (B) read RR 13-2000

-Upon reading sec. 49 read Banas vs. CA

325 SCRA 259 and Filipina vs. Comm. 316

SCRA 480

-Upon reading sec. 60-66, read Ona vs.

Bautista 45 SCRA 74

III. Estate Tax

-Sections 84-97 see sec. 104

-Upon reading sec. 85 (B) read Vidal

de Roces vs. Posadas 58 Phil. 108

Dizon vs. Posadas 57 Phil 465

-Sec. 85 (G) compare with sec. 100

-sec. 85 (H) compare with sec. 86 (C)

-Upon reading sec. 86 see RR 2-2003

-Upon reading sec. 94 see Marcos vs.

Sandiganbayan 273 SCRA 47

IV. Donors Tax Law

- Sections 98-104

- G and Cumulative methods of filing

donor’s tax returns sections 99 (A), 103

(A) (1) and RR 2-2003

- Sections 100 and 85 (9)

V. Value Added Tax

- Sections 105-115


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-Read RA 9337

-Read ABAKADA vs Comm.

GR 168056, Sept. 1, 2005

VI. Remedies Under the Internal Revenue

Code

-Sections 202-229

-RR 12-99

Phoenix vs Comm 14 SCRA 52

Basilan vs. Comm. 21 SCRA 17

Yabut vs. Flojo 115 SCRA 278

Union Shipping vs. Comm 185 SCRA

547

Comm. vs. TMX 205 SCRA 184

Comm. vs. Philamlife 244 SCRA

Comm. vs. CA & BPI 301 SCRA 435

BPI vs. Comm. 363 SCRA 840

-Prescription sections 203 and 222 of

NIRC, sec. 194 of the LGC, sec. 270 of

the LGC, sec. 1603 of Tariff and

Customs Code

-Protest sec. 228 of NIRC and RR 12-99

sec. 195 of LGC, 252 LGC, sec. 2313 of

Tariff & Customs Code and RA 7651

VII. Local Taxation

- Sections 128-196 of LGC

-Proceed 1st

to sec. 186 read Bulacan

vs. CA 299 SCRA 442

-Then proceed to 187

-Then to 151

-128

-Under sec. 133 (e) read Palma vs.

Malangas 413 SCRA 572

-Under 133 (h) read Pililia vs. Petron

198 SCRA 82

-Under 133 (i) read First Holdings Co.

vs. batangas City 300 SCRA 661

-Under 133 (l) read Butuan vs. LTO

322 SCRA 805

-Under 137 read sec. 193 of LGC

Misamis vs. Cagayan de Oro 181

SCRA 38

Reyes vs. San Pablo City 305

SCRA 353

Meralco vs. Laguna 306 SCRA

750

PLDT vs. Davao City 363 SCRA

522

- Co-relate sec. 139 and 147 of LGC

- Under sec. 140 of the LGC see sec.

125 of the Internal Revenue Code

- Under sec. 150 of the LGC read the

following:

Phil. Match vs. Cebu 81 SCRA 99

Allied Thread vs. Manila 133

SCRA 338

Sipocat vs. Shell 105 Phil. 1263

Iloilo Bottles vs. Iloilo City 164

SCRA 607

VIII. Real Property Tax

- Sections 197-294

- Sec. 235

LRT vs. Manila 342 SCRA 692

Cebu City vs. Mactan 261 SCRA 667

IX. Tariff & Customs Code

- Special Customs Duty sec. 301-304 of

TCC

- Regukar Customs Duty sec. 104 of TCC

- RA 7631

X. Court of Tax Appeals

- RA 1125 as amended by RA 9282


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Rules in the Classroom:

1. do not be absent

if you are absent, you have to

transcribe what happened in class when

you were out.

The next meeting you attend class,

consider yourself a resident of balic-balic,

babalikbalikan ka sa recit.

Exception: if you get married.

2. read the assignment. Wag zapote ang

aral.

3. holiday – make up class probably on a

Sunday

4. allowed to glance at your notes, wag lang

pahalata/garapal

5. materials:

codal

commentaries (any author will do)

magic notes (Sababan Lecture and

Q&A)

Book stand

Coverage of Taxation Law Review:

1. Basic Principles including Constitutional

Provisions

2. Income Tax

3. Estate Tax

4. Donor’s Tax

5. Remedies

6. Local Tax

7. Real Property Tax

8. Tariff and Customs Code

9. Court of Tax Appeals

10. VAT (although not part of the coverage of

the Bar Exams, questions have been asked

since 1999)

Title 5,6 and 7 are always included in the

coverage

No computations in the bar

There are only 1 or 2 questions in the Bar

about Basic Principles

What are the favorite topics in the Bar? → 12 questions on Income Tax

→ 8-10 questions on remedies

→ 8-10 questions allocated to the 7 topics

BASIC PRINCIPLES:

► Taxation is an inherent power of the

State.

Q: What do you mean by INHERENT?

A: The power to tax is not provided for in

the law, statute or constitution; it depends on

the existence of the state. No law or

legislation for the exercise of the power to

tax by the national government.

Q: Do local governments exercise this

inherent power?

A: No. Only the National Government

exercises the inherent power to impose

taxes.

Q: The taxing power of local governments is

a DELAGATED power. Delegated by whom?

A: Delegated by Congress through law in

case of autonomous regions, and delegated

by the constitution in case of LGUs not

considered an autonomous region.

► Cities, provinces and municipalities →

power granted under Art. X Sec. 5&6 of the

Constitution

► Autonomous Regions → power conferred

by Congress through law. Art. X Sec. 20 #2

of the Constitution is a non-self-executing

provision. Thus the power is granted by

Congress because said provision requires an

enabling law.

► Article X, Section 5 is self-executing thus

the power is granted by the constitution.

CONSTITUTIONAL LIMITATIONS

Due Process Clause

Q: why is it a limitation to the power to tax?

A: The due process clause as a limitation to

the power to tax refers both to substantive

and procedural due process. Substantive due

process requires that a tax statute must be

within the constitutional authority of

Congress to pass and that it be reasonable,

fair and just.

Procedural due process, on the other

hand, requires notice and hearing or at least

the opportunity to be heard.

Ex: On Substantive Due Process- when the

Congress passes a law exempting the 13th

month pay from tax but with the concurrence

only of the majority of the quorum – law

would be invalid because the Constitution

provides that any grant of tax exemption


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shall be passed with the concurrence of the

majority of all the members of the Congress.

Q: Does it follow that the adverse party must

always be notified?

A: No. As a rule, notice and hearing or the

opportunity to be heard is necessary only

when expressly required by law. Where there

is no such requirement, notice and the

opportunity to be heard are dispensable.

Ex. Before Oct. 1, 1995, you can secure a

TRO without notifying the adverse party. If

you are a suspect in a criminal case, you have

the right to have an opportunity to be heard

(if there is a law).

Before July 1, 1998, no notice need be

given to a party declared in default. After the

amendment, the party declared in default has

to be notified of subsequent proceedings

albeit without the right to participate therein.

In the case of a search warrant, the

person to be searched was not notified. The

person searched cannot claim that there was

a violation of due process because there is no

law requiring that the person to be searched

should be notified.

Regarding delinquent tax payers,

before levy, there must be notice.

REASON:

No provision of law requires notice to the

adverse party. If the adverse party is notified,

he may abscond. Thus, in adversarial

proceedings, in connection with procedural

due process, the adverse party need not be

notified all the time.

Equal Protection Clause

► As a rule, taxpayers of the same footing

are treated alike, both as to privileges

conferred and liabilities imposed. Difference

in treatment is allowed only when based on

substantial distinction. Difference in

treatment not based on substantial

distinction is frowned upon as “class

legislation.” This is violated when taxpayers

belonging to the same classification are

treated differently form one another; and

taxpayers belonging different classifications

are treated alike.

