TAXATION

REVIEW NOTE

PART 1

GENERAL PRINCIPLES OF TAXATIONCHAPTER 1

Concepts, Classifications, and Distinctions

Taxation DefinedTaxation is the act of levying a tax. It is the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government.

As a power it refers to the inherent power of the State to demand enforced contributions for public purpose or purposes.

It is the inherent power of a State to collect enforced proportional contribution to support the expenses of government.

Basic Purposes of Taxation1. The primary purpose of taxation on the part of the government is to

provide funds or property with which to promote the general welfare and protections of its citizens and to enable it to finance its multifarious activities.

Almost all revenues of the government are derived from taxes raised through taxation.

2. Taxation may also be employed for purposes of regulation or control.

Taxes DefinedTaxes 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 the government and all public needs.

Taxes are enforced proportionate contributions, which the State collects in exercising its inherent power from persons, property or interest to defray the expenses of the government.

Essential elements of tax1. It is an enforced contribution.2. It is generally payable in money.3. It is proportionate in character.4. It is levied on persons, property, or the exercise of a right or

privilege.

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5. It is levied by the State which has jurisdiction over subject or object of taxation.

6. It is levied by the law-making body of the State; and7. It is levied for public purpose or purposes.

It is also important characteristic of a tax that it is commonly required to be paid at regular periods or intervals.

Basis of Taxation

Lifeblood Doctrine (Bar 1991)Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need. The collection of taxes must be made without hindrance if the state is to maintain its orderly existence.

Theories of Taxation

1. Necessity Theory.

The power of taxation proceeds upon the theory that the existence of government is a necessity; that it cannot continue without means to pay its expenses; and that for this means it has a right to compel all its citizens and property within its limits to contribute.

2. Benefits-Protection Theory

The basis of taxation is found in the reciprocal duties of protection and support between the State and its inhabitants. In return for his contribution, the taxpayer receives benefits and protection from the government. This is so-called “benefits received principle”.

Benefits Received Principle (Doctrine of Symbiotic Relationship) – the one is compensation for the other: protection for support and support for protection. This does not mean, however, that only those who are able to and do pay taxes can enjoy the privileges and protection given to a citizen by the government.

Question:May a person legally refuse to pay a tax on ground that he will derive no personal benefit from the tax?

Answer:No, in return for the tax, the government promises or renders no definite specific commodity or benefit to any particular property or person. The only benefit to which the taxpayer is entitled is that derived from his enjoyment of the privileges of living in an organized society established and safeguarded by the devotion of taxes to public purposes.

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Nature or Characteristics of the State’s power to tax (Bar 1996)1. It is inherent in sovereignty – it may be exercised although not

expressly granted by the Constitution;2. It is legislative in character – only the legislature can impose taxes

(although the power may be delegated); and3. It is subjected to constitutional and inherent limitations – it is not an

absolute power than can be exercised by the legislature anyway it pleases.

Nature of the Power of Taxation (96 Bar 1(b) (5%)1. Inherent power of a sovereign state2. Legislative in nature3. Civil and not political in character4. Tax laws are not penal in nature

(97 Bar)Question:Assuming that the new Constitution drafted by the delegates and ratified by the people failed to provide for the enactment of law imposing taxes, may the legislative body created by the same Constitution enact tax laws? Explain your answer.

Answer:Yes, the legislative body may enact tax laws.

Taxation is an inherent power of a sovereign state and can be exercised whether or not the Constitution provides for it. Absence of any Constitutional limitations, the taxing power becomes unlimited provided revenues raised therein are for a public purpose.

Scope of Legislative Power to Tax or extent of the Taxing Power (Bar 2000)

The power of taxation reaches to every trade or occupation; to every object of industry, use, enjoyment; to every species of possession, and it imposes a burden which in case of failure to discharge the same may be followed by seizure, confiscation or forfeiture of the property.

Taxation is said to be:1. Comprehensive2. Unlimited3. Plenary4. Supreme

Comprehensive – it covers persons, businesses, activities, professions, rights and privileges.

Unlimited - the power to impose taxes is one so unlimited in force and so searching in extent that the courts scarcely venture to declare that it is subject to any

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restrictions whatever, except such as rest in the discretion of the authority which exercises it.

Plenary as it is complete – Under the NIRC, the BIR may avail of certain remedies to ensure the collection of taxes.

Supreme - Although referred to as the strongest of all the powers of the government, cannot be interpreted to mean that it is superior to the other inherent powers of the government, only that it is supreme insofar as the selection of the subject of taxation is concerned.

Discretion as to PURPOSEThe sole arbiter of the purpose for which taxes shall be levied is the legislature, provided the purposes are public.

The courts may review the levy of the tax to determine whether the purpose is a public one but once that is determined, the courts can make no other inquiry as to the purpose of the tax, as it affects the power to impose it.

Discretion as to SUBJECT OF TAXATIONThe legislature has unlimited scope as to the persons, property or occupation to be taxed, where there are no constitutional restrictions, provided the property is within the territorial jurisdiction of the taxing state.

It is inherent in the power to tax that a state be free to select the subject of taxation, and it has been repeatedly held that “inequality(ies) which result from singling out of one particular class from taxation or exemption infringe no constitutional limitation.

Discretion as to AMOUNT OF TAXThe legislature has the right to finally determine the amount or rate of tax, in the absence of constitutional prohibition.

Not only that it is unlimited, it acknowledges no limits and may be carried even to the extent of exhaustion and destruction, thus becoming in its exercise a power to destroy.

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Scope

Discretion as to Purpose

Discretion as to subject of taxation

Discretion to amount or rate

of tax

Discretion to manner, means and agency of

collection

Power to Tax the Power to Destroy (Bar 1983)The power to tax is the strongest of all the powers of government. It is inherent power to tax vested in the legislature includes the power to determine who to tax, what to tax and how much tax is to be imposed.

The power to tax includes the power to destroy if it is used validly as an implement of the police power in discouraging and in effect, ultimately prohibiting certain things or enterprises inimical to the public welfare.

The power to tax is a power to destroy if it is used to regulate even to the extent of prohibition or destruction.

The power to tax is not the power to destroy while the Supreme Court sitsThe power to tax should be exercised with due care and circumspection, considering not only the presumption of validity but also the relatively modest rank of a city court in the judicial hierarchy.

If so great an abuse is manifested as to destroy natural and fundamental rights which no free government could consistently violate, it is the duty of the judiciary to hold such an act unconstitutional.

Discretion as to MANNER, MEANS and AGENCIES OF COLLECTION OF TAXES

Process, aspect, phases of Taxation

1. Levying or imposition of the tax which is a legislative in character;2. Collection of the tax levied which is essentially administrative in

character.

The first is taxation, strictly speaking, while the second may be referred to as tax administration. The two processes together constitute the taxation system.

Purposes of Taxation

1. Primary purpose (General, fiscal or revenue)

To raise revenue for government expenditures. For the support of the government and for all public needs.

2. Secondary purpose (Special or regulatory)(Bar 1991)

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Levy or Imposition

Assessment and Collection

Payment

Enactment of tax laws

This is administrative in character and can be

delegated

Act of compliance by the taxpayer

To achieve some social or economic ends irrespective of whether revenue is actually raised or not.

Taxation also seeks to [PIER](a) Protect our local industries against unfair competition;(b) Implement the police power of the state (regulatory);(c) Encourage the growth of local industries;(d) Reduce social inequality.

Reduce social inequalityOur present tax system has adopted the progressive system of taxation. In progressive system of taxation, the tax rate increases as the tax base increases. This system aims at reducing the inequality in the distribution of wealth by preventing its undue concentration in the hands of a few individuals.

Encourage the Growth of Local IndustriesIt is a settled rule that the power to tax carries with it the power to grant tax exemptions. Tax exemptions and tax reliefs serve as incentives to encourage investment in our local industry and thereby promote economic growth.

Protect our local industries against unfair competitionThe Tariff and Customs Code allows the imposition of certain taxes (countervailing and dumping duties) upon imported goods or articles to further protect our local industry. RA 8752 (Anti-Dumping Act) imposes stricter conditions.

As an implement of the Police Power of the State (Regulatory Measure)The power of taxation may be used as an implement of the police power of the State through the imposition of taxes with the end in view of regulating a particular activity.

Lutz vs. AranetaAs a protection and promotion of the sugar industry is a matter of public concern, the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion.

Principles of a Sound Tax System (Bar 1973) [FAT]1. Fiscal adequacy2. Administrative Feasibility 3. Theoritical Justice or Equality

Fiscal Adequacy – it means that the sources of revenue should be sufficient to meet the demands of public expenditures.

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Administrative Feasibility – it means that tax laws should be capable of convenient, just and effective administration. Tax laws must be capable of effective and efficient enforcement. They must not obstruct business growth and economic development.

Theoritical Justice or Equality – it means that the tax burden should be proportionate to the taxpayer’s ability to pay. This is the so-called “ability to pay principle”.

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Taxation Distinguished From Other Inherent Powers and Impositions

Taxation distinguished from Police Power

Taxation Police PowerAs to PURPOSE

Is levied for the purpose of raising revenue.

Is exercised to promote public welfare through regulation.

As to AMOUNT OF EXACTION

The amount gathered in the exercise of taxation contemplates of no limits.

The exaction is limited to the cost of regulation, issuance, of the license, or surveillance.

As to the BENEFITS RECEIVED BY THE TAXPAYER

No special or direct benefit is received by the taxpayer other than the fact that the government secures the citizen that general benefit resulting from the protection of his person and property and the welfare of all.

No direct benefits are received through the exercise of Police Power, yet a healthy economic standard of society is maintained.

As to SUPERIORITY OF CONTRACTS

Recognizes the obligations imposed by contracts.

This limitation does not apply to Police Power.

As to TRANSFER OF PROPERTY RIGHTS

The taxes paid form part of the public funds.

Allows merely the restraint on the exercise of property rights.

Taxation distinguished from Eminent Domain

Taxation Eminent DomainAs to PURPOSE

Is levied for the purpose of raising revenue.

Is taking of property for public use.

As to COMPENSATION

Payment of taxes accrue to the general benefit of the citizens of the taxing state.

Just compensation is given the owner of the expropriated property.

As to the PERSONS AFFECTE

Applies to all persons, property and exercises that may be subject

Only particular property is comprehended.

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D thereto.

Limitations on the Taxing Power

Classes of Limitations in Taxing Power1. Inherent Limitations on the Power to Tax2. Constitutional Limitations on the Power to Tax

Inherent Limitations on the Power to TaxThese limitations proceed from the very nature of the taxing power itself.

These are: [N. PITT)1. Non-delegation of the power to tax2. Public purpose3. International comity4. Tax exemptions granted government agencies or instrumentalities.5. Territoriality

Non-delegation of the power to taxThe power to tax is exclusively vested in the legislative body.

Exceptions:1. Article VI, Sec. 28(2) of the constitution (Flexible Tariff Clause) [Bar

2000 Q.18]2. Article X, Sec. 5 of the constitution (Local/Municipal Taxation)

Board of Assessment Appeals of Laguna vs. Court of Tax Appeals

8 SCRA 224

In the absence of constitutional provision, the power to tax may be delegated to local government units in accordance with the well-settled doctrine that the power to create local government units by implication confers upon it the power to tax. So even if no constitutional provision exists, local government units still possess the power to tax.

Public purposeA revenue measure must stand the first requisite of a lawful taxation – that the purpose for which it is laid be a public purpose.

The legislature is bereft of power to appropriate revenues for anyting other than a public purpose.

It is the public purpose determines the public character of the law, not the number of persons benefit. As long as the ultimate results favors the welfare of the public in general, the appropriation of a public revenue is deemed done for a public purpose.

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International comity

Art. II, Sec. 2 1987 ConstitutionThe Philippines adopts the generally accepted principles of international law as part of the law of the land, and adheres to the policy of peace, equality, justice, freedom, cooperation, and amity with all nations.

Thus, if a law is passed imposing taxes on the income of foreign ambassadors or imposing real property taxes upon foreign embassies, this is not a valid law because the imposition is in violation of the universal principles of international law. Under international laws, foreign embassies are considered extensions of the territoriality of the foreign states; to impose taxes upon them would be tantamount to an exercise of jurisdiction over these foreign states.

TerritorialitySince laws ceases to operate beyond a country’s jurisdictional limits, the taxing power of a country is limited to person and property within and subject to its jurisdiction. This same rule applies to the taxing power of a territory.

Exemption from Taxation of Government Agencies/Instrumentalities

General Rule: Agencies performing governmental functions are tax-exempt unless expressly taxed.

Agencies performing proprietary functions are subject to tax unless expressly exempted.

Certain corporations have been granted exemption under Sec. 27(c) of RA 8424:

1) GSIS; 2) SSS; 3) PHIC; 4) PCSO; and 5) PAGCOR.

Constitutional Limitations on the Power to Tax1. Due process of law;2. Equal protection of laws;3. Uniformity;4. Progressive system of taxation;5. Non-impairment of contracts;6. non-imprisonment for non-payment of poll tax;7. appropriation, revenue and tariff bills must originate exclusively in the

House of Representatives;8. Presidential veto;9. Presidential power to fix tariff rates;10. Freedom of the press;11. Freedom of religion;12. Exemption from property tax of properties of religious, educational,

charitable institutions;13. Tax exemptions granted to non-stock, non profit educational,

charitable institutions;

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14. No public money or property used for a particular sec, priest, religious minister, etc;

15. Grant of tax exemptions;16. Grant of power of taxation to local government units;17. Money collected for a special purpose shall be considered a special

fund;18. Exclusive appellate jurisdiction of the Supreme court over judgments

of lower courts involving the legality of taxes, imports, assessment, fees, penalty.

1. Due Process of Law

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

Due process mandates that no person shall be deprived of life, liberty, or property without due process. The implication is that one may be deprived as long as the requirement of due process – notice and hearing – have been complied with.

Due process is usually violated where the tax imposed is for a private purpose as distinguished from a public purpose; a tax is imposed on property outside the State, i.e, extra-territorial taxation; and arbitrary or oppressive methods are used in assessing and collecting taxes. But, a tax does not violate the due process clause, as applied to a particular taxpayer, although the purpose of the tax will result in injury rather than a benefit to such taxpayer.

The following situations are illustrative of violations of the due process clause:

(a) If the tax amounts to a confiscation of property;(b) If the subject of confiscation is outside the jurisdiction of the

taxing authority;(c) If the law is imposed for a purpose other than a public purpose;(d) If the law which is applied retroactively imposes unjust and

oppressive taxes;(e) Where the law is in violation of inherent limitations.

2. Equal Protection Clause

Equal protection does not require equal rates of taxation on different classes of property, nor prohibit unequal taxation so long as the inequality is not based upon arbitrary classification.

Legislation which, in carrying out a public purpose, is limited in its application, does not violate the provisions if, within the sphere of its operation, it affects alike all persons similarly situated. It does not prohibit special legislation or legislation that is limited either in the

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objects to which it is directed, or by the territory within which it is to operate.

It merely requires that all persons subjected to such legislation shall be treated alike, under like circumstances and conditions, both in the privileges conferred and in the liabilities imposed.

The power to select the subjects of taxation and apportion the public burden among them includes the power to make classifications. The inequalities which result from the singling out of one particular class for taxation or exemption infringe no constitutional limitation. (Lutz vs. Araneta, G.R. L-7859, Dec. 22, 1955, 98 Phil. 148)

However, for classification to be valid, the following requisites must concur:(a) it must be based on substantial distinction;(b) it must apply both to present and future conditions;(c) it must be germane to the purpose of the law;(d) it must apply equally to all members of the same class.

3. Uniformity of Taxation (1998 Bar Question No. 1)

Art. VI, Sec. 28[1] of the ConstitutionThe rule of taxation shall be uniform and equitable.

Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. It does not mean that lands, chattels, securities, occupations, franchises, privileges, necessities and luxuries shall all be taxed or assessed at the same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class every where, with all the people and at all times.

A tax is uniform when it operates with the same form and effect in every place where the subject of it is found.

Double TaxationDouble Taxation is the imposition of two (2) or more taxes upon the same person, the same property or subject matter, for the same purpose, by the same State, Government, or taxing authority, within the same jurisdiction or taxing district, during the same taxing period and same king or character of tax.

1997 Bar 1(a)Question:Is double taxation a valid defense against the legality of a tax?

Answer:

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No, double taxation is not a valid defense against the legality of a tax. There is no constitutional prohibition double taxation. A tax enactment cannot be illegal simply because it results to double taxation.

1997 Bar. 1(c)Question:What are the various methods of avoiding the occurrence of double taxation?

Answer:There are two methods of relief:1. The exemption method

Income or capital taxable in the state of source or situs but exempted in the sate of residence; and

2. The credit methodWhile the income or capital is taxed in both the state of source and in the state of residence, the tax paid in the former is credited against the tax levied in the latter.

1996 Bar 2(a) (5%); 1980 Bar 3,9(Villanueva vs. City of Iloilo, 26 SCRA 578)

Question:X, a lessor of a property, pays real estate tax on the premises, a real estate dealer’s tax based on rental receipts and income tax on the rentals. X claims that this is double taxation. Decide.

Answer:1. There is no double taxation. The three (3) types of

taxes have different purposes/nature and are imposed by different taxing authorities.

2. Real estate tax is imposed on the property itself by the

Local Governments.

3. Real Estate Dealer’s Tax is imposed on the dealer’s privilege to engage in the buy and sell of real property.

4. The Income Tax on the Rental Income is imposed on the businessman’s privilege to earn income and is under the National Government’s BIR.

1997 Bar 1(b)BIR Ruling No. 018-96, Feb. 20, 1996

Question:

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When an item of income is taxed in the Philippines and the same income is taxed in another country, is there a case of double taxation?

Answer:No, there is no double taxation. The foreign government has the right to withhold taxes, in the exercise of its inherent and sovereign right to tax. There are two (2) separate taxing authorities involved.

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4. Progressive Taxation

Art. VI, Sec. 28[1] of the ConstitutionCongress shall evolve a progressive system of taxation.

Taxation is said to be equitable when its burden falls on those better able to pay; taxation is progressive when its rate goes up depending on the resources of the person affected.

The Constitution does not really prohibit the imposition of regressive taxes. What is simply provides is that Congress shall evolve a progressive system of taxation.

Kinds of Taxation System1. Progressive Taxation2. Regressive Taxation

Progressive System of Taxation favors the imposition of more direct taxes versus indirect taxes.

Regressive System of Taxation is characterized by more indirect taxes being imposed.

Direct and Indirect Taxes (2001 Bar Question 2(b) (2%)Direct Taxes are those that are demanded from the very person, who, it is intended or desired, should pay them.

Indirect Taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the burden to some else.

1997 Bar 5(a) (2.5%)Question:Discuss the meaning of the Global and Schedular Systems of Taxation?

Answer:1. Global or Uniform Tax Rate refers to tax structure where

only one (1) tax rate is applied across the tax base.2. Schedular or Progressive Tax Rates refer to the

imposition of graduated rates of taxes in scalar range or a layered set of tax bases.

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1997 Bar 5(b) (2.5%)Question:To which system would you say the method of taxation under the National Internal Revenue Code belongs:

Answer:1. The National Internal Revenue Code uses both the

Global and the Schedular Systems of Taxation. The Corporate Income Tax Rate and the 10% VAT Rate as examples of Global rates of taxes.

2. The Income Tax Table for individual Taxpayers is an

example of the Schedular rates of taxes. Income taxes on individuals are progressive tax rates because the rates increase as the scale of income increases.

5. Non-impairment Clause

Art. III, Sec. 10 of the ConstitutionNo law shall be passed impairing the obligations of contracts.

When the state has stipulated by contract to give exemption from taxation, or has commuted the uncertain taxes for a definite and fixed sum or sums, and afterwards undertakes to tax, in the same manner as it taxes other subjects, the persons, corporations or property which were the subject of the exemption or commutation, the obligation of the contract is impaired.

The constitutional prohibition against the impairment of the obligation of contracts only applies, however, where it is claimed that the obligation of a contract is impaired by a law of the state – a statute or constitutional provision of the state. It does not apply to mere decisions of courts construing a contract.

1997 Bar (3)Question:Is a tax exemption revocable?

Answer:(Qualified Answer)

1. If the grant of an exemption does not constitute a contract, but merely “a spontaneous concession by the legislative, not connected with any service or duty imposedIt is revocable by the power which made the grant. A state may, at its pleasure, withdraw an exemption which is a mere gratuity possessing no element of a contract,

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even though the corporation may have incurred expense on the faith thereof.

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2. If the tax exemption constitutes a binding contract and for valuable considerationThe government cannot unilaterally revoke the tax exemption.

When the government enters into a contract, it descends to the level of an ordinary individual. It cannot invoke state immunity.

6. Non-imprisonment for non-payment of poll tax

Art. III, Sec. 20 of the ConstitutionNo person shall be imprisoned for non-payment of a debt or poll tax.

While a person may not be imprisoned for non-payment of a cedula or poll tax, he may be imprisoned for non-payment of other kinds of taxes where the law so expressly provides.

7. Bills to Originate from the House of Representatives

Art. III, Sec. 24 of the ConstitutionAll appropriation, revenue or tariff bills, bills authorizing the increase of the public debt, bills of local application and private bills, shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.

1997 Bar (2)Tolentino vs. Secretary of Finance, et a.

GR. No. 115455, August 25, 1994, 235 SCRA 630

Question:Petitioners assail the constitutionality of Republic Act. No. 7716 imposing a value added tax (VAT). The contention of petitioners is that in enacting RA 7716 congress violated the Constitution because, although H. No. 11197 had originated in the House of Representatives, it was not passed by the Senate but was simply consolidated with the Senate version (S. No. 1630) in the Conference Committee to produce the bill which the President signed into law. Decide.

Answer:This argument will not bear analysis. What the constitution simply means is that the initiative for filing revenue, tariff, or tax bills, bills authorizing an increase of the public debt, private bills and bills of local application must come from the House of Representatives on the

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theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are elected at large, are expected to approach the same problems from the national perspective. Both views are thereby made to bear on the enactment of such laws.

Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the House, so long as action by the Senate as a body is withheld pending receipt of the House Bill.

8. Veto Power of the President

Art. VI, Sec. 27[2] of the ConstitutionThe 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.

The item or items vetoed shall be returned to the Lower House of Congress together with the objections of the President. If after a reconsideration 2/3 of all the members of such House shall agree to pass the bill, it shall be sent, together with the objection, to the other House by which it shall likewise be reconsidered, and if approved by 2/3 of all the Members of that House, it shall become a law.

9. President’s Power to Tax

Art. VIII, Sec. 28[2] of the ConstitutionThe 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 imports within the framework of the national development program of the government.

2000 Bar (18)Question:What is flexible tariff clause?

Answer:The term refers to the authority given to the President to adjust tariff rates under Section 401 of the Tariff and Custom Code, which is the enabling law that made effective the delegation of the taxing power to the President under the Constitution.

10. Taxation and the Freedom of the Press

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Art. III, Sec. 4 of the ConstitutionNo law shall be passed abridging the freedom of speech, of expression, or of the press x x x

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11. Taxation and the Freedom of the Religion

Art. III, Sec. 5 of the ConstitutionNo 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 forever be allowed. No religious test shall be required for the exercise of civil or political rights.

12. Tax Exemption of Properties Actually, Directly and Exclusively Used for Religious, Charitable and Education Purposes

Art. IV, Sec. 28 [3] of the ConstitutionCharitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation.

Exclusive but not Absolute UseThe term “exclusively used” does not necessarily mean total or absolute use for religious, charitable and educational purposes. Even if the property is incidentally used for said purposes, the tax exemption will apply.

Corollary, if a property, although actually owned by a religious, charitable and educational institution is used for a non-exempt purposes, the exemption from tax shall not attach.

1996 Bar No. 8Herrera vs. Quezon City Board of Assessment Appeals

3 SCRA 186

Question:The Constitution exempts from taxation charitable institutions, churches, parsonages or convents appurtenant thereto, mosques and non-profit cemeteries and lands, exclusively used for religious, charitable and educational purposes. Mercy Hospital is a 100-bed hospital organized for charity patients.

Can said hospital claim exemption from taxation under the above-quoted constitutional provision? Explain.

Answer:

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Yes, being a charitable institution, Mercy Hospital can claim tax exemption under the Constitution but only with respect to real property taxes provided that such real properties are used actually direct and exclusively for charitable purposes.