Requirements of Reasonable Classification:

1) There must be substantial distinctions

that make a real difference.

2) It must be germane or relevant to the

purpose of the law.

3) The distinction or classification must

apply not only to the present but also

to future situations.

4) The distinction must apply to

persons, things and transactions

belonging to the same class.

Ex: In one case, a tax ordinance was

assailed on the ground that the ordinance

failed to distinguish a worker form casual,

permanent or temporary. The SC said that

the ordinance was invalid because of the

failure to state the said classification.

In PEOPLE v. CAYAT the Supreme Court

mandated the requisites for a valid

classification.

TIU v. COURT OF APPEALS (301 SCRA 278)

Q: what happened in the city of Olonggapo?

A: The Congress, with the approval of the

President, passed RA 7227, an act

creating the conversion of the military

bases into other productive uses.

Q: Who was the President at that time?

A: President Ramos

Q: What were signed?

A: RA 7227, EO 97 and EO 97-A

→ The first led to the creation of the

Subic Special Economic Zone (SSEZ). The

latter set the limitations and boundaries

of the application of the incentives (no

taxes, local and national, shall be

imposed within SSEZ. In lieu thereof, 3%

of the Gross Income shall be remitted to

the national gov’t) to those operating

their businesses within the said area.

Q: Who are the petitioners and what was

their contention?

A: The petitioners are Filipino businessmen

who are operating their business outside

the secured area. The petitioners

contended that the law in question was

violative of their right to equal protection

of laws since they are also Filipino

businessmen.

H: The Supreme Court ruled that there

was no violation since the classification

was based on a substantial distinction.


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The element invoked here is element

#1 that there must be substantial

distinction in the classification of

taxpayers on whom the tax will be

imposed.

The Court observed that those foreign

businessmen operating within the

secured area have to give a larger capital

to operate in the secured area (to spur

economic growth and guarantee

employment).

ORMOC SUGAR CENTRAL vs. CIR

Q: What did the municipality of Ormoc do?

A: The City Council of Ormoc passed a

Municipal Ordinance No.4 imposing upon

any and all centrifugal sugar milled at the

Ormoc Sugar Central a municipal tax on

the net sale of the same to the United

States and other foreign countries.

Q: Did the owner accept this imposition?

A: No. the tax due was paid under protest,

then filed a complaint against the City of

Ormoc.

H: The Supreme Court said there was a

violation of the equal protection clause.

The element invoked here was element

#3, that it must be applicable to both

present and future circumstances. The

Supreme Court said that one must go to

the provision itself, in the case at bar,

there was a violation of element #3

because the law was worded in such a

way that it only applies to Ormoc Sugar

Central alone and to the exclusion of all

other sugar centrals to be established in

the future.

TAKE NOTE: People vs. Cayat

Freedom of Religion

It Involves 3 Things:

1. freedom to choose religion

2. freedom to exercise one’s religion

3. prohibition upon the national

government to establish a national religion

Q: Which one limits the power to tax?

A: Prohibition upon the national government

to establish a national religion because this

will require a special appropriation of money

coming from the national treasury which is

funded by the taxes paid by the people.

Non-impairment Clause

Q: What are the sources of obligation in the

Civil Code?

A: Law, Contracts, Quasi-Contracts, Delict,

Quasi-Delict.

Q: What is the obligation contemplated in

this limitation?

A: Those obligations arising from contracts.

General Rule: The power to tax is pursuant

to law, therefore, the obligation to pay taxes

is imposed by law, thus the non-impairment

clause does not apply.

► You have to determine first the source of

obligation:

1. If the law merely provides for the

fulfillment of the obligation then the law is

not the source of the obligation.

2. When the law merely recognizes or

acknowledges the existence of an obligation

created by an act which may constitute a

contract, quasi-contract, delict, and quasi-

delict, and its only purpose is to regulate

such obligation, then the act itself is the

source of the obligation, not the law.

When the law establishes the obligation

and also provides for its fulfillment, then the

law itself is the source of the obligation

Q: So, in what instance does the non-

impairment of contracts clause becomes a

limitation to the power to tax?

A: it is when the taxpayer enters into a

compromise agreement with the government.

In this instance, the obligation to pay the tax

is now based on the contract between the

taxpayer and the government pursuant to

their compromise agreement.

Take Note: the requirement for its

application: the parties are the government

and private individual.

Poll Tax

Q: What is a poll tax?

A: It is a tax of a fixed amount on individuals

residing within a particular territory, whether

citizens or not, without regard to their

property or to the occupation in which they

may be engaged.


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It is a tax imposed on persons without

any qualifications. persons may be allowed to

pay even if they are not qualified as to age or

property ownership.

Example of Poll Tax: Community Tax

Certificate under Section 162 of the Local

Government Code.

Q: Why is it a limitation to the power to tax?

A: It is a limitation to the power to tax

because Congress is prohibited from passing

a law penalizing with imprisonment a person

who does not pay poll tax. (funds for sending

a person to jail is taken from the national

treasury which is funded by the taxes paid by

the people)

Exemption from payment of Real Estate

Tax

Q: What is the requirement for exemption

from payment of real property tax under the

1935, 1973 and 1987 Constitution?

A: Art. 6, Sec 22 (3), 1935 Constitution –

Cemeteries, churches and parsonages or

convents appurtenant thereto, and all lands,

buildings and improvements used

EXCLUSIVELY for RELIGIOUS, CHARITABLE or

EDUCATIONAL purposes shall be exempt for

taxation.

Art. 8, Sec. 17 (3), 1973 Constitution –

charitable institutions, churches, parsonages

or convents appurtenant thereto, mosque,

and non-profit cemeteries, and all lands,

buildings, and improvements ACTUALLY,

DIRECTLY, and EXCLUSIVELY used for

RELIGIOUS and CHARITABLE purposes shall

be exempt from taxation.

Art. 6, Sec. 28 (3), 1987 Constitution –

charitable institutions, churches, and

parsonages or convents appurtenant thereto,

mosque, non-profit cemeteries, and all lands,

buildings, and improvements ACTUALLY,

DIRECTLY and EXCLUSIVELY used for

RELIGIOUS, EDUCATIONAL and CHARITABLE

purposes shall be exempt from taxation.

HERRERA v. QC-BOARD OF ASSESSMENT

(1935 Constitution)

Q: What is involved in this case?

A: A charitable institution, St.

Catherine’s Hospital. The hospital was

previously exempt from taxation until it

was reclassified and subsequently

assessed for the payment of real property

tax.

The contention of the respondent is

that the hospital was no longer a

charitable institution because it accepts

pay-patients, it also operates a school for

midwifery and nursing, and a dormitory.

Since it is not exclusively used for

charitable purposes it is not exempt from

taxation.

H: The Court ruled that petitioner is not

liable for the payment of real estate

taxes. It is a charitable institution, thus

exempt from the payment of such tax.

The hospital, schools and dormitory

are all exempt fro taxation because they

are incidental to the primary purpose of

the hospital.

NOTE: this arose during the 1935

Constitution.

“Exempted by virtue of incidental

purpose” was merely coined by the Supreme

Court. Thus, it does not apply to other taxes

except Real Estate Tax.

PROVINCE OF ABRA v. HERNANDO


A A religious institution was involved in

this case, the Roman Catholic Bishop of

Bangued, Inc. (bishop filed declaratory

relief after assessed for payment of tax).

The respondent judge granted the

exemption from taxes of said church

based only on the allegations of the

complaint without conducting a

hearing/trial. The assistant prosecutor

filed a complaint contending that

petitioner was deprived of its right to due

process.

SC: the Court ordered that the case be

remanded to the lower court for further

proceedings. The Court observed that the

cause action arose under the 1973

Constitution, not under the 1935

Constitution (note the difference). Tax

exemption is not presumed. It must be

strictly construed against the taxpayer and

liberally construed in favor of the

government.