The exemption in favor of property used exclusively for charitable or educational purposes is ‘not limited to property actually indispensable’ therefore, but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes, such as in the case of hospitals, ‘a school for training nurses, a nurses’ home, property use to provide housing facilities for interns, resident doctors, superintendents, and other members of the hospital staff, and recreational facilities for student nurses, interns, and residents’, such as ‘Athletic fields’ including ‘ a firm used for the inmates of the institution.

13. Tax Exemption granted to non-stock non-profit educational institution (2000 Bar (9))

Art. XIV, Sec. 4 of the ConstitutionAll 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. Upon the dissolution and cessation of the corporation existence of such institutions, their assets shall be disposed of in the manner provided by law.

Subjects 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.

14. Appropriation of Public Money

Art. VI, Sec. 29 [1] of the ConstitutionNo public money or property shall be appropriated, applied, paid or employed directly or indirectly for the use, benefit or 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 such priest, preacher, minister or dignitary is assigned to the armed forces or to any penal institution or government orphanage or leprosarium.

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1996 Bar 4(a)Gonzales vs. Marcos, GR L-31685, July 31, 1975

Tan vs. Macapagal, GR L-34161, February 29, 1972

Question:When may a taxpayer’s suit be allowed?

Answer:1. A taxpayer’s suit may be allowed when the issue

involves the unlawful disbursement of public funds raised through taxation.

2. When the issue involves “the disbursement of public funds by an officer of the State for administering an unconstitutional act, constitutes a misapplication of such funds,” such disbursement “may be enjoined at the request of a taxpayer.

15. Grant of Tax Exemptions

Art. VI, Sec. 28 [4] of the ConstitutionNo law granting any tax exemption shall be passed without the concurrence of a majority of all the members of Congress.

Note that in granting any tax exemptions, an absolute majority vote of the Members of Congress is required, while in cases of withdrawal of such tax exemption, a relative majority vote is sufficient.

Tax amnesties, tax condonations, and tax refunds are in the nature of tax exemptions. Such being the case, a law granting tax amnesties, tax condonations, and tax refunds requires the vote of an absolute majority of the Members of Congress.

2001 Bar 2(a)Question:Distinguish tax exemption and tax amnesty

Answer:

Tax Amnesty is an immunity from all criminal and civil obligations arising from non-payment of taxes. It is a general pardon given to all taxpayers. It applies only to past tax periods, hence of retroactive application.

Tax Exemption is an immunity from civil liability only. It is an immunity or privilege, a freedom from a charge or burden of which others are subjected. It is generally prospective in application.

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1996 Bar 3 (5%)Asiatic Petroleum Co. vs. Llanes

49 Phil 466, 471-472, (1926)

Question:Why are tax exemptions strictly construed against the taxpayer?

Answer:A grant of tax exemption is looked upon with disfavor. The right of taxation will not surrendered unless the intention to surrender is too plain to be mistaken for the state cannot strip itself of the most essential power of taxation by doubtful words.

So, when exemption is claimed, it must be shown indubitably to exist, for every presumption is against it, and a well-founded doubt is fatal to the claim.

Revocation of Tax Exemption

1997 Bar 3 (5%)Meralco vs. Vera, GR L-23847, October 22, 1975

Question:X Corporation was the recipient in 1990 of two tax exemptions both from Congress, one law exempting the company’s bond issue from taxes and the other exempting the company from taxes in the operation of its public utilities. The two laws extending the tax exemptions were revoked by Congress before their expiry dates.

Were the revocation constitution?

Answer:The revocation were constitutional provided the corporate beneficiaries did not have to perform a reciprocal duty in order to avail of the exemptions. The congressional power to grant an exemption carries with it the consequent power to revoke the same.

16. Municipal Taxation

Art. X, Sec. 5 of the ConstitutionEach 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.

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17. Special Fund

Art. VI, Sec. 29(3) of the ConstitutionAll money collected on 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.

18. Supreme Court’s Jurisdiction over Tax Cases

Art. VIII, Sec. 2 of the ConstitutionThe 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 section 5 hereof.

Art. VIII, Sec. 5 of the ConstitutionThe Supreme Court shall have the following powers:Review, revise, reverse, modify or affirm on appeal or certiorari as the law or the Rules of Court may provide, final judgments or orders of lowers courts in(b) all cases involving the legality of any tax, impost, assessment or toll, or any penalty imposed in relation thereto.

SITUS OF TAXATIONSitus of taxation literally means place of taxation.

The basic rule is that the state where the subject to be taxed has a situs may rightfully levy and collect taxes; and the situs is necessarily in the state which has jurisdiction or which exercises dominion over the subject in question.

Rules observed in fixing tax situs1. Poll/Capitation/Community Tax2. Property tax3. Excise tax

i. Income taxii. Donor’s taxiii. Estate taxiv. VAT

Poll/Capitation/Community TaxAre based upon the residence of the taxpayer, regardless of the source of income or location of the property of the taxpayer.

Property taxa) Real property tax

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Real estate is subject to taxation in the state or country where it is located, regardless of whether the owner is a resident or a non-resident.

b) Personal property

The situs of personal property, wherever it was actually kept or located, was held to be at the domicile of its owner, following the age-old doctrine of “mobilia sequuntur personam” (movables follow the person. [1994 Bar Q2)

(Business Situs Doctrine) [1996 Bar Q6)

Sec. 104, RA 8424 enumerates certain properties which have acquired actual situs in the Philippines:(a) Franchise exercised in the Philippines;(b) Shares of stock, obligations, bonds issued by

domestic corporations organized and constituted in accordance with Philippine laws;

(c) Shares, obligations, bonds issued by a foreign corporation where 85% of its business is located in the Philippines. It is subject to donor’s tax and estate tax.

(d) Shares, obligations, bonds issued by foreign corporation which has acquired business situs which such have been used in the furtherance of business of the foreign corporation;

(e) Shares or rights in a partnership business or industry established in the Philippines.

c) Excise tax Excise taxes are taxes imposed on the exercise of a right or privilege.

1) Income tax (Place, Nationality, Residence) [PNR]

Place All are taxed upon sources of income derived from within the Philippines:

(a) Non-Resident Alien;(b) Non-Resident Foreign Corporation(c) Non-Resident Citizen

Nationality Taxed upon sources of income derived within and without the Philippines:

(a) Resident Citizen(b) Domestic Corporation

Residence Taxed upon income derived from sources within the Philippines:

(a) Resident Alien(b) Resident Foreign Corporation

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2) Donor’s tax (Place, Nationality, Residence) [PNR]

Place Tax upon properties situated within the Philippines:

(a) Non-Resident Alien; Nationality

Taxed upon properties wherever situated:(a) Resident Citizen(b) Non-Resident Citizen

Residence Taxed upon properties wherever situated:

(a) Resident Alien

3) Estate tax (Place, Nationality, Residence) [PNR]

Place Tax upon properties situated within the Philippines:

(a) Non-Resident Alien; Nationality

Taxed upon properties wherever situated:(a) Resident Citizen(b) Non-Resident Citizen

Residence Taxed upon properties wherever situated:

(a) Resident Alien

4) Value Added TaxIts tax situs is the place where the transaction is made. If the transaction is made (perfected and consummated) outside of the Philippines, we can no longer tax such a transaction.

Kinds of Taxes Differentiated

1. Direct and Indirect (2001 Bar 2)

Direct Tax is a tax for which a taxpayer is directly liable on the transaction or business it engages.

Indirect Tax is a tax primarily paid by persons who can shift the burden upon someone else.

2. Specific and Ad valorem

Specific Tax is imposed and based on weight or volume capacity or any other physical unit of measurement.

Ad valorem is based on selling price or other specified value of the goods.

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3. General and Special

General Tax is imposed solely to raise revenue for the government.

Special Tax is imposed and collected to achieve a particular legitimate object of government.

4. National and Local

National Tax is imposed by the national government.

Local Tax is levied and collected by the local government.

5. Personal and Property

Personal Tax is of fixed amount imposed on individuals, whether citizens or not, residing within a specified territory, without regard to their property or occupation.

Property Tax is imposed on property, real or personal, in proportion to its value.

6. Progressive and Regressive

7. Debt and Tax

Tax – Cannot be compensated and be set-off.Debt – there is compensation and set-off.

Tax Evasion and Tax Avoidance Distinguished

1996 Bar 3(a); 1989 Bar 4(b)

Question:Distinguish tax evasion from tax avoidance.

Answer:

Tax Evasion is the use of fraudulent or forbidden schemes or devices to lessen or defeat the taxpayer’s tax obligation.

Tax Avoidance is the legal method of reducing or altogether avoiding the tax liability by finding and availing of valid and legitimate shortfalls in the law.

1998 Bar 20Question:Is assessment necessary before a taxpayer may be prosecuted for willfully attempting, in any manner, to evade or defeat any tax imposed by the Internal Revenue Code?

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Answer:No, an assessment is not necessary before a criminal charge can be filed.

Section 205 of the Tax Code clearly mandates that the civil and criminal aspects of the case may be pursued simultaneously. A criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code. The crime is complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat a part of all of the tax.

Doctrine of Imprescriptibility1997 Bar 4; 2001 Bar 3(a)

Question:Taxes were generally imprescriptible; statutes, however, may provide otherwise. State the rules that have been adopted on this score by –a) The National Internal Revenue Code;b) The Tariff and Customs Code;c) The Local Government Code.

Answer:The rules that have been adopted are as follows:a) National Internal Revenue Code

The statute of limitation for assessment of tax if a return is filed is within three (3) years from the last day prescribed by law for the filing of the return or if filed after the last day, within three years from date of actual filing. If no return is filed or the return filed is false or fraudulent, the period to assess is within ten years from discovery of the omission, fraud or falsity.

The period to collect the tax is within three years from date of assessment. In the case, however, of omission to file or if the return filed is false or fraudulent, the period to collect is within ten years from discovery without need of an assessment.

Any internal revenue tax which has been assessed within the period of limitation may be collected by distraint or levy or by a proceeding in court within five (5) following the assessment of the tax.

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Assessment of Tax (AT)

Collection of Tax (CT)

b) Tariff and Customs Code

It does not express any general statute of limitation; it provided, however, that “when articles have entered and passed free of duty or final adjustment of duties made, with subsequent delivery, such entry and passage free of duty or settlement of duties will after the expiration of one (1) year, from the date of the final payment of duties, in the absence of fraud or protest, be final and conclusive upon all parties, unless the liquidation of import entry was merely tentative.

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AT

With a RETURN FILED

Without a RETURN FILED

3 years

(a) if filed before deadlineThe 3 year period is counted from the last day prescribed by law for filing of a return.

(b) If filed after deadlineFrom the date of actual filing

10 yearsFrom date of discovery of the omission, fraud or falsity

CT

With a RETURN FILED

Without a RETURN FILED

With assessment

Without need of assessment

3 years from date of assessment [Cash collection]

5 years from date of assessment [Levy, distraint or court action]

10 years from date of discovery

c) Local Government Code

Local taxes, fees, or charges shall be assessed within five (5) years from the date they become due. In case of fraud or intent to evade the payment of taxes, fees or charges the same may be assessed within ten (10) years from discovery of the fraud or intent to evade payment. They shall also be collected either by administrative or judicial action within five (5) years from date of assessment.

Assessment of Tax (AT)

Collection of Tax (CT)5 years from date of assessment either administrative or judicial action.

PART 2

INCOME TAXATIONGENERAL FORMULA OF INCOME TAXATION

Gross Income subject to tax PxxxxxxLess: Deductions xxxxxx

Taxable Income Pxxxxx ======

Kinds of Gross Income:1. Gross Income subject to tax (Inclusion from Gross Income)2. Gross Income not subject to tax (Exclusion from Gross Income)

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AT

No intent to/ Fraud, evade payment of tax, fees or charges

With intent/ Fraud, evade payment of tax, fees or charges

5 years from due date

10 years from due date

Requisites for income to be taxable1. There must be gain or profit2. The gain must be realized or received3. The gain must not be excluded by law or treatry from taxation.

Dintinction between income from capital

1995 Bar 1bVicente Madrigal, et al vs. James Rafferty

38 Phil. 414

Question:How does “income” differ from “capital”? Explain.

Answer:Income means any wealth, which flows into the taxpayer other than a return of capital. Income is the service of wealth.

Capital is the investment that brings about income. Capital is a fund or property existing at one distinct point of time. Capital is wealth.

Income DefinedIncome, in its broad sense, means all wealth which flows into the taxpayer other than as a mere return on capital.