ABRA VALLEY COLLEGE INC. v. AQUINO



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A: An educational institution is involved

in this case. The ground floor of the

school was leased to Northern Marketing

Corp., a domestic corporation. The 2nd

floor thereof was used as the residence of

the school director and his family.

The Province of Abra now contends

that since the school is not exclusively

used for educational purposes, the school

is now liable to pay real estate tax.

H: The Court held that the school is

PARTIALLY liable for real estate tax.

1. Residence – exempt by virtue of

incidental purpose; justified because

it is necessary.

2. Commercial – not exempt because it

is not pursuant to the primary

purpose; not for educational

purposes.

Q: is the doctrine in the case of Herrera the

same with this case?

A: NO. in the Herrera case, the exemption

was granted to all the real property (hospital,

school and dorm). But in this case, the

Supreme Court made a qualification. The

Supreme Court said it depends.

NOTE: both cases arose under the 1935

Constitution despite having been decided in

1988.

Q: At present, do we still apply the

exemption from tax by virtue of the Doctrine

of Incidental Purpose?

A: Not anymore. The cause of action in said

case arose under the 1935 Constitution and

it does not apply to the provisions of the

1987 Constitution.

PHILIPPINE LUNG CENTER v. QUEZON CITY


A: A charitable institution, a hospital. It

is provided in the charter of the Lung

Center of the Philippines is a charitable

institution. However, part of its building

was leased to private individuals and the

vacant portion of its lot was rented out to

Elliptical Orchids. Respondent contends

that since the hospital is not used

actually, directly, an d exclusively for

charitable purposes, it is liable to pay real

estate taxes.

H: The Supreme Court held that the

petitioner is liable to pay tax for those

parts leased to private individuals for

commercial purposes. For the part of the

hospital used for charitable purposes

(whether for pay or non-pay patients),

petitioner is exempt from payment of real

estate tax.

NOTE: petitioner contended that the profits

derived from the lease of its premises were

used for the operation of the hospital. The

Court held that the use of the profits does

not determine exemption, rather it is the use

of the property that determines exemption.

The case of Herrera does not apply

because said case arose under the 1935

Constitution and the present case arose

under the 1987 Constitution. The

requirements for exemption are different. In

the 1935 Constitution, the property must be

EXCLUSIVELY used for religious, educational

or charitable purposes. Under the 1987

Constitution, the property must be used

ACTUALLY, DIRECTLY, and EXCLUSIVELY for

religious, educational and charitable

purposes.

Q: Was the doctrine laid down in Abra Valley

affirmed in the Lung Center case?

A: Yes. The Supreme Court unconsciously

applied a doctrine laid down by the 1935

Constitution. The Supreme Court reiterated

the ruling in the Abra Valley case which arose

under the 1935 Constitution. The Supreme

Court made a qualification, it held that it

depends on whether or not the use is

incidental to the primary purpose of the

institution.

NOTE: at present, “exemption from tax by

virtue of incidental purpose” is not applicable

to all taxes including real estate tax.

COMM v. SC JOHNSON and SONS, INC.

Important :

1. international double taxation

2. importance of international tax treaty

3. implication of most favored nation

clause

Q: What is the corporation involved in this

case?

A: A domestic corporation (DC).


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SC Johnson and Sons, Inc. entered

into a license agreement with SC Johnson

and Sons U.S.A (Non-Resident Foreign

Corp, NRFC) whereby the former was

allowed to use the latter’s trademark and

facilities to manufacture its products. In

return, the DC will pay the NRFC royalties

as well as payment of withholding tax.

A case for refund of overpaid

withholding tax was filed. Apparently, the

DC should have paid only 10% under the

most favored nation clause.

H: The Supreme Court coined the term

International Double Taxation or

International Juridical Double Taxation.

Q: What prompted the SC to coin such

term?

A: Because a single income (tax royalties

paid by a DC) was subjected to tax by two

countries, the Philippines income tax and

the U.S. tax.

International Juridical Double Taxation

applies only to countries where the tax

liabilities of its nationals are imposed on

income derived from sources coming

from within and without.

Q: Is there an instance where

international double taxation does not

apply?

A: Yes. If it involves nationals of

countries wherein the tax liability is

imposed only from income derive from

sources within and not including those

derived from sources without.

(Ex: Switzerland)

→ The controversy in the case at bar

involves the income tax paid in the

Philippines.

After paying 25%, the US firm

discovered that they are entitled to 10%

under the most favored nation clause.

The question is: was the tax paid under

similar circumstances with that of the RP-

West Germany Treaty?

The CTA and Court of Appeals ruled

that it was paid under similar

circumstances. The phrase referred to the

royalties in payment of income tax. The

Supreme Court ruled that the lower

courts’ interpretation of the phrase was

erroneous. Rather, the phrase applies to

the application of matching credit.

Q: What is matching tax credit?

A: RP-Germany Treaty provides for that

20% of the tax paid in the Philippines

shall be credited to their tax due to be

paid in Germany.

The 10% does not apply because there

is no matching credit. Thus, there is no

similarity in the circumstances.

EQUITABLE RECOUPMENT AND DOCTRINE

OF SET-OFF

Equitable Recoupment

This doctrine provides that a claim for

refund barred by prescription may be allowed

to offset unsettled tax liabilities. This is not

allowed in this jurisdiction, because of

common law origin. If allowed, both the

collecting agency and the taxpayer might be

tempted to delay and neglect the pursuit of

their respective claims within the period

prescribed by law.

Q: What is the doctrine of Equitable

Recoupment?

A: When the claim for refund is barred by

prescription, the same is allowed to be

credited to unsettled tax liabilities.

(Sir gives an illustration found in page 3 of

magic notes)

Q: Is the rule absolute? Reason

A: Yes, the rule is absolute. The rationale

behind this is to prevent the taxpayer and

government official from being negligent in

the payment and collection of taxes.

(furthermore, you have to be honest for this

to work, hence, the government is preventing

corruption)

There is no exception at all otherwise, the

BIR would be flooded with so many claims.

Set-off

Presupposes mutual obligation between

the parties. In taxation, the concept of set-

off arises where a taxpayer is liable to pay

tax but the government, for one reason or

another, is indebted to the said taxpayer.

Q: What do you mean by SET-OFF?

A: This presupposes mutual obligations

between the parties, and that they are mutual


11

creditors and debtors of each other. In

taxation, the concept of taxation arises where

a taxpayer is liable to pay taxes but the

government, for one reason or another, is

INDEBTED to said taxpayer.

REPUBLIC v. MAMBULAO LUMBER CO.

Q: What is the liability of Mambulao?

A: They are liable to pay forest charges

(under the old tax code).

NOTE: under our present tax code, the NIRC,

we do not have forest charges as the

same was abolished by President Aquino.

Q: What did the lumber company do?

A: The lumber company claimed that

since the government did not use the

reforestation charges it paid for

reforestation of the denuded land covered

by its license, the amount paid should be

reimbursed to them or at least

compensated or applied to their liability

to pay forest charges.

H: The Court ruled that the reforestation

charges paid is in the nature of taxes.

The principle of compensation does

not apply in this case because the parties

are not mutually creditors and debtors of

each other. A claim for taxes is not a

debt, demand, contract or judgment as is

allowed to be set-off under the statute of

set-off which is construed uniformly, in

the light of public policy, to exclude the

remedy in connection or any

indebtedness of the State or any

municipality to one who is liable for

taxes. Neither are they a proper subject

for recoupment since they do not arise

out of contract or the same transaction

sued on.

General Rule: no set-off is admissible against

demands for taxes levied in general or local

governmental purposes.

Reason: Taxes are not in the nature of

contracts or debts between the taxpayer and

the government, but arises out of a duty to,

and are positive acts of the government to

the making and enforcing of which, the

consent of the individual is not required.

Taxes cannot be the subject matter of

compensation.

DOMINGO v. GARLITOS

Q: What is being collected in this case?

A: Estate and inheritance taxes.

NOTE: we do not have inheritance taxes

anymore because the same was abolished

by Lolo Macoy.

Q: Who is the administratrix?

A: The surviving spouse.

Q: What did the surviving spouse do?

A: The surviving spouse suggested that

the compensation to which the decedent

was entitled to as an employee of the

Bureau of Lands be set-off from the estate

and inheritance taxes imposed upon the

estate of the deceased.

H: Both the claim of the government for

estate and inheritance taxes and the

claim of the (intestate) for the services

rendered have already become overdue

hence demandable as well as fully

liquidated, compensation therefore takes

place by operation of law, in accordance

with Art. 1279 and 1290 of the Civil Code

and both debts are extinguished to the

concurrent amount.

Compelling Reason: Congress has

enacted RA 2700, allocating a certain sum

of money to the estate of the deceased.

FRANCIA v. IAC

Q: This happened in what city?

A: Pasay City

Q: What is the tax being collected? Who is

collecting the same?

A: Payment for real estate taxes for the

property of Francia. It appears that

petitioner was delinquent in the payment

of his real estate tax liability. The same is

being collected by the Treasurer of Pasay.

Q: What is the suggestion of petitioner?

A: Suggested that the just compensation

for the payment of his expropriated

property be set-off from his unpaid real

estate taxes. (the other part of his

property was sold at a public auction)

H: The factual milieu of the case does

not justify legal compensation.

The Court has consistently ruled that

there can be no off-setting of taxes

against the claims that the taxpayer may

have against the government. A taxpayer

cannot refuse to pay a tax on the ground

that the government owes him an

amount.


12

Internal Revenue taxes cannot be the

subject of compensation because the

government and the taxpayer are not

mutually creditors and debtors of each

other, and a claim for taxes is not a debt,

demand, contract or judgment as is

allowed to be compensated or set-off.

Furthermore, the payment of just

compensation was already deposited with

PNB Pasay, and the taxes were collected

by a local government, the property was

expropriated by the national government.

(diff parties, not mutual creditors and

debtors of each other.)

CALTEX PHIL v. COA

Q: What is being collected?

A: Caltex’s contribution to the Oil Price

Stabilization Fund (OPSF).

COA sent a letter to Caltex asking the

latter to settle its unremitted collection

stating that until the same is paid, its

claim for reimbursement from the OPSF

will be held in abeyance.

Q: Why is Caltex entitled to reimbursement?

A: Because of the fluctuation of the oil

prices in the Middle East and Europe.

Caltex wanted to off-set its unremitted

collection from its reimbursements.

H: The Court did not allow the set-off,

and reiterated its ruling in the case of

Mambulao and Francia. Furthermore, RA

6952 expressly prohibits set-off from the

collection of contributions to the OPSF.

The Court likewise stated that Caltex

merely acted as agent of the government

in collecting contributions for the OPSF

because such is being shouldered by the

consumers when they purchase

petroleum products of oil companies,

such as Caltex.

Taxation is no longer envisioned as a

measure merely to raise revenues to

support the existence of the government.

Taxes may be levied for regulatory

purposes such as to provide means for

the rehabilitation and stabilization of a

threatened industry which is vested with

public interest, a concern which is within

the police power of the State to address.

PHILEX MINING CORP v. COMM

The petitioner is liable for the payment of

excise taxes, which it wanted to be set-off

from its pending claim for a VAT Input

credit/refund.

The Court did not allow set-off. Taxes

cannot be the subject of compensation for

the simple reason that the government and

taxpayer are not mutual creditors and

debtors of each other. Taxes are not debts.

Furthermore, in the instant case, the

claim for VAT refund is still pending. The

collection of a tax cannot await the results of

a lawsuit against the government.

DOUBLE TAXATION

Double taxation is allowed because there

is no prohibition in the Constitution or

statute.

Obnoxious double taxation is the

synonym of double taxation.

Elements of Double Taxation:

1) Levied by the same taxing authority

2) For the same subject matter

3) For the same taxing period and

4) For the same purpose

There is no double taxation if the tax is

levied by the LGU and another by the national

government. The two (2) are different taxing

authorities.

LGUs are expressly prohibited by the

provisions of RA 7160 or the LGC of 1991

from levying tax upon: (1) the National

Government; (2) its agencies and

instrumentalities; (3) LGUs (sec.113(o)).

The National Government, pursuant to

the provisions of RA 8424 of the Tax Reform

Act of 1997, can levy tax upon GOCCs,

agencies and instrumentalities (Section 27

c)), although income received by the

Government form:

1) any public utility or

2) the exercise of any essential

governmental function

is exempt from tax.

KINDS OF INCOME TAXPAYERS

Q: Generally, how many kinds of income

taxpayers are there?

A: Under section 22A of NIRC, there are

three (3), namely:


13

1. individual;

2. corporate;

3. estate and trust.

I. INDIVIDUAL TAXPAYER

Q: How many kinds of individual taxpayers

are there?

A: There are seven (7). Namely:

1. Resident Citizen (§23A and 24A);

2. Nonresident Citizen (§23B and 24A);

3. OCW and Seaman (§23C and 24A);

4. Resident Alien (§22F, 23D and 24A);

5. Nonresident Alien Engaged in Trade

or Business (§22G, 23D and 25A)

6. Nonresident Alien NOT Engaged in

Trade or Business (§22G, 23D and

25B)

7. Aliens Engaged in Multinational

Companies, Offshore Banking Units,

Petroleum Service Contractors

(§25C,D and E)

Resident Citizen (RC)

Q: How many types of RC?

A: There are two (2), namely:

1. RC residing in the Philippines; and

2. Filipino living abroad with no

intention to reside permanently

therein.

Q: If you are abroad, and you have the

intention to permanently reside therein, can

you still be considered a RC?

A: Yes. If such intention to permanently

reside therein was not manifested to the

Commissioner and the fact of your physical

presence therein, you may still be considered

a RC.

OCW and Seamen

OCW was used and not OFW in the CTRP,

because the classification shall cover only

those Filipino citizens working abroad with a

contract. TNTs are not covered.

A Filipino seaman is deemed to be an

OCW for purposes of taxation if he receives

compensation for services rendered abroad

as a member of the complement of a vessel

engaged exclusively in international trade.

Consequently, if he is not a member of

the complement or even if he is but the

vessel where he works is not exclusively

engaged in international trade, said seaman

is not deemed to be an OCW. He is either a

RC or a NRC depending on where he stays

most of the time during the taxable year.

If he stays in the Philippines most of the

time during the taxable year, he is

considered a RC, otherwise, a NCR.

If you are a seaman in the US Navy, you

are not the one being referred to.

The importance of ascertaining whether

or not a seaman is a RC or a NRC, is that if he

is a RCm he is taxable on ALL income derived

from all sources within and without. If he is a

NRC, he is taxable only on income derived

form sources within the Philippines.

Q: What is the significance of using OCW?

A: It only covers Filipinos who works abroad

with a contract. It does not cover TNTs.

Q: What is the status of a TNT?

A: Since they are not covered by this

classification, they are considered RC

because they work abroad without a contract

and they have not manifested their intention

to permanently reside abroad. (distinguish

from an immigrant)

Requirements for a seaman to be considered

an OCW:

1. must be a member of the compliment of

a vessel;

2. the vessel must be exclusively engaged in

international trade or commerce.

Resident Alien (RA)

An individual whose residence is within

the Philippines and who is not a citizen

thereof.

Intention to reside permanently in the

Philippines is not a requirement on the part

of the alien.

The requirement under RR#2 is that he is

actually present in the Philippines, neither a

sojourner, a traveler, not a tourist.


14

Whether he’s a transient or not is

determined by his intent as to the nature and

length of his stay.

Q: Is the intention to permanently reside in

the Philippines necessary?