Doctrine of Constructive Receipt of incomeThe doctrine is designed to prevent the taxpayer on the cash basis from deferring or postponing the actual receipt of taxable income. Without the rule, the taxpayer can conveniently select the year in which he will report his income.

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General Principles of Income Taxation

Subject of Taxation Basis of TaxationResident Citizen Income derived from sources

within and without the Philippines.

Non-resident Citizen and Overseas Contract Worker

Taxable only on income derived from sources within the Philippines.

Alien Individual, whether resident or not

Taxable only on income derived from sources within the Philippines.

Domestic Corporation Income derived from sources within and without the Philippines.

Foreign Corporation, whether engaged or not in trade or business in the Philippines

Taxable only on income derived from sources within the Philippines.

Concept of Gross Income

Taxable Income DefinedTaxable Income means the pertinent items of gross income specified in the Code less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the Code, or other special laws.

Gross Income Defined (1995 Bar 1a) [CGG-IRR-DAP-PP]Gross Income means all income derived from whatever source, including (but not limited to) the following items:(1) Compensation for services, in whatever form paid including fees,

salaries, wages, commissions, and similar items;(2) Gross income derived from the conduct of trade or business or the

exercise of a profession;(3) Gains derived from dealings in property;(4) Interests;(5) Rents;(6) Royalties;(7) Dividends;(8) Annuities;(9) Prizes and winnings;(10)Pensions; and(11)Partners’ distributive share from the net income of a general

professional partnership.

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1. Compensation Income

Rules on Inclusion of the Corresponding amount as income from compensation paid for services rendered

Mode of Payment Value of Income subject to taxCash Full amount received.

Paid other than money

Fair market value of the thing taken in payment.

At a stipulated price

Price shall be presumed to be the fair market value.

In stocks Fair value of the stock at the time he received it.

Living quarters furnished in addition to salary

The rental value of such quarters should be reported as income.

Bonuses representing additional payments for satisfactory services rendered

Reported as income. They are, however, not taxable as income if given in the nature of outright gifts. Then it will be subject to donor’s tax.

Gross Compensation Income (Revenue Regulation 2-1998)All renumeration for services performed by the employee for his employer under an employee-employer relationship unless explicitly excluded by the tax code.

Test of employee-employer relationship [AC-DC]3. Appointment4. Compensation5. Dismissal6. Control

Rules on Life Insurance Premium

Assumption or Situation

Tax implication on Employer

Tax incidence on Employee

1. The beneficiary is the estate, heir, family of the employee.

Can claim as deduction under Sec. 34 par. A sub. Par. 1

If employee is rank and filePart of gross income.

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If employee is supervisory or managerialSubject to fringe benefit tax

2. The employer is the beneficiary.

Cannot be claimed as deduction under Sec. 36 par. A sub. Par. 4

Not a taxable income

Tax implication – whether can be claimed as deduction from gross income.

Tax incidence – whether it is part or not of gross income.

1996 Bar 3(b) (2.5%)

Question:Assuming the shares of stocks were given to Mr. Y in consideration of his services to the corporation, what are the tax implications? Explain.

Answer:Mr. Y will be liable for income tax on the services he rendered using the fair market value of the shares received for valuation.

Convenience of the Employer RuleUnder this rule, allowances furnished to the employee for, and as a necessary incident to, the performance of his duties are not taxable. Thus, the value of meals and living quarters given a driver who is available any hour of the day when needed by his doctor-employer is not considered income of the said driver.

2001 Bar 6a (5%)Question:X was hired by Y to watch over Y’s fishponds with a salary of P10,000.00. To enable him to perform his duties well, he was also provided with a small hut, which he could use as his residence, in the middle of the fishponds. Is the fair market value of the use of the small hut by Z a “fringe benefit” that is subject to the 32% tax imposed by Section 33 of the National Internal Revenue Code? Explain your answer.

Answer:No, the fair market value of the use of the small hut is not subject to the 32% tax as a fringe benefit. The use of said hut is not taxable under the Employer Convenience Rule.

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X’s use of the hut is for the convenience of his employer and intrinsically for his personal benefit.

1996 Bar 6(a) (5%)Question:X is employed as a driver of a corporate lawyer and receives a monthly salary of P5,000.00 with free board and lodging with an equivalent value of P1,500.00. What will be the basis of X’s income tax? Why?

Answer:X’s income tax will be based on the sum of his Salary (P5,000.00) and the equivalent value of his free board and lodging (P1,500.00).

He does not benefit from the Employer Convenience Rule because his free board and lodging is not needed to provide any convenience at all in the exercise of his employer’s occupation as a Corporate Lawyer.

1996 Bar 6(b) (5%)Question:Will your answer in question be the same if X’s employer is an obstetrician? Why?

Answer:No, my answer will be different. X’s income tax will be based solely on his salary.

The equivalent amount of his free board and lodging will be tax exempt. He will benefit from the Employer Convenience Rule because the occupation of employer, an Obstetrician, makes its necessary for him to be available even beyond the normal working hours.

Rules on Unused Vacation Leaves converted to CashBIR Ruling No. 016-96, Feb. 20, 1996

Vacation Leave Credits, not exceeding ten (10) days per year, are not subject to income taxes.

However, any Monetized vacation leaves in excess of ten (10) days shall be subject to income taxes through the withholding tax mechanism.

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Rules on cancellation, forgiveness of indebtedness3 possible results of cancellation:1. It may amount to compensation income;2. It may give rise to taxable donation;3. It may constitute taxable capital transaction.

Situation Parties ConsiderationCreditor Debtor

1. Condonation was due to employer-employee relationship or for services rendered.

Employer can claim it as a deduction.

Employer-debtor should report this as part of his gross compensation income

Services rendered

2. The condonation was due to liberality of the creditor.

Payment in Dacion in Pago where value of property is much lesser than the liability.

This will be considered as Donation

Employer or other person as creditor is not considered as Donor and is not subject to Donor’s Tax.

The employer or other person is now considered as a donee.

Such amount/value cancelled is excluded from gross income under Sec. 32 par. G no. 3

No consideration.

Liberality of creditor.

3. The creditor is a corporation and the debtor is a stockholder.

The corporation cannot claim this as a deduction since it will be considered as distribution of dividends.

This will be treated as dividends on the part of the stockholder.

It will be subject to 10% final withholding tax.

Indirect dividend

distribution

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2. Income derived from the conduct of trade or business or the exercise of a profession

Gross Income means the total sales, less the cost of goods sold plus any income from investments and from incidental or outside operations or sources.

Formula for Gross Income derived from conduct of Trade or Business (Sec. 41)

Sales. . . . . . . . . . . . . . . . . . . . . . . . . .P xxxxxLess: Cost of Sales . . . . . . . . . . . . . . . . . . xxxxxGross profit . . . . . . . . . . . . . . . . . . . . . .P xxxxxAdd: Other income . . . . . . . . . . . . . . . . . . . xxxxxGross income . . . . . . . . . . . . . . . . . . . . . .P xxxxx

=======

In determining the gross income, subtractions are not allowed for depreciation, depletion, selling expenses or losses, or for items not ordinarily used in computing the cost of the goods sold.

Long-term contractsPersons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns upon either of the following:

(1) Percentage of completion basis (Sec. 44(a))(2) Completed contract basis (Sec. 44(b))

Percentage of completion basisGross income already earned though not yet received based on estimates of architects or engineers duly certified by them, is reported in a taxable year and all deductions relating to such gross income for the taxable year, even if not yet paid, are taken into account.

Completed contract basisThe taxpayer reports his income and deductions in the year the contract is finally completed, He accumulates all the expenditures during the years of construction and deducts them from the income of the contract in the year it is completed.

3. Gross income derived from dealings in property

It includes all income derived from the disposition of property, whether real, personal, or mixed, for money (sale) or for other property (exchange) or for a combination of both, which results in gain (or loss) because of the difference between the taxpayer’s investment in what he disposed of and the value in what he received.

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Computation of gain or loss:

Selling Price of the Property . . . . . . . . . . . P xxxxxxxLess: Basis (or adjusted basis) of the Property -- Book value . . . . . . . . . xxxxxxGain (loss from sale) . . . . . . . . . . . . . . . P xxxxxx

=========

Basis of the Property

Manner of Acquisition Basis1. By purchase Its costs Sec.40(B)(1)

Sec. 136 RR No.2

2. By inheritance FMV as of the date of acquisition. Sec. 40(B)(2)

3. By gift or donation Cost or FMV whichever is lower.

The same as in the hand of the donor or last preceding owner who acquired it not by gift, but if such basis is greater that the FMV of the property, then for the purpose of determining loss, the basis shall be such value. Sec. 40(B)(3)

4. Less than adequate consideration

Amount paid by the transferee for the property. (Cost)

5. In transaction where no gain or loss is not recognized.

Under Sec. 40(C)(2) the basis as defined in Sec. 40(C)(5),(B)(5)

6. Included in the inventory It latest inventory value.

Sec. 39-Capital Gains and Losses (Bar 2003, 2001, 2000)Capital assets shall include properties whether or not used in trade or business by the taxpayer excluding those properties considered by law as ordinary assets.

The following constitutes ordinary assets: [SOUR]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 primarily for sale to customers in the ordinary course of business;

3. Property used in the trade or business, of character which is subject to the allowance for depreciation as provided in Sec. 34(f);

4. Real property used in trade or business of the taxpayer.

39

40

Stock transaction/transaction where no gain or loss is recognized as provided by Sec. 40(C)1. Exchange of proper for shares of stock2. Involves an exchange of stock against stock3. Securities for shares of stock

4. Exchange of property for shares of stock not made in accordance with the plan of merger and consolidation provided that the transferor or transferors be not more than five (5) individuals and such transferor or transferors acquires majority ownership.

Note: Purchase of all or substantially all assets of another corporation is considered as merger and consolidation.

Rules on Recognition of Capital Gains and Losses

Classification Holding period Reportable Gain1. Short-term capital

assets. 12 months or less 100%

2. Long-term capital assets. More than 12 months 50%

Capital losses shall be deducted only to the extent of capital gains.

Ordinary losses are deductible from capital gains. Capital loss cannot be deducted from ordinary gain or income. “Net capital loss carry-over” [NELCO] is allowed. To be carried

over for 1 year.

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Made in accordance with the plan of merger and consolidation

Exchanges with cash consideration or transaction not solely in kind

Result toGAIN

Result toLOSS

TAXABLE Not Deductible

Rules on sale of shares of stock

Rule on Installment Sales (Sale of Real Property) [Sec. 49]

General rule:The whole profit accruing from the sale of property is taxable as income in the year the sale is made. [installment plan]

Exception: Initial payment:Exceed 25% of the SP The profit should be computed on

the deferred-payment basis not on installment plan. (Apply the rules on recognition of income on installment sales)

Within 25% of the CP, exclusive of the proceeds of discounted notes.

The sale qualifies as an installment sale, otherwise, it is a deferred sales.(Apply the general rule)

{Banas vs. CA, 325 SCRA 259)

Capital Gains Tax on sale of Real Property Classified as Capital AssetA final income tax of six percent (6%) based on the gross selling price or current fair market value, whichever is higher, is imposed upon capital gains presumed to have been realized from the sale (voluntary or involuntary), exchange, or other disposition of real property.

Requisites:1. The object sold is a real property;2. It is located in the Philippines;3. It is a capital asset; and4. The seller is either an individual, estate, trust or corporation

Exempt sale of real property to capital gains1. Sale to the government;

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Sale of shares

of stock

Trade thru PSE

Trade thru PSE

Subject to percentage tax of ½ of 1% of the Gross Selling Price (GSP)

Subject to FINAL TAX of the gain:Not more than P100,000– 5%In excess of P100,000 - 10%

2. Sale of the owner and the proceeds is used to acquire or construct a new principal residence.

Requisites of sale of real property which is exempt from 6% capital gains1. The seller is a resident citizen and a resident alien;2. The proceeds of the sale must be used either to construct or

acquisition of new principal residence.

Principal residence refers to dwelling and land to which the residence is created.

3. The holding period must not be more than 18 months or the sale must be made within 18 months.

4. A 30 day notice to CIR.5. Can be availed once every ten (10) years.

4. Gross income derived from interest

Note: Taxable interest income is subject to final withholding tax.

Interest income is only such interest as arises from indebtedness, that is, compensation for the loan or forbearance of money, goods, or credits.