A: No, so long as he is not a sojourner,

tourist or a traveler.

Non-Resident Alien Engaged in Trade or

Business (NRAETB)

A foreigner not residing in the Philippines

but who is engaged in trade or business here.

RR 2-98 has expanded the coverage of

the term, “engaged in trade or business” to

include the exercise of a profession.

Furthermore, by the express provision of the

law, a NRA who is neither a businessman nor

a professional but who come to and stays in

the Philippines for an aggregate period of

more than 180 days during any calendar year

is deemed to a NRAETB in the Philippines.

Q: How many types?

A: There are three (3) types, namely:

1. NRA engaged in trade or business

(25a1);

2. NRA who practices a profession

(Revenue Regulation 2-98);

3. foreigner who comes and stays in the

Philippines for an aggregate period of

MORE THAN 180 days during any

calendar year.

Q: What is the status of a Chinese who stays

here for 200 days in 2001?

A: NRAETB

Q: Suppose he stayed here for 100 days in

2000 and another 100 days in 2001?

A: He is not a NRAETB. To be considered as

such, he must stay for an aggregate period of

more than 180 days during a calendar year.

Q: What is the income tax applicable to said

taxpayer?

A: Net Income Tax (NIT) on all its income

derived form sources within the Philippines.

Non-Resident Alien Not Engaged in

Trade or Business

Q: How many kinds?

A: Only one.

The reason why the NRANETB are

included in any income tax law is because

they may be deriving income form sources

within the Philippines.

They are subject to tax based on their

GROSS INCOME received form all sources

within the Philippines.

Aliens Employed by Regional or Area

Headquarters & Regional Operating

Headquarters of Multinational

Companies/ Aliens Employed by

Offshore Banking Units (Aliens

Employed by MOP)

► Status: either a RA or NRA depending on

their stay here in the Philippines.

► Their status may either be RA or NRA

because Section 25 C and D does not

distinguish.

► Liable to pay 15% from Gross Income

received from their employer

► Income earned from all OTHER sources

shall be subject to the pertinent income tax,

as the case may be.

Aliens Employed in Multinational and

Offshore Banking Units

Q: How are they classified?

A: If they derived income from other sources

aside from their employer, you may classify

them either as RA, NRAETB, or NRANETB.

Aliens Employed in Petroleum Service

Contractors and Subcontractors

► Status: ALWAYS NRA. If they derive

income from other sources, such income

shall be subject to the pertinent income tax,

as the case may be.

► Income derived or coming from their

employer shall be subject to a tax of 15% of

the gross.

II. CORPORATE TAXPAYER


15

1. Domestic Corporation (DC) – created

or organized under Philippine laws.

2. Resident Foreign Corporation (RFC) –

corporation created under foreign

law, and engaged in trade or

business.

3. Nonresident Foreign Corporation

(NRFC) – created under foreign law,

and NOT engaged in trade or

business.

Q: What are deemed corporations under the

NIRC?

A: The term corporation shall include

partnerships, no matter how created or

organized, joint stock companies, joint

accounts, associations, or insurance

companies, but DOES NOT includes general

professional partnerships and a joint venture

or consortium formed of the purpose of

undertaking construction projects or

operations pursuant to or engaging in

petroleum, coal, geothermal or consortium

agreement under a service contract with the

Government.

1. Partnerships and others no matter how

created

2. Joint Stock Companies

3. Joint Accounts

4. Associations

5. Insurance Companies

CIR v. COURT OF APPEALS

The phrase no “matter how created or

organized” was interpreted.

Even if the partnership was pursuant to

law or not, whether nonstick, nonprofit, it is

still deemed a corporation.

Reason: because of the possibility of

earning profits form sources within the

Philippines.

Q: Are partnerships always considered

corporations? Is there no exception?

A: General Rule: a partnership is a

corporation.

Exception: General Professional Partnerships

(GPP)

Q: What is a GPP?

A: It is a partnership formed by persons for

the sole purpose of exercising their

profession, no part of the income of which in

derived from any trade or business. (what if a

partner has other businesses not related to

the GPP? > read section 26 quoted hereunder)

Two (2) Kinds of GPP formed for:

1) Exercise of a profession – not a

corporation; exempt from Corporate

Income Tax (CIT)

2) Exercise of a profession and engaged

in trade or business – a corporation;

subject to CIT

TAN v. DEL ROSARIO

general rule: a partnership is a

corporation

exception: GPP

exception to the exception: if the GPP

derives income from other sources, it is

considered a corporation, thus liable to pay

corporate income tax.

Rule:

1. if the income is derived from other

sources and such income is subject to NET

INCOME TAX, it is not exempt and it is

considered a corporation.

2. if the income is derived from other

sources and such income is subject to FINAL

INCOME TAX, it is still EXEMPT and it is not

deemed a corporation. ( separate return for

this. It will not reflect in the GPP’s ITR)

» This is pursuant to the fact that FIT will

not reflect in the ITR of the GPP since the

withholding agent is liable for the payment of

the FIT.

Q: What is the importance of knowing

whether the corporation is exempt or not?

A: To determine their tax liability. This is

important to determine the tax liability of the

individual partners of the GPP.

► Section 26 (1st paragraph) provides: “a

GPP as such shall not be subject to the Net

Income Tax…” however, “…persons engaging

in business as partners in a GPP shall be

liable for income tax only in their separate

and individual capacities.”

In short, each partner will be paying NIT,

and the distributive shares they will be

receiving from the net income of the GPP will

be included in the gross income of the

partner.


16

Q: If the GPP is deemed a corporation, will the

partners have to pay for the income tax?

A: No. as far as the share of the GPP is

concerned, it is considered a taxable dividend

which is subject to FIT.

Q: Is a joint venture a corporation?

A: Generally, yes, it is a corporation.

Q: Corporation X and Corporation Y joined

together. How many corporations do we

have?

A: Three, namely Corporation X, Y, and X+Y.

the joint venture has a separate and distinct

personality from the two corporations.

Q: When is a joint venture not considered a

corporation?

A: It is not deemed a corporation when it is

formed for the purpose of undertaking a

(“construction?) project or engaging in

petroleum, gas, and other energy operations

pursuant to “?” or consortium agreement

under a service contract with the

government.

Domestic Corporation

Is one created or organized in the

Philippines or under its laws.

Taxable on all income derived from

sources within or without the Philippines.

Resident Foreign Corporation

Foreign corporations engaged in trade or

business in the Philippines.

Taxable for income derived within the

Philippines.

Non-Resident Foreign Corporation

Foreign corporations not engaged in

trade or business in the Philippines.

Taxable for income derived within the

Philippines.

Both DC and RFC are liable for the

payment of the following:

1) NIT – Net Income Tax

2) FIT – Final Income Tax

3) 10% income tax on corporations with

properly accumulated earnings.

4) MCIT (Minimum Corporate Income

Tax) of 2% of the Gross Income

5) Optional Corporate Income Tax of

15% of the Gross Income

A NRFC is liable for payment of the ff:

1) GIT- Gross Income Tax

2) FIT – Final Income Tax

III. TRUST AND ESTATE

Q: How many for each?

A: Seven (7) kinds for each because the trust

or estate will be determined by the status of

the trustor, grantor, or creator, or of the

decedent.

The status of the estate is determined by

the status of the decedent at the time of his

death; so an estate, as an income taxpayer

can be a citizen or an alien.

When a person who owns property dies,

the following taxes are payable under the

provision of income tax law:

1) Income Tax for Individuals – to cover

the period beginning January to

the time of death.

2) Estate Income Tax – if the property is

transferred to the heirs.

3) If no partition is made, Individual or

Corporate Income Tax, depending

on whether there is or there is no

settlement of the estate. If there

is, depending on whether the

settlement is judicial or

extrajudicial.

Judicial Settlement

1) During the pendency of the

settlement, the estate through the

executor, administrator, or heirs is

liable for the payment of ESTATE

INCOME TAX (Sex, 60 (3)).