Unless exempted by law, interest received by a taxpayer, whether or not usurious, is taxable.

5. Gross income derived from rents and royalties

Income from royalties is subject to final withholding tax.

Rents may be derived not only from real estate but also from the use of personal property. Like rents, royalties are payments for the use of

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Interest

Banks or corporate bonds

Subject to final tax of 20% (Excluded from gross income)

Government bonds Exempt

Other loans

Taxable (included in

gross income)

property. They include earnings from copyrights, trademarks, patents, and natural resources under lease.

Question:Suppose buildings are erected or improvements are made by a lessee in pursuance of an agreement with the lessor and such buildings or improvements are not subject to removal, how may the lessor report the income there from?

Answer:Upon either of the following methods:(1) He may report as income at the time when such

buildings or improvements are completed, the fair market value of such buildings or improvements subject to the lease; or

(2) He may spread over the life of the lease, the estimated depreciated value of such buildings or improvements at the termination of the lease and report as income for each year of the lease an aliquot part thereof.

Illustration:R leased his lot to E for a term of 10 years at an annual rental of P120,000. A building was erected by E on the lot with a cost of P5,000,000 and with an estimated life of 25 years. As per contract, the building will belong to R after the term of the lease.

Answer:

1. Under the first method (assuming the cost of construction is the same as the fair market value of the building), R should report his income as follows:

FMV of building in year Completed . . . . . . . . . . P5,000,000Add: Annual rental . . . . . . . 120,000Total income to be reported . . . P5,120,000

==========

2. Under the second method, the annual income of R will be computed thus:

Cost of building . . . . . . . ……… P5,000,000Less: Accumulated depreciation At the end of lease (5,000,000/25 x 10 years). 2,000,000Book value (depreciated value) At the end of lease (total income of R on building) . . . . . . . . P3,000,000

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==========

Annual income on building (3,000,000/10 years) . . . . P 300,000Plus: Annual rental . . . . . . 120,000

Total annual income . . . . . . P 420,000 ==========

6. Gross income derived from Dividends

Kind of Dividend

Taxability Rate

Cash dividend

Is taxable paid to shareholders or members.

Subject to Final Withholding Tax. 6%,8% and 10%, beginning 1998 upwards.

Property dividend

FMV of property received. Is taxable.

Same as cash dividend.

Stock dividend

Not taxable.

Scrip dividend

Taxable. Same as cash dividend.

Liquidating dividend

If not gain – not taxableIf there is gain – taxable Same as cash

dividend.

Rules on Cash Dividends and Stock Dividends

Recipient of Cash DividendsBasis Tax rate

Resident alien and Resident citizen

Sec. 24(B)(1)

10% Final Tax

Non-resident alien engaged in trade or business Sec. 25(B) 20% Final TaxNon-resident alien not engaged in trade or business Sec. 25(B) 25% Final TaxDomestic corporation Sec. 27(D) ExemptResident foreign corporation

Sec. 26(A) ExemptNon-resident foreign corporation Sec. 28(B)

(5)

With tax credit15% final tax

Without tax credit

32% Final taxDividends from foreign corporations

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a) Considered as source within If Philippine income is 50% or more of its total (global) income in the last three (3) years

b) Considered as source withoutIf Philippine income is less than 50% of global income

Sec. 42

Use the rules mentioned above.

Rate will depend on recipient.

Applies to:1. Resident

citizen – 10%Domestic corporation -0%

Stock dividends Sec. 73 Exempt

Special rules of stock dividend

General rule:Stock dividends are tax exempt because it is solely a transfer of surplus, unrestricted retained earnings to capital. There is no wealth flowing in to the taxpayer and therefore there is no profit.

Exception1. If it will result to a change in the stockholder’s interest in the net

asset of the corporation or increase his percentage of ownership.2. Stock dividends received by usufructuary.3. Dividend in stock of another corporation (Property dividends).4. Disguise dividend. (CIR vs. Manny, 66 SCRA 14)

Income subject to final tax [RP-WIDS]1. Royalties;2. Prizes more than P10,000

if less than 10,000 it is considered as ordinary income and reportable in the ITR

3. Winnings except lotto or PCSO winnings;4. Interest income from banks;5. Dividends received by

(a) Resident citizen and alien(b) Non-resident alien(c) Non-resident foreign corporation

6. Share of a partner from net income after tax of business or taxable partnership.

Meaning of “Income subject to final tax”They are items of taxable income where tax is collected at source. The tax collected represents the final settlement of the tax due. The taxpayer need not include the said income in the computation of his

46

gross income and no longer required to file a return on the said income.

The burden of paying and filing of the return is shifted to the withholding agent or agents.

Claim of Right DoctrineThe state or taxing authority can claim tax on income derived from illegal source.

Examples of Income Derived from Whatever Source

1. Gains arising from expropriation of property which constitute income from dealings in property;

2. Income derived from illegal sources, such as gambling, theft, embezzlement, and smuggling;

3. Compensation for damages if it represents payment for loss of expected profits (BIR Ruling, Sept. 8, 1954);

4. The amount of the debt, where the stockholder is indebted to a corporation and the latter forgives such debt, because the transaction has the effect of the payment of dividend;

5. Bad debts previously charged-off but afterwards recovered;6. Contest awards and prizes for commercial and non-commercial

contests; and7. Taxes paid and subsequently refunded.

Reason why bad debts and tax refund is taxableTax benefit rule.

Tax benefit rule – is a situation which gives the taxpayer a right or allows him to deduct an amount thereby reducing his taxable income in the preceding periods.

Exceptions to Sec. 40(c) as provided in Sec. 40(d) exchanges where no gain/no loss recognized

1. Exchanges where there cash involve or transaction not solely in kind:Realized gain . . . . . . . . . . Taxable incomeIncurred loss . . . . . . . . . . Not deductible

2. Illegal transaction:Realized gain . . . . . . . . . . Taxable incomeIncurred loss . . . . . . . . . . Not deductible

3. Transaction between related parties:Realized gain . . . . . . . . . . Taxable incomeIncurred loss . . . . . . . . . . Not deductible

4. Wash sales or 61 day sale5. Short sale

Related taxpayer (Sec. 36 par.b)1. Members of the same family;2. Between stockholders and the corporation;

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3. Between two or more corporations owned or controlled by the same stockholders;

4. Parties to a trust.

Wash sale (Sec. 38)

Subject Shares of stock, securities and stock optionSeller Not a dealer of securitiesPeriod 30 days before date of sale

There is a sale of identical or substantially identical stock, securities and stock option.

30 days after date of saleThere is a purchase of identical or substantially identical stock, securities and stock option.

Exclusions from Income

Exclusion as used in income taxation:Exclusion refers to income received or earned but is not taxable as income because exempted by law or by treaty. Such tax-free income is not to be included in the income tax return unless information regarding it is specifically called for.

Items expressly excluded from the computation of gross income and are excluded from income taxation.

[LAGCIRM](1) Life Insurance proceeds to heirs & beneficiaries(2) Amount received as a return of Premiums to the Insured(3) Gifts, Bequests & Devices (Subject to donor’s tax)(4) Compensation for Injuries or Sickness(5) Income exempt from Treaty(6) Retirement Benefits, Pensions & Gratuities(7) Miscellaneous items

(a) Income from Investment by Foreign Government(b) Income derived by the Government or its political subdivisions (c) Income from Public Utilities(d) Income from essential Government Function(e) Prizes and Awards for achievement in(f) Religious(g) Charitable(h) Scientific(i) Educational(j) Artistic(k) Literary(l) Civic activities(m) Prizes & Awards in Sports Competition(n) 13th Month Pay & Other Benefits

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(o) GSIS, SSS, Medicare & Labor Union dues of Individual Taxpayers(p) Gains from Sale of Bonds, Debentures or Certificates of

Indebtedness maturing in more than five (5) years(q) Gains from Redemption of Investment in Stocks or Mutual Funds

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Distinction between Exclusions and Deductions

Exclusions DeductionsAs to nature It is an inflow of

wealth but are not taxable because it is excluded or exempted by the constitution, treaty or statute.

It is an amount deducted from gross income.

As to use It pertains to computation of gross income.

It is necessary to determine the taxable income.

As to purpose It is something which does not form part of gross income.

It is something paid or spent in doing a trade or business or in the exercise of a profession.

1. Proceeds of Life Insurance to heirs & beneficiaries

The proceeds paid to beneficiaries upon the death of the insured, whether in a single sum or otherwise.

If the amount are held by the insurer under an agreement to pay interest thereon, the interest payment shall be included in gross income.

2. Return of Premiums to the Insured

The amount received by the insured, as a return of premium or premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract;

3. Gifts, bequests, and devises

The value of property acquired by gift, bequest, devise, or descent.

Income from such property as well as gift, etc. of income from any property, in cases of transfer of dividend interest, shall be included in gross income.

Rules on Donation

Kinds of Donation Implication(Donor)

Incidence(Donee)

1. Inter vivos Subject to Donor’s tax

Not subject to tax.

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Excluded from gross income.

2. Mortis cause Subject to estate tax

Not subject to tax.

Excluded from gross income.

4. Compensation for Injuries or Sickness

Amounts received, through accident or health insurance or under Workmen’s Compensation Act, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness;

1996 Bar 9(a) (5%)

Question:X, an employee of ABC Corporation, died. ABC Corporation gave X’s widow an amount to X’s salary for one year.

Is the amount considered taxable income to the widow? Why?

Answer:No, the one year salary given to the Widow on account of the employee’s death is not taxable income to her. Amounts received by the heir from the employer, as a consequence of her husband’s death, is not taxable.

5. Income exempt under Treaty

Income of any kind, to the extent required by any treaty obligation binding upon the government of the Philippines.

6. Retirement Benefits, Pensions & Gratuities

(b) Retirement benefits received under RA No. 7641 and those by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer, subject to certain conditions.

Bar Question

RSU retired from his employment in 1983 and was paid P100,000 as retirement gratuity without deduction of any tax. The corporation subsequently became insolvent. Can the BIR deduct from the P100,000 any tax?

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Answer:No. the BIR cannot deduct any amount from the P100,000 as tax because under Sec. 32(b) par. (f) states that retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer are excluded from income taxation provided that:(1) The retiring official or employee has been in service for

the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of retirement;

(2) The benefit granted by the official or employee is availed only once.

The mere fact that the corporation who paid the retirement pay becomes insolvent does not make it taxable.

BAR Question

Mr. Kirus worked as chief account in a hospital for 45 years. When he retired at 65, he received retirement pay equivalent to 2 months salary as provided in hospital’s BIR-approved retirement plan. The Board of Directors of the hospital felt that they should provide more in view of Mr. Kirus loyalty. Hence, he was given a gratuity of P1 million over and above his retirement benefit.

The BIR Commissioner taxed the P1 million as pay of Mr. Kirus’ income.a) He protested that it is a retirement benefit, was he

correct?b) Was Mr. Kirus correct in holding the P1 million as a gift,

therefore, not taxable?

Answer:a) No, he is not correct. The additional P1 million was

given as gratuity was not taken from the BIR-approved retirement benefit plan. The P1 million given out of the votation made by the Board of Directors of the hospital. His retirement pay had already been received by him. To be excluded from gross income, the retirement pay received must come from a retirement benefit plan by the company, approved of the BIR. Thus, the P1 million received is not excluded from gross income, hence, taxable.

b) The additional P1 million was given because the Board

of Directors voted for it in view of Mr. Kirus long and loyal service to the company. It would seem than the

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P1 million falls within the classification of a gift for his retirement pay had long been paid. Loyalty may be a consideration but it is not a valuable one, hence, the P1 million is a gift and is therefore excluded from gross income but subject to donor’s tax.

(c) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or physical disability or for any cause beyond the control of said official or employee;

(d) Social security benefits, retirement gratuities, pensions and other similar benefits received by resident or non-resident Filipino citizens or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public;

(e) Payments of benefits due to or to become due to any persons residing in the Philippines under the laws of the United States administered by the United Stated Administration;

(f) Benefits received from or enjoyed under the social security system in accordance with RA No. 8282;

(g) Benefits received from the GSIS under RA No. 8291 including the retirement gratuity received by government officials and employees.

1996 Bar 9(a) (5%)

Question:A, an employee of the Court of Appeals, retired upon reaching the compulsory age of 65 years. Upon compulsory retirement, A received the money value of his accumulated leave credits in the amount of P500,000.00.

Is the said amount subject to tax? Explain.

Answer:No, all the amounts received, on account of an employee’s separation from employment without his desire nor consent to do so, are not subject to income taxes. Subject employee is forced to retire at his compulsory age.

7. Income from Investment by Foreign Government

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Income derived from investment in the Philippines in loans, stocks, bonds, or other domestic securities, or from interest on deposits in banks in the Philippines by:

1) Foreign governments;2) Financing institutions owned, controlled, or enjoying

refinancing from foreign governments, and3) International or regional financing institutions established

by foreign governments.

8. Income derived by Government or its political subdivisions9. Income from Public Utilities10. Income from essential Government Function

Income derived from any public utility or from the exercise of any essential governmental function accruing to the government of the Philippines or to any political subdivision thereof (e.g., income received by a municipality from the operation of a market or an electric power plant).

11. Prizes and Awards for Achievement in (a) Religious; (b) charitable; (c) scientific; (d) educational; (e) artistic; (f) literary; (g) civic activities.

Prizes and awards made primarily in recognition of:[SCRA-LEC]

1. Scientific;2. Charitable3. Religious;4. Artistic;5. Literary;6. Educational; and7. Civic achievement but only if:

Requisites:1. The recipient was selected without any action on his part

to enter the contest or proceeding; and2. The recipient is not required to render substantive future

services as a condition to receiving the prizes or award;

12. Prizes and Awards in Sports Competition

Prizes and awards granted to athletes in local and international sports competitions and tournaments.

13. 13 th month pay and other benefits

Gross benefits received by officials and employees of public and private entities, provided, that the total exclusion shall not exceed P30,000.

1997 Bar 9 (5%)

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Question:During the year, a domestic corporation derived the following items of revenue: (a) gross receipts from a trading business; (b) interest from money placements in the banks; (c) dividends from it stock investments in domestic corporations; (d) gains from stock transactions through the Philippine Stock Exchange; (e) proceeds under an insurance policy on the loss of goods.

In preparing the corporate income tax return, what should be the tax treatment on each of the above items?

Answer:1. Gross receipts from a trading business: Taxable.2. Interest from money placements in the banks: Excluded

since interests are subject to a final withholding tax at source.

3. Dividends from its stock investments in domestic corporations: excluded since dividends are subject a final withholding tax at source.

4. Gains from stock transactions through the Philippine Stock Exchange; Excluded since capital gains are subject to a final withholding tax at source.

5. Proceeds under an insurance policy on the loss of goods: Excluded because these proceeds are exclusions under the law.

Special Treatment of Fringe Benefits

Fringe Benefit DefinedFringe Benefit means any good, service, or other benefit furnished or granted in cash or in kind by an employer (individual, professional partnership, or corporation), whether taxable or not, or the government and its instrumentalities to an individual employee (except rank-and-file employees) such as but not limited to, the following:

(1) Housing;(2) Expense account;(3) Vehicle of any kind;(4) Household personnel, such as maid, driver and others;(5) Interest on loan at less than market rate to the extent of the

difference between the market rate and actual rate granted;(6) Membership fees, dues and other expenses borne by the employer for

the employee in social and athletic clubs or other similar organizations;

(7) Expense for foreign travel;(8) Holiday and vacation expense;(9) Educational assistance to the employee or his dependents and(10)Life or health insurance and other non-life insurance premiums or

similar amounts in excess of what the law allows.

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Fringe benefits not subject to income tax(1) Fringe benefits which are authorized and exempted from tax under

special laws;(2) Contributions of the employer for the benefit of the employee to

retirement, insurance and hospitalization benefit plan;(3) Benefits given to the rank-and-file employees, whether granted under

a collective bargaining agreement or not;(4) De minimis benefits which, in general, are limited to facilities or

privileges furnished or offered by the employer that are relatively of small value and merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees such as rice subsidy, laundry allowance, and medical cash allowance; benefits, uniforms, and major anniversary celebrations for employees and their guests.

(5) Benefits required by the nature of or necessary to the trade, business or profession, or for the convenience or advantage of the employers.

De minimis benefits not subject to income tax as well as withholding1. Monetized unused vacation and sick leave of government employee;2. Monetized unused vacation of private employees not exceeding 10 days;3. Medical cash allowance to dependents of employees not exceeding

P750.00 per semester or P125 per month;4. Rice subsidy of P1,000.00;5. Actual medical benefits not exceeding P300.00 per month;6. Laundry allowance not exceeding P300.00 per month;7. Uniform and clothing allowance not exceeding P3,000.00;8. Employees achievement awards with annual monetary value not

exceeding P10,000.00;9. Gift given during Christmas and major anniversary celebrations not

exceeding P3,000.00 per employee per annum;10. Flowers, fruits, books or similar items given to employees under special

circumstances;11. Daily meal allowance for overtime work not exceeding 25% of the basic

minimum wages.

Treatment of Fringe benefitsA final tax of 32%, effective January 1, 2000, is imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee by the employer.

Deductions from Gross Income

Deduction DefinedDeductions are items or amounts which the law allows to be deducted under certain conditions from gross income in order to arrive at taxable income.

Distinction between deductions and personal exemptions

Deductions Personal ExemptionAs to Are of the nature of Partake of the nature of

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nature business expenses family living and personal expenses

As to purpose

To recoup the cost of doing business.

To recover the family living and personal expenses paid during the taxable year

As to amount

Refer to actual amount paid or incurred in the conduct of business

In the nature of arbitrary amount which may not be enough to cover the family living and personal expenses.

As to claimant

Can be claimed by individual and corporate taxpayer except:12. Non-resident alien

not engage in trade or business;

13. Non-resident foreign corporation.

Can only availed by individual taxpayer except by non-resident alien not engage in trade or business.

As to kind Classified into two:1. Itemized

deductions;2. Optional standard

deduction of 10% of gross income.

Classified into two:1. Basic personal;2. Additional.

Requisites for Deductions(1) The taxpayer seeking a deduction must point to some specific

provisions of the statute authorizing the deduction; and(2) He must be able to prove that he is entitled to the deduction

authorized or allowed.(Atlas Consolidated Mining and Development Corp. vs. Comm., 102 SCRA 246, Jan. 27, 1981)

Basilan Estates, Inc. vs. Commissioner21 SCRA 17, Sept. 5, 1967

Question:May deductions be created by implication?

Answer:Deductions have generally been deemed to be a matter of legislative grace. They are allowed only where there is a clear provision in the statute for the deduction claimed; and where particular deductions are authorized by the statute, no other may be made.

The taxpayer has the burden of justifying the allowance of any deduction claimed by him.

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Kinds of Deductions from Gross Income(1) Deductions from compensation income(2) Deductions from business and/ or professional income(3) Deductions from corporate income(4) Special deductions

1. Deductions from compensation income

They refer to:(2) personal exemptions;(3) additional exemptions Sec. 35) and (4) premium payments on health and/ or hospitalization insurance

which are allowed to be allowed to be deducted by an individual taxpayer who receives income for personnel services rendered under an employer-employee relationship.

2. Deductions from business and/ or professional income

They refer to:(1)itemized deductions enumerated in Section 34 (A to M) of the Tax

Code(2)including those deductible from compensation income, which self-

employed individuals and or professional engaged in the practice of a profession may deduct.

Note: In lieu of itemized deductions (above), an individual subject to income tax who is engaged in trade or business or in the exercise of a profession, other than a non-resident alien individual, may elect the 10% optional standard deduction (Sec. 34(L)).

3. Deductions from corporate income

They refer to the itemized deductions enumerated in Sec. 34 (A to J) of the Tax Code which corporations (including partnerships other than general professional partnerships) engaged in trade or business are authorized to claim and they are:(1) Ordinary and necessary expenses;(2) Interests paid on indebtedness;(3) Taxes;(4) Losses;(5) Bad Debts;(6) Depreciation;(7) Depletion;(8) Charitable and other contributions;(9) Research and development;(10)Payment to employees’ pension trust; and(11)Special deductions

Special deductions – they refer to the deductions allowed in addition to the itemized deductions allowable to corporations above which may be

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availed of by insurance companies and proprietary educational institutions and hospitals which are non-profit.

1. Ordinary and Necessary Expenses

Requisites in order that an expense may be deductible1. The expense must be ordinary and necessary2. It must be paid or incurred during the taxable year3. It must be paid or incurred in carrying on any trade or business or

profession;4. It must be reasonable in amount;5. It must be substantiated by sufficient evidence such as official receipts

and other official records; and6. It must not be against law, morals, public policy or public order.

Meaning of “ordinary”Ordinary means when it is commonly incurred in the trade or business of the taxpayer as distinguished from capital expenditures.

Meaning of “necessary”Necessary – if it is appropriate and helpful to the taxpayer’s business or if it is intended to realize profit or to minimize a loss.

Determinative test for ordinary and necessary expenses [DOM]1. Development of business, trade or practice of profession;2. Operations;3. Management.

Kinds of Ordinary and Necessary Deductions [SOTERAS]1. Salaries;2. Ordinary repairs;3. Traveling;4. Entertainment;5. Rentals;6. Advertising;7. Supplies and materials.

1993 Bar 1

Question:X is the manager of Mang Douglas Hamburger Inc. X had dinner with Y, owner of a chain of restaurants to convince the latter to carry Mang Douglas hamburgers. After Y agreed both went their separate ways. X celebrated by going to a single’s bar. He picked up a partner and consumed a bottle of beer. He drove home at 3:00 a.m.. On his way home, he sideswiped a pedestrian, who died as a result of the accident. X amicably settled the case by paying the heir of the pedestrian. The money, however, came from Mang Douglas Hamburger Inc.

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Discuss whether the reward, given to the heir, can be claimed by Mang Douglas Hamburger Inc. as an expense deductible in its income tax return.

Answer:The reward given to the heir cannot be an expense deductible for Mang Douglas Hamburger Inc. The damage, which X caused upon the pedestrian, is not an ordinary, necessary and normal expense in the conduct of the hamburger business. X was no longer performing his regular task when he inflicted the damage.

Requisites for deductibility of compensation payments4. The payments are reasonable; and5. They are, in fact, payments for personal services actually rendered

2. Interest paid for indebtedness

Requisites for deductibility of interest [CIS]1. Connection with the taxpayer’s trade, business, or profession;2. Incurred or paid within the taxable year; and3. Stipulated in writing.

Comm. Vs. PrietoL-13912, Sept. 30, 1960

Question:Is interest for tax delinquency deductible?

Answer:Yes, an interest expense (but not as tax). Although taxes are not considered debts, they constitute indebtedness (in favor of the government) for purposes of deduction from gross income of the interest paid. The tax being considered an indebtedness, it is immaterial whether the same is deductible or not.

Theoretical InterestTheoretical interest is one merely computed or calculated and is not paid. It does not arise from interest bearing note.

It is not deductible since:1. It does not rise from the interest bearing note;2. It is not paid during the year.

Interest on capital is not deductible. It is being charge to surplus of a corporation.

Rule on interest relative to purchase of PPE

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It may be treated as:1. Part of cost of an asset and proportionately be deducted or charged

as depreciation over its useful or economic life; or2. Charged it as interest.

Rule on loans used to purchase government securitiesInterest on loans used to purchase government securities is not deductible since interest income from government securities is not taxable under the new tax code.

3. Taxes

Taxes deductible from gross incomeAs a general rule, all taxes, national or local, pad or incurred within the taxable year in connection with the taxpayer’s trade, business or profession are deductible from gross income.

Taxes not deductible from gross income [PISTE]1. Philippine income tax;2. Income taxes imposed by the authority of any foreign country, but

deduction is allowed (only) in the case of a taxpayer who is entitled to tax credit for taxes of foreign countries but does not avail of the same;

3. Estate and donor’s taxes;4. Special assessments or levies (which are not really taxes) assessed

against local benefits of a kind tending to increase the value of the property assessed; and

5. Taxes which are not connected with the trade, business or profession of the taxpayer.

Tax Credit DefinedTax Credit refers to the taxpayer right to deduct from the income tax due the amount of tax he/it has paid to a foreign country subject to limitations.

Bar

Question:Given the distinctions between tax deductions and tax credit.

Answer:(1) Tax deductions are deducted from gross income in

computing the net income, while tax credit are deducted from Philippine income tax itself; and

(2) Tax deductions, all taxes, as a general rule, are allowed deductions with the exceptions of the five kinds of taxes expressly or impliedly excluded, while the latter,

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only foreign income taxes may be claimed as credits against Philippine income tax.