2) If upon the termination of the judicial

settlement, when the decision of the

court shall have become final and

executory, the heirs still do not divide

the property, the following

possibilities may arise:


17

a) If the heirs contribute to the

estate money, property or industry

with the intention to divide the

profits between and among

themselves, an UNREGISTERED

PARTNERSHIP is created and the

estate becomes liable for payment

of CIT (Evangelista vs. Collector

(102 Phil 140))

b) If the heirs without contributing

money, property or industry to

improve the estate, simply divide

the fruits thereof between and

among themselves, a CO-

OWNERSHIP is created and

Individual Income Tax (IIC) is

imposed on the income derived by

each of the heirs, payable in their

separate and individual capacity

(Pascual vs. COMM (165 scra 560)

and Obillos vs. COMM (139 SCRA

436))

Extrajudicial Settlement and if NO Settlement

Some possibilities may arise. The income

tax liability depends on whether or not the

unregistered partnership or co-ownership is

created.

Trust

Trusts can be created by will, by contract

or by agreement. The status of a trust

depends upon the status of the grantor or

trustor or creator of the trust. Hence, a trust

can also be a citizen or an alien.

Q: Where the trust earns income and such

income is not passive, who among the parties

mentioned is liable for payment of income

tax thereon?

A: The TRUST itself, through the trustee or

fiduciary but only if the trust is irrevocable.

If it is revocable, or for the benefit of the

grantor, the liability for the payment of

income tax devolves upon the trustor himself

in his capacity as individual taxpayer.

KINDS OF INCOME TAX

Q: How many kinds of income tax?

A: There are Six (6), namely:

1. Net Income Tax (NIT);

2. Gross Income Tax (GIT);

3. Final Income Tax (FIT);

4. Minimum Corporate Income Tax of

2% of the Gross Income (MCIT)

5. Income Tax on Improperly

Accumulated Earnings subject to 10%

of the Taxable Income;

6. Optional Corporate Income Tax of

15% on the Gross Income

I. NET INCOME TAX

Q: what is the formula?

A: Gross Income – Deductions and Personal

Exemptions = Taxable Income

Taxable Income x Tax Rate = Net

Income

Taxable Net Income – Tax Credit =

Taxable Net Income Due

Net Income means Gross Income less

deductions and

Formula:

GI

- deductions

Net Income

x Tax Rate

Income Tax Due

Q: What is the rate?

A: Individual: 32%

Corporation: 35%

NOTE: the formula allows for deduction,

personal exemptions and tax credit.

Q: What are the other terms for NIT?

A: NIRC:

a. taxable income

b. gross income (wlang kasunod)

→ only income tax from improperly

accumulated earnings does not use this term.

1. CFA: “to be included in the gross

income”

2. Revenue Regulations and Statutes:

a. ordinary way of paying income

tax;

b. normal way of paying income tax .

Characteristics:


18

Q: Who are not liable to pay NIT?

A: 1. NRANETB (liable for GIT);

2. NRFC (GIT also);

3. With certain modifications, AEMOP, if

they derive income from other

sources;

Q: Is the taxable net income subject to

withholding tax?

A: It is subject to withholding tax if the law

says so.

Q: What if the law is silent?

A: If the law is silent, it is not subject to

withholding tax.

Q: What is another term for withholding tax?

A: It is also known as the creditable

withholding tax system under the income tax

law.

Q: Do we have to determine if there is an

actual gain or loss?

A: Yes because the formula for deductions,

etc.

Q: If you fail to pay, will you be held liable?

A: Yes, you will be held liable.

II. GROSS INCOME TAX (GIT)

Q: What is the formula?

A: Gross Income x Rate

Q: How many taxpayers pay by way of the

gross?

A: There are two (2)

individual - NRANETB

corporation - NRFC

NOTE: the formula does not allow any

deduction, personal exemptions and tax

credit.

Characteristics:

► NRANETB and NRFC, though not engaged

in trade or business, are liable to pay by way

of the gross for any income derived in the

Philippines. While not engaged in trade or

business, there is a possibility that they may

earn income in the Philippines.

Q: Is this subject to withholding tax?

A: Yes, it is subject to withholding tax

because the persons liable are foreigners.

This rule is ABSOLUTE

NOTE: there are two (2) ways of paying taxes

depending on which side of the bench you

are.

III. FINAL INCOME TAX (FIT)


A: (Each Income) x (Particular Rate)

Unlike in the gross income tax where you

add all the income from all the sources and

multiply the sum thereof by the rate of 25%

or 35%, as the case may be, in final income

tax, you cannot join all the income in one

group because each income has a particular

rate.

Q: What is the rate?

A: 35% as the case may be.

NOTE: like GIT, the formula does not allow

deductions, personal exemptions, and tax

credit.

Characteristics:

Q: Who are liable to pay FIT?

A: All taxpayers are liable to pay FIT

provided the requisites for its application are

present.

Q: Do you still have to pay NIT?

A: No. if you are liable for FIT, no need to

pay NIT or else there will be double taxation.

NOTE: as time passed by, the number of FIT

increased.

► before 1979 – proceeds from the sale of

real property not exempt, it is subject to NIT

or GIT, as the case may be.

after 1979 – capital gains tax. Proceeds

from the sale of real property is exempt.

Q: If you fail to pay, will you be liable?

A: No. the withholding agent is liable to pay

FIT.

► Case of Juday, Richard and Regine


19

► For one to be liable for the payment of

NIT, the income must be derived on the basis

of an employer – employee relationship.

Employer – Employee Relationship

(3 Cs):

1. contract;

2. control;

3. compensation;

► However, in the case of celebrities, there

is no employer – employee relationship, they

are merely receiving royalties. Royalties are

subject to final withholding tax, thus the

agent is liable to pay. (so, distinguish nature

of income, whether royalty or compensation)

RULE:

1. for NIT, whether or not subject to

Creditable Withholding Tax (CWT), the

taxpayer is always liable if he fails to

pay.

2. for GIT and FIT, absolute liability to

pay is upon the withholding agent.

Q: Why is it that the rate of withholding is

always lower, and why is it that the rate of

GIT and FIT is always equal?

A:

1. NIT allows deductions;

2. GIT and FIT do not allow deductions.

Q: Do you have to determine whether there

is an actual loss or gain?

A: No need to determine because the

formula does not allow deductions. Gain is

presumed. No liability for final withholding

tax except for the sale of shares of stock. (?)

IV. MINIMUM CORPORATE INCOME TAX

(MCIT)


A: Gross Income x 2%

Q: Who pays this tax?

A: DC and RFC only.

Q: May it be applied simultaneous with NIT?

A: No. there must be a computation of the

NIT first then apply which ever is higher. The

MCIT is paid in lieu of the NIT.

Reason: to discourage corporations from

claiming too many deductions.

V. OPTIONAL CORPORATE INCOME TAX

Q: Under what section is this found?

A: Section 27A 4th

paragraph and Section 28

A(1) 4th

paragraph.

Q: Is this applicable now?

A: No. this is not yet implemented.

Q: To what kind of taxpayer does this apply?

A: To DC and RFC.

Q: What kind of taxes are applicable or

imposed upon the 1st

five individual

taxpayers?

A: Only two (2) kinds are applicable out of

the six (6) kinds of income taxes.

1. NIT;

2. FIT;

Q: What kind of income tax will apply to

AEMOP?

A: Generally, only one kind, 15% FIT with

respect to income derived from their

employer.

Income from other sources:

1. Determine the status of the AEMOP;

a. NIT

b. FIT

2. NRANETB

a. GIT

b. FIT

Q: What kind of income tax applies to DC?

A: Only four (4) kinds will apply out of the

six (6)

1. NIT

2. FIT

3. MCIT

4. Improperly Accumulated Earnings

Q: May all of these be applied

simultaneously?