Who are allowed to claim a tax credit1. Residents citizens2. Domestic corporations, including business partnerships;3. Members of general professional partnerships; and4. Beneficiaries of estates and trusts.

Who are not entitled to claim tax credit1. Non-resident citizens;2. Alien individuals, whether resident or non-resident; and3. Foreign corporations, whether resident or non-resident.

4. Losses

Requisites for deductibility of a loss1. The loss must be incurred in trade, business, or profession of the

taxpayer;2. It must be actually sustained (and charged off) within the taxable year;3. It must be evidenced by a closed and completed transaction;4. It must not be compensated for by insurance or other forms of indemnity;

and5. The taxpayer has filed a sworn declaration of loss; within 45 days after

the date of discovery of the casualty or robbery, theft, or embezzlement.

What losses may a taxpayer deduct from gross incomeThe taxpayer may deduct all losses actually sustained and charged off within the taxable year and not compensated for by insurance or other forms of indemnity, as follows:

1. Those incurred in trade, business, or profession in the Philippines; and2. Casualty losses of property connected with trade, business, or

profession in the Philippines.

Losses which are not allowed by law to be deducted from gross income1. Loss on voluntary removal of building on land purchased with a view to

erecting another building.2. Wagering losses not covered by wagering gains;3. Capital losses not covered by capital gains;4. Losses from exchanges of property in corporate readjustments;5. Losses (generally) from wash sales of stock and securities;6. Losses from illegal transactions;7. Losses from sales or exchanges of property between related

taxpayers; and8. Losses not incurred in trade, business, or profession.

Net Operating Loss Carried Over (NOLCO)The net operating loss of a taxable year not deducted from Gross Income, which can be carried over as a deduction from Gross Income for next three (3) consecutive years following the loss.

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Limitations(1) Net loss incurred in a year during which the taxpayer was tax exempt

cannot be claimed as a tax deduction.(2) Net operating loss carried over shall be allowed only if there is no

substantial change in the ownership of the business.

5. Bad Debts

Bad debts definedBad debts are debts due to the taxpayer which are actually ascertained to be worthless and charged off within the taxable year.

Requisites for the deductibility of bad debts [WNC-VC]1. Worthless and uncollectible during the taxable year 2. Not sustained in a transaction entered into between related taxpayers

under Sec. 36(b) of the Tax Code.3. Charged off during the taxable year; and4. Valid and subsisting debt;5. Connected with the trade, business, or profession of the taxpayer.

6. Depreciation (1998 Bar 6(a))

Depreciation DefinedDepreciation is the gradual diminution in the useful value of tangible property used in trade, business, or profession resulting from exhaustion, wear and tear, and obsolescence.

The term is also applied to amortization of the value of intangible assets, the use of which in trade or business is definitely limited in duration.

Requisites that must concur for the deduction of depreciation 1. The allowance for depreciation must be reasonable;2. It must be for property used in the trade, business, or profession;3. It must be charged off during the taxable year; and4. A statement on the allowance must be attached to the return.

7. Depletion

What is depletionDepletion is the exhaustion of natural resources like mines and oil and gas wells as a result of production or severance from such mines or wells.

8. Charitable and other Contributions

Classification of Charitable Contributions

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1. Ordinary – those which are subject to limitation as to the amount deductible from gross income; and

2. Special – those which are deductible in full from gross income.

Requisites for charitable contribution 1. The contribution must actually be paid or made to the Philippine

government or any political subdivision thereof or to any of the domestic corporations or associations specified by the Tax Code;

2. It must be made within the taxable year;3. It must not exceed:

Individuals – 10% Corporation – 5% Of the taxpayer’s taxable income (except where the donation is deductible in full) to be determined without the benefit of the contribution

4. It must be evidenced by adequate records or receipts.

Types of contributions or gifts that are deductible 1. To or for the use of the government of the Philippines, or any of its

agencies or any political subdivisions thereof exclusively for public purposes (full deduction)

2. To accredited domestic corporations or associations organized and operated exclusively for:

(a) Religious;(b) Charitable;(c) Scientific;(d) Youth and sports development;(e) Cultural; or(f) Educational purposes; or for the(g) Rehabilitation of veterans

3. To social welfare institutions or to non-government organizations in accordance with the rules and regulations promulgated by the Sec. Of Finance upon recommendation of the CIR, provided no part of the net income of which inures to the benefit of any private stockholder or individual.

9. Research and development

Nature of Research and developmentA taxpayer may treat research and development expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account.

The expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred.

10. Pension Trusts

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Requisites for pension trusts1. The employer must have established a pension or retirement plan to

provide for the payment of reasonable pension to his employees;2. the pension plan is reasonable and actuarially sound;3. it must be funded by the employer;4. the amount contributed must no longer be subject to his control or

disposition; and5. the payment has not yet been allowed as a deduction.

Requisites for a reasonable retirement benefit plan 1. It must be a definite written program setting forth al provisions

essential for qualification;2. It must be a permanent and continuing program unless sooner

terminated by virtue of a valid business reason;3. It must cover at least 70% of all officials and employees. 4. it must provide for the non-diversion of the corpus or income of the

trust fund to any purpose other than for the exclusive benefit of officials and employees;

5. it must not provide for discrimination in contributions or benefits in favor of officials and employees who are officers, shareholders, supervisors or highly compensated officers;

6. It must provide for the contribution to the trust fund by the employer of officials and employees or both the purpose of distributing to the officials and employees or beneficiaries, the corpus and income of the fund accumulated by the trust in accordance with the plan; and

7. It must provide for non-forfeitable rights, that is, upon the termination of the plan or upon the complete discontinuance of contributions under the plan, the rights of each official or employer to benefits accrued to the date of such termination, to the extent then funded, or the rights of each employer to the amounts credited to his account at such time are non-forfeitable.

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Tax on Individuals

Personal ExemptionsPersonal Exemptions definedPersonal Exemptions are arbitrary amounts allowed, in the nature of a deductions from taxable income, for personal, living or family expenses of an individual taxpayer.

They are considered to be the equivalent of the minimum subsistence of the taxpayer.

Who are allowed personal exemptions under the Tax Code1. Citizens of the Philippines;2. Resident aliens;3. Non-resident aliens engage in trade or business in the Philippines

under certain conditions;4. Estate and trusts, which are treated for purposes of personal

exemptions as a single individual.

Personal exemptions allowed to citizens of the Philippines and resident aliens

1. P20,000 – single, married judicially decreed as legally separated with no qualified dependents; and

2. P25,000 – for head of a family;3. P32,000 – married individuals.

Additional exemptions is allowed of P8,000 for each dependent (not parents, brothers, or sisters), not exceeding four (4), for head of the family or married individuals.

Qualification of “Head of Family” 1998 Bar 4(a)(1) An unmarried individual or a legally separated man or woman;(2) With any of the following living with and dependent upon him/her for

chief support:(b) Parents, one or both;(c) Children – legitimate, recognized natural or legally adopted.

Additional requires of Brothers, sisters or children(1) not more than twenty-one (21) years old;(2) unmarried;(3) not gainfully employed;(4) over 21 years old but incapable of self-support due to mental or physical

defect.

The presence of parents, brothers or sisters simply allows the taxpayer the status of “Head of Family” for the benefit of P25,000 basic personal exemption. Said parents, brothers or sisters will not allow the taxpayer to claim additional exemption because of them.

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Filing of Returns and Payment of Tax

Income Return definedIncome Tax Return is a sworn instrument in which the taxpayer discloses the nature and extent of his tax liability by formally making a report of his income and allowable deductions for the taxable year in the prescribed form.

Classes of income tax returns required1. Individual income tax returns;2. Corporation income tax returns;3. Income tax returns of general professional partnerships;4. Fiduciary income tax returns; and5. Miscellaneous returns.

Individuals required to file a return (1997 Bar 7 (5%))1. Resident Filipino Citizen2. Non-resident Filipino Citizen on his income from sources within the

Philippines3. Resident aliens on income from sources within the Philippines;4. Non-resident alien engaged in trade or business or in the exercise of

his profession in the Philippines, on income from sources within the Philippines.

Individual not obliged to file an income tax return (Sec. 51)1. Individual whose gross income does not exceed his total personal and

additional exemption;2. Individual who received purely compensation income, the income tax

on which are correctly withheld;3. Individual whose sole income has been subject to final withholding tax;4. Individual who is exempt from income tax.

1997 Bar 7 (5%)

Question:A bachelor was employed by Corporation A on the first working day of January 1996 on a part-time basis with a salary of P3,500.00 a month. He then received the 13th

month pay. In September 1996, he accepted another part-time job from Corporation B from which he received a total compensation of P14,500.00 for the year 1996. The correct total taxes were withheld from both earnings.

With the withholding taxes already paid, would he still be required to file an income tax return for his 1996 income?

Answer:Yes, Under Sec. 51 (A2b) of RA 8424 he is required to file an income tax return even when his total annual compensation income does not exceed P60,000.00. An individual deriving compensation concurrently from two or more employers shall file an income tax return.

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Tax on Corporations

Definition of Corporation (Sec. 22(B))The term ‘corporation’ includes partnerships no matter how created or organized, joint-stock companies, joint accounts, associations, or insurance companies.

Oña vs CIR45 SCRA 74

Co-ownership is converted to unregistered partnership when the co-owners, after partition, vest the administration to one of the heirs with the intent to gain profit and to divide the same among themselves.

There are, therefore, liable for corporate income tax.

Obillos, Sr. vs. CIR(1985)

There was no partnership formed or created. No intention to earn profit and to divide among themselves.

Pascual & Drago vs. CIR(1988)

No clear intent to form a partnership. These transaction, 5 parcels of land, are isolated transactions. The parties share on gross income.

Liability of Domestic and Resident Foreign Corporation for payment of Taxes

Kind of taxes BasisNet income tax Sec. 27(A),(B),(C)

Sec. 28(A)(1)Final income tax Scattered under

Sec. 27 and 28.10% income tax on corporations with improperly accumulated earnings.

Sec. 29

Minimum income tax of 2% based on gross income

Sec. 27(E)Sec. 28(A)(2)

Optional corporate income tax of 15% of gross income

Sec. 27(A),4-10 pars.Sec. 28(A)(1), 4th

or last paragraph

Exempt Corporation (Sec. 30) (2002 Bar)1. Labor, agricultural and horticultural organization;2. Mutual savings bank and cooperative bank;3. Beneficiary society if exempt from tax only if operated for the

exclusive benefit of the members such as fraternal organization operating under the lodge system;

4. Non-profit Cemetery company;

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5. Religious, charitable, scientific, athletic or cultural corporation or corporation for rehabilitation of veterans;

6. Business league;7. Civic league;8. Non-stock and non-profit educational institution;9. Government educational institution;10. Mutual insurance companies and like organization;11. Cooperative associations acting as sales agents for farmers or

others;12. Fruit growers.

3 tax exempt associations and partnerships1. General professional partnership;2. Joint ventures for the purpose of construction;3. Consortium for purpose of engaging in petroleum.

Tax exempt resident foreign corporation1. Regional headquarters of multi-national corporation;2. Those engage in offshore banking activities;3. International carrier.

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Minimum Corporate Income Tax

A minimum corporate income tax of two percent (2%) of the gross income is imposed on corporations.

When MCIT commencesMCIT begins only on the fourth taxable year from the time the corporation started its business operations, and only when the net income tax due is less than two (2%) percent of its gross income.

Rule on liabilityThe corporate income taxpayer is liable for the payment of either the regular net income tax or the minimum corporate income tax of two percent (2%), whichever is higher.

Entities exempt from MCIT1. Private proprietary educational institution;2. Non-profit, non-stock hospitals;3. Depository bank that operates in an expanded foreign currency

deposits;4. Enterprises registered with Philippine Economic Zone Authority and

Bases Convertion and Development Authority (BCDA).

Rule on exemption from MCITEntities exempt in MCIT is not exempt automatically for payment of normal corporate income tax.

Rationale of MCIT (Bar 2001)To forestall the prevailing practice of overclaiming deductions to reduce income tax payments.

Equitable provision relative to MCIT (Sec. 27(e)The excess of 2% MCIT over actual corporate income tax may be carried over as a credit for three (3) consecutive years.

Instances where MCIT is suspended1. Prolong labor dispute.