A: No. only the NIT, FIT and Improperly

Accumulated Earnings be applied

simultaneously. NIT and MCIT cannot be

applied simultaneously. Only one will apply,

whichever is higher between the two.

Q: What kind of tax will apply to NRFC?


20

A: Out of the six (6) kinds, only two (2) will

apply:

1. GIT

2. FIT

Q: What is the significance of knowing the

classification of these taxpayers?

A:

1. to determine the kind of income tax

applicable to them;

2. to determine their tax liability.

Q: Under Section 23, who are liable for

income within and income without?

A: Only

1. RC

2. DC

► The rest of the taxpayers will be liable for

income coming from sources within.

► Income from sources without, no liability,

therefore exempt.

NOTE: The income taxpayer is not a RC or a

DC. Determine if the income came from

sources within or without to know the

taxpayer’s liability.

► If the facts are specific, do not qualify

your answer. Answers must be responsive to

the question.

Q: Is section 42 relevant to all the taxpayers?

A: NO. SECTION 42 IS NOT MATERIAL TO

ALL taxpayers, particularly the RC and DC

because these two are liable for both income

within and without.

► Section 42 is applicable only to taxpayers

who are liable for income within, the rest of

the taxpayers are otherwise exempt.

Q: Section 42(A)(1) provides for how many

kinds of interests?

A: It establishes two (2) kinds of interests,

namely:

1. interest derived from sources within

the Philippines.

2. interest on bonds, notes or other

interest bearing obligations of

residents, corporate or otherwise.

Q: What is the determining factor in order to

know if the income is from within?

A:

1. location if the bank is from within the

Philippines (pursuant to a Revenue

Reg.)

2. residence of the obligor (whether an

individual or a corp.) – contract of

loan with respect to the interest

earned thereon.

► For example the borrower is a NRAETB,

he borrowed money from a RA. The interest

earned by the loan will be considered as an

income without. RA is not liable to pay tax

since RA is liable only for income within,

therefore exempt from paying the tax.

NATIONAL DEVELOPMENT CO. v. CIR

F: The National Development Company

(NDC) entered into a contract with several

Japanese shipbuilding companies for the

construction of 12 ocean-going vessels.

The contract was made and executed in

Tokyo.

The payments were initially in cash

and irrevocable letters of credit.

Subsequently, four promissory notes were

signed by NDC guaranteed by the

Government.

Later on, since no tax was withheld

from the interest on the amount due, the

BIR was collecting the amount from NDC.

The NDC contended that the income

was not derived from sources within the

Philippines, and thus they are not liable

to withhold anything. NDC said that since

the contract was entered into and was

executed in Japan, it is an income

without.

H: The government’s right to levy and

collect income tax on interest received by

a foreign corporation not engaged in

trade or business within the Philippines is

not planted upon the condition that the

activity or labor and the sale from which

the income flowed had its situs in the

Philippines. Nothing in the law (Section

42(1)) speaks of the act or activity of

nonresident corporations in the

Philippines, or place where the contract is

signed. The residence of the obligor who

pays the interest rather than the physical


21

location of the securities, bonds or notes

or the place of payment is the

determining factor of the source of the

income. Accordingly, if the obligor is a

resident of the Philippines, the interest

paid by him can have no other source

than within the Philippines.

Q: Suppose a NRFC, an Indonesian firm,

becomes a stockholder of two corporations, a

DC and a RFC, and both corporations

declared dividends, what is the liability of the

Indonesian firm if the same received the

dividends?

A:

1. Dividends received from DC: the

Indonesian firm is liable to pay taxes.

NRFC, under the law, is liable if the

income is derived from sources

within. (Sec 42a)

2. Dividends received from RFC: the

Indonesian firm’s liability will depend

on amount of gross income from

sources within the Philippines.

The NRFC will be liable to pay income tax if

the following requisites are present:

1. at least 50% is income from sources

within;

2. the 1st requisite is for the three (3)

preceding taxable years from the time

of declaration of the dividends.

► In the absence of any or both

requisites, the income will be considered

from sources without, thus exempting the

Indonesian firm from payment of income tax.

Q: Same scenario, but this time the shares of

stock of the two corporations were being

disposed off. What is the tax liability of the

Indonesian firm?

A:

1. sale of shares of stock of DC: the

Indonesian firm will be liable for the

payment of taxes because the income

is from sources within.

2. sale of shares of stock of RFC: the

liability will depend on where the

shares of stock were sold. (mejo

Malabo sa notes, please be guided

accordingly)

Q: Filipino Executive, assigned to Hong

Kong, receiving two salaries, one from the

Philippines, the other from HK. The

performance of the job was in HK. Is he liable

for both salaries?

A: No, he is not liable for the two incomes.

His status is an OCW (note facts: working in

HK under contract). The compensation he

received is not subject to tax pursuant to

Section 42(c). Compensation for labor or

personal services performed in the

Philippines is considered an income within.

When it comes to services, it is the place

where the same is rendered which is

controlling. In the case at bar, the services

were rendered abroad, thus it is an income

derived from sources without, irrespective of

the place of payment.

Q: Suppose a DC hired a NRFC to advertise

its products abroad. What is the liability of

the NRFC? Will there be a withholding tax

imposed?

A: The income is derived from sources

without since the services in this case were

performed abroad. As such, the NRFC is not

liable and therefore exempt from the

payment of tax. If the NRFC is not subject to

NIT, then it is not also subject to withholding

tax.

Q: What is the controlling factor?

A: The controlling factor is the place where

the services were performed and not where

the compensation therefore was received.

RENTALS AND ROYALTIES

►income from sources within

Q: Granted by who?

A: NRFC

Q: Suppose you are the franchise holder, how

much is the withholding?

A: 35% (GIT)

Q: if the franchise is granted by RFC, how

much is the withholding?

A: 10% (NIT) and in some cases 15%

Section 42(4) MEMORIZE FOR RECIT

(CEKSTTM)

a. right of, or the right to use

copyright, patents, etc


22

b. industrial, commercial,

scientific equipment

c. supply of knowledge

d. supply of services by

nonresident

e. supply of technical assistance

f. supply of technical advice

g. right to use: motion picture

films, etc.

Q: What is the rule as regards the sale of real

property?

A: Gains, profits, and income from the sale

of real property located within the Philippines

considered income within.

Q: What about the sale of personal property,

what is the rule?

A: Determine first if the property is

produced or merely purchased.

1. it the property is manufactured in the

Philippines and sold abroad, or vice-

versa, it is an income partly within

and partly without.

2. if the property is purchased,

considered derived entirely from the

sources within the country where it is

sold.

EXCEPTION: shares of stock of domestic

corporation, it is an income within wherever

it is sold.

COMMISSIONER v. IAC

Q: What is the issue here?

A: They cannot determine if the business

expense was incurred in the Philippines.

Q: if you are the BIR, and the taxpayer is not

sure, will you disallow the deduction?

A: No. determine it pro rata.

Formula: GI from within

GI from without

Example: 100,000

1,000,000

= 10%

► Hence, 10% is the ratable share in the

deduction. If the deduction being asked is

100,000 not all of it will be allowed. Only

10,000 or 10% of 100,000 will be allowed

as deduction.

CAPITAL GAINS AND LOSSES

Section 39

Q: What is capital asset?

A: Capital asset is an asset held by a

taxpayer which is not an ordinary asset.

The following are ordinary assets:

1. stock in trade of the taxpayer or other

property of a kind which would

properly be included in the inventory

of the taxpayer if on hand at the close

of the taxable year;

2. property held by the taxpayer

primarily for sale to customers in the

ordinary course of trade or business;

3. property used in trade or business of

a character which is subject to the

allowance for depreciation provided in

subsection 1.

4. real property used in trade or

business of the taxpayer.

All other property not mentioned in the

foregoing are considered capital assets.

Q: What is a capital gain? What is a capital

loss?

A: Capital gains are gains incurred or

received from transactions involving property

which are capital assets. Capital losses are

losses incurred from transactions involving

capital assets.

Q: What is ordinary gain? Ordinary loss?

A: Ordinary gains are those received from

transactions involving ordinary assets.

Capital losses are losses incurred in

transactions involving ordinary assets.

Q: What is the relevance of making a

distinction?

A: It is relevant because Section 39B,C, and

D apply to capital assets only.

1. time when property was held (39B)

(holding period applies only to

individuals);

2. limitations on capital losses (39C);

3. Net Capital Carry-Over (39D)

I. CAPITAL ASSETS

Q: What is the holding period?


23

A: If capital asset is sold or exchanged by an

individual taxpayer, only a certain percentage

of the gain is subject to income tax.

It is the length of time or the duration of

the period by which the taxpayer held the

asset.

Q: What is the requirement?

A:

1. the taxpayer must be an individual.

Section 39B states “in case of a

taxpayer, other than a corporation..”

2. property is capital in nature.

Q: What is the term?

A: 100% if the capital asset has been held

for not more than 12 months; (short term)

50% if the capital asset has been held for

more than 12 months. (long term)

NOTE: the holding period applies to both

gains and losses.

Q: Do you include capital gains in your ITR?

A: General rule: yes, include in ITR.

EXCEPT:

1. gains in sales of shares of stock not

traded in stock exchange(section 24);

2. capital gains from sale of real

property(section 24).

Q: When will the holding period not apply?

A:

1. property is an ordinary asset

2. taxpayer is a corporation

3. sale of real property considered as

ordinary asset

II. LIMITATION ON CAPITAL LOSSES

►synonymous to 34D & loss capital rule

► this applies to individual and corporate

taxpayer

Q: What is the loss limitation rule?

A: Pursuant to Section 39 C, losses from

sales or exchange of capital assets may be

deducted only from capital gains, but losses

from the sale or exchange of ordinary assets

may be deducted from capital or ordinary

gains. (applies to individual and corporation)

Q: In connection with 34 D, Losses in

Allowable Deduction, what is the rationale

behind this rule?

A: If it is otherwise, it will run counter with

the rule that the loss should always be

connected with the trade or business, capital

losses are losses not connected to the trade

or business, thus it is not deductible

Q: what is your remedy?

A: 39 D, net capital loss carry-over

Q: What is the rationale in allowing ordinary

loss to be deducted from either the

capital gains or ordinary gains?

A: It is already included in ITR, the gross

income less deductions hence it already

carries with it the deduction

TAKE NOTE: Normally if the loss is an

ordinary loss there is no carry over.

Except: a. 34D3

b. if the loss is more than GI

III. NET CAPITAL LOSS CARRY-OVER

Q: What are the requirements?

A:

1. taxpayer is an individual;

2. paid in the immediately succeeding

year;

3. applies only to short term capital

gain;

4. capital loss should not exceed net

income in the year that it was

incurred.

Q: How does net capital loss carry-over differ

from net operating loss carry-over under

Section 34 D (3)?

A: Under the net capital loss carry-over rule,

the capital loss can be carried over in the

immediate succeeding year. In net operating

loss carry-over rule, capital loss can be

carried over to the next three (3) succeeding

calendar year following the year when the

loss was incurred.

NOTE: only 15% of the loss will be carried

over, if the loss is greater than the gains.

► In net operating loss carry-over there is

an exception to the 3 year carry-over period.

In case of mines other than oil and gas wells,

the period is up to 5 years.

Q: What is a short sale?


24

A: Sale of property by which the taxpayer

cannot come into the possession of the

property. EX: shares

CALAZANS v. CIR

F: The taxpayer inherited the property

fro her father and at the tie of the

inheritance it was considered a capital

asset. In order to liquidate the

inheritance, the taxpayer decided to

develop the land to facilitate the sale of

the lots.

I: Was the property converted to

ordinary asset?

H: The conversion from capital asset to

ordinary asset is allowed because Section

39 is silent.

Q: Are you allowed to convert ordinary asset

to capital asset?

A: General rule: it is not allowed. Read

Revenue Regulation 7-2003

The case at bar still applies despite of the

issuance of said Revenue Regulation.

Q: What is the conversion prohibited in the

Revenue Regulation?

A: Conversion of real estate property.

Q: What is the rationale?

A: Section 24 D – final income tax of 6% if

the real estate is capital asset. If it is an

ordinary asset, it will be subject to income

tax of 32% for individual taxpayer, and 35% if

the taxpayer is a corporation.

Q: What are the properties involve in the RR

7-2003?

A: 1. those property for sale by the realtors

2. real property use in trade or business

not necessary realtors

Q: That is the conversion allowed by the

Revenue Regulation? Is there an instance

when an ordinary asset may be converted to

capital asset?

A: Yes, provided that the property is an

asset other the real property, and it has been

idle for two (2) years.

SECTION 24

TAX ON INDIVIDUALS

Q: What is the tax mentioned in section 24?

A: NIT

Q: What is taxable income?

A: (memorize section 31) it is the pertinent

items of gross income specified in the NIRC,

less the deductions and/or personal and

additional exemptions, if any, authorized for

such types of income by the NIRC or other

laws. It refers to NIT because it allows

deductions.

Q: What do you mean by the phrase “other

than B, C, and D”?

A: It means that if the elements of passive

income are present, the taxpayer has to pay

FIT.

Q: Who are the taxpayers mentioned in

section 24?

A:

1. RC

2. NRC

3. OCW

4. RA

► Additionally, under Section 25, NRAETB

Q: What is the tax liability of NRAETB?

A: Section 25(1) NRAETB is subject to

income tax in the same manner as those

individuals mentioned in Section 24.

Q: What about Domestic Corporations?

A:

1. Sec. 27 A,B, and C

2. Sec. 26- GPP is not subject to income

tax.

Q: What about Resident Foreign

Corporations?

A: Sec 28(l) it is subject to 35% Net Income

Tax

Q: What about Non Resident foreign

Corporation and Non Resident Alien not

engaged in Trade or Business?

A: Not Subject to Net Income Tax but they

are liable for Gross Income tax.

Q: Do legally married husband and wife need

to file separately or jointly?

A: It depends if:

1. Pure compensation income- separate

2. Not Pure compensation income- joint


25

Passive Income

Interest, Royalties, prizes and Other winnings

Interest

Q: Bank Interest, what is the requirement?

A: The bank must be located in the Phils.

because the income must be derived from

sources w/in.

Q: Do you include this in your ITR?

A: No! because it is subject already to FIT.

The bank is the one liable for the payment of

this.

NOTE: Liability for NIT, GIT, and MCIT will

depend on the elements present.

Q: Who are liable for bank interest?

A:

1. RC }

2. NRC} Sec. 24 B1

3. RA }

4. NRAETB

5. NRANETB Sec. 25 (25%)

6. AEMOP

7. DC

8. RFC

9. NRFC

Q: What is the rate of interest?

A: FIT of 20%

Q: Is there a lower rate?

A: 7 ½ % if under EFCDS

Q: What if the depositor is non resident

alien?

A:

-W/in – FIT

- W/out- exempt

Q: What is the rule on pre- termination?

A: If it is pre terminated before 5th

year a FIT

shall be imposed on the entire income and

shall be deducted and withheld by the

depositary bank from the proceeds of the

long term deposit based on the remaining

maturity thereof

a. 4 yrs to less than 5 yrs – 5%

b. 3 yrs to less than 4 yrs- 12%

c. Less than 3 yrs- 20%

Q: Does it apply to all individuals?

A: No! It does not apply to 10 NRFC and NRA

and NRAETB because they are liable to GIT.

NOTE: if the depositary is a Non resident it is

exempt

► Resident citizen is liable to pay tax for

bank interest earned abroad (NIT)

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