Prolong labor dispute is one which lasted for more than six (6) months and must result to temporary shut down of operations;

2. Force majeure which includes the following: [FILES](a) Flood and fire;(b) Insurgency and war;(c) Lighting;(d) Earthquake;(e) Storm.

3. Business reverses due to FERT(a) Fire;(b) Embezzlement;(c) Robbery;(d) Theft.

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Income Tax on Corporation with Improperly Accumulated Earnings

An improperly accumulated earnings tax of 10% is imposed on improperly accumulated taxable income of domestic and resident foreign corporations.

Rationale for improperly held earnings tax under RR 2-2001By virtue of withholding of profits and/or earnings, the government is deprived of taxes on dividends and therefore the said tax is imposed by was of penalty to the corporation for such unreasonable withholding of earnings.

Meaning of improper withholdingImproper withholding is unreasonable withholding of profits or earnings or withholding not proper to the business of the corporation.

Corporations covered by IHETClosely held corporations which includes holding companies and investment companies.

Exempt corporations [BPI]1. Publicly held corporations;2. Banks and other nonblank financial intermediaries3. Insurance companies.

Additional exempt corporation under RR 2-20011. Taxable partnership2. General professional partnership3. Taxable joint venture4. Firms and enterprises registered with EPZA.5. Firms and enterprises registered with BCDA.

When tax is appliedThe improperly accumulated income tax is imposed only when the accumulation of the earnings and profits is beyond the reasonable needs of the business.

There is prima facie presumption of IHE1. Substantial portion of earnings is invested in unrelated venture or

business;2. Investment in bonds and other long-term securities;3. Accumulation in excess of the 100% of paid-up capital of the

corporation.

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TRANSFER TAXES

Kinds of Transfer Taxes1. Estate tax (Sec. 84-94)2. Donor’s tax (Sec. 98-104); and3. Transfer tax on real property [capital gains tax] (Sec. 135, Local

Government Code)

Estate Tax

Transfer Tax DefinedTransfer Tax are taxes imposed upon the gratuitous disposition of private property. They are not taxes on property as such because their imposition does not rest upon general ownership but on the passing of the property.

Formula of Estate Tax

Gross Estate (Sec. 85) . . . . . . . . . . . . . . . . . . . P xxxxxxxLess: Deductions (Sec. 86) . . . . . . . . . . . . . . . . . xxxxxxxNet estate . . . . . . . . . . . . . . . . . . . . . . . . . P xxxxxxxLess: Exemptions (Sec. 84). . . . . . . . . . . . . . . . . xxxxxxxTaxable estate . . . . . . . . . . . . . . . . . . . . . . . P xxxxxxxMultiply by: Tax Rate (Sec. 84) . . . . . . . . . . . . . . xxxxxxxEstate tax due . . . . . . . . . . . . . . . . . . . . . . . P xxxxxxxLess: Tax credit, if any (Sec. 86(E), Sec. 110(B)). . . . . xxxxxxxEstate tax due . . . . . . . . . . . . . . . . . . . . . . . P xxxxxxx

=========

Covered taxpayersEstate tax applies to the following taxpayers: [ReN-ReN]

1. Resident citizen;2. Non-resident citizen;3. Resident alien; and4. Non-resident alien

Gross Estate of the Decedent

Composition of Gross Estate (Sec. 85)1. Decedent’s interest (RTI)2. Transfer in contemplation of death3. Revocable transfer4. Property passing under general power of appointment5. Proceeds of life insurance6. Transfer for insufficient consideration

Resident or Filipino Decedent InterestThe gross estate shall include, to the extent of his interest, the value at the time of his death of all:

(a) Real or immovable property wherever situated;

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(b) Tangible personal property wherever situated; and(c) Intangible personal property wherever situated.

Non-resident alien decedent InterestIt shall include, to the extent of his interest, the value at the time of his death of all:

(a) Real property situated in the Philippines;(b) Tangible personal property situated in the Philippines; and(c) Intangible personal property with a situs in the Philippines

unless exempted on the basis of reciprocity.

Transfer in contemplation of DeathIt contemplates a situation where the transferor, during his lifetime, transfers property in contemplation of or intended to take effect in possession or enjoyment at or after his death; or, where the transferor retains the income from the property, or the right to designate the person who shall passes or enjoy the property or the income therefrom.

Meaning of “transfer in contemplation of death”The words mean that it is the though of death, as a controlling motive, which induces the disposition of the property for the purpose of avoiding the tax.

2001 Bar 15Question:A, aged 90 years and suffering from incurable cancer, on August 1, 2001 wrote a will and, on the same day, made several inter-vivos gifts to his children. Ten days later, he died. In your opinion, are the inter-vivos gifts considered transfers in contemplation of death for purposes of determining properties to be included in his gross estate. Explain your answer.

Answer:Yes, such donation inter-vivos is within the concept of transfer in contemplation of death. Such transfer is defined by the law as a gift in contemplation of death, as a controlling motive, which induces the disposition of the property for the purpose of avoiding the tax.

Vidal de Roces vs. Posadas57 Phil. 465

If donation is made simultaneously with the execution of the will; such donation is deemed a transfer in contemplation of death. Hence, estate tax-not donor’s tax – should apply.

If, in the meantime, the donor’s tax had been paid is simply credited to the estate tax due. There is no problem here because estate tax is usually bigger than donor’s tax.

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Effect of transfers of property made by the decedent during his lifetime, where such transfer partake of the nature of testamentary dispositionsSuch transfer (which are inter vivos in form but mortis cause in substance) are treated by law as farce and are, therefore, disregarded. The consequence is that they are includible in the taxable gross estate.

Inter vivos transfer which are treated as substitutes for testamentary dispositions(1) Transfer in contemplation of death;(2) Transfer with retention or reservation of certain rights;(3) Revocable transfers;(4) Transfer of property arising under a general power of appointment; andTransfer for insufficient consideration.

Property passing under general power of appointment

There are three (3) persons included here:1. Transferor;2. 1st transferee (Decedent);3. 2nd transferee.

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Transferor

1st Transferee(Decedent)

Has authority to determine the person who, upon the latter’s death, would next passes or enjoy the property transferred.

Has no authority to determine the person who, upon the latter’s death, would next passes or enjoy the property transferred.

Authority emanates from GENERAL POWER OF APPOOINTMENT

Authority emanates from SPECIAL POWER OF APPOOINTMENT

2nd TransfereePart of gross estate of decedent. (A badge of ownership)

Not part of gross estate of decedent.

When proceeds of a life insurance policy “taken out by the decedent upon his own life” includible in the gross estate

1. If the beneficiary is the estate of deceased, his executor or administrator;

2. If the beneficiary is other than the decedent, where the insured reserved to himself the power to change or revoke the name of the beneficiary during his lifetime.

When applicable: The person insures his own life.

Rules observed

Transfer for insufficient consideration

When transfer is considered “insufficient consideration”When the consideration received is lower than the fair market value of the property.

When applicable

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Proceeds of Life Insurance

Beneficiary

His estate Third persons

Represented by the:1. Administrator;2. Executor; or3. HeirRegardless whether the designation of said beneficiary is irrevocable or revocable.

Part of Gross Estate

Kind of designation

Revocable Irrevocable

Part of Gross Estate

Not part of Gross Estate

Section 85(G) refers to all property without distinction subject matter of transfer in

1. Contemplation of death;2. Revocable transfer;3. General power of appointment.

Issue to be resolvedWhether estate tax or donor’s tax should be applied.

Exclusions from Estate1. Separate property of surviving spouse;2. Share of surviving spouse in conjugal property.

Net estate subject to taxThe tax code imposed an estate tax on net estates with value exceeding P200,000. By implication, net estates which are not in excess of P200,000 are exempt from the estate tax.

Properties or transfers which are exempt from estate tax under special laws.1. Benefits received by members of the GSIS and the SSS by reason of

death;2. Amounts received from the Philippines and United States governments

for damages suffered during the last war.3. Benefits received by beneficiaries residing in the Philippines under

laws administered by the U.S. Veterans Administration; and4. Bequests to social welfare, cultural, and charitable (not including

educational and religious) institutions no part of the net income of

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Balance(Difference between FMV-Consideration)

It will depend upon the motive

of the transferor

If due to his IMPENDING DEATH

If merely out of kindness and

generosity

Subject to ESTATE TAX

Subject to DONOR’S TAX

which inures to the benefit, of any individual, provided that not more than 30% of said bequests shall be used by the donee for administration purposes.

Deductions from Gross estate1. Ordinary deductions

(a) Funeral expenses(b) Judicial expenses of proceedings(c) Claims against the estate(d) Claims against insolvent persons(e) Unpaid mortgages(f) Unpaid taxes(g) Casualty losses

2. Vanishing deductions3. Transfer for exclusively public use4. The value of the decendent’s family home not exceeding P1 million

pesos5. Standard deduction equivalent to P1 million;6. Medical expenses under certain conditions;7. Retirement benefits received by the heirs under RA 49178. Share of surviving spouse in the conjugal or community property.

Requisites for deductibility of funeral expenses1. Funeral expenses must be actually paid and incurred by the estate;2. The amount thereof is limited to 5% of the gross estate, whichever is

lower, but in no case to exceed P200,000.

Expenses incurred after the interment, e.g. prayers, masses, etc., or those borne by relatives and/or friends are not deductible.

2001 Bar 16Question:On the first anniversary of the death of Y, his heirs hosted a sumptuous dinner for his doctors, nurses and others who attended to Y during his last illness. The cost of the dinner amounted to P50,000.00. Compared to his gross estate, the P50,000 did not exceed five percent of the estate. Is the said cost of the dinner to commemorate his one-year death anniversary deductible from his gross estate? Explain your answer.

Answer:No, such is not deductible expense.

Expenses incurred after the interment, e.g. prayers, masses, etc., or those borne by relatives and/or friends are not deductible.

Judicial expenses

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These expenses include “administration expenses” or those actually and necessarily incurred in the administration of the estate, that is, in the collection of assets, payments of debts, and distribution among persons entitled to the estate.

Requisites for claims against decedent’s estate to be deductible1. They were contributed in good faith and for an adequate and full

consideration in money or money’s worth;2. They must be existing against the estate;3. They must be legally enforceable obligations of the decedent and

ought to be enforced by the claimants; and4. They must be reasonably certain in amount.

Requisites that must concur in order that the claims of the deceased against insolvent persons may be deductible from the decedent’s gross estate

1. The amount of said claims has been initially included as part of his gross estate; and

2. The incapacity of the debtors to pay their obligations is proven, not merely alleged.

Requisites for unpaid mortgage indebtedness be deductible from gross estate

1. The fair value of the property mortgaged without deducting the mortgage indebtedness has been initially included as part of his gross estate; and

2. The mortgage indebtedness was contracted in good faith and for an adequate and full consideration in money or money’s worth.

Unpaid taxes to be deductibleTaxes owed by the decedent and unpaid, being debts in favor of the government, are also deductible as a claim against the estate but income taxes upon income received after death of the decedent, or property taxes not accrued before his death, or any estate tax are not, because they are chargeable to the income of the estate.

Casualty lossesCasualty losses include all losses incurred during the settlement of the estate arising from fires, storms, shipwreck or other casualties, or from robbery, theft, or embezzlement.

Requisites of casualty losses1. There must be a loss arising from any causes given above;2. Such loss is not compensated for by insurance or otherwise;3. Such loss has not been claimed as a deduction for income tax

purposes; and4. Such loss was incurred not later than the last day of the payment of

the estate tax.

Transfer for pubic use

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The Tax Code allows the deduction from the gross estate the amount of all bequests, legacies, or transfers, to or for the use of the government or any political subdivision thereof for exclusively public purposes.

Rule with respect to the deduction from the gross estate of the value of the decedent’s family homeAn amount equivalent to the current or fair market value or zonal value of the decedent’s family home, whichever is higher.

If the said current or fair value or zonal value exceeds P1 million, the excess shall be subject to estate tax.

As a sine quo non condition for the exemption or deduction, said family home must have been the decedent’s family home as certified by the Barangay captain of the locality.

Vanishing deduction (property previously taxed) [PPT]The deduction, which is commonly referred to as vanishing deduction, is an amount allowed to reduce the taxable estate of decedent where property(1) received by him from a prior decedent by gift, bequest, devise or

inheritance, or(2) transferred to him by gift, has been the object of previous transfer

taxation.

The rate by gift, has been the object of previous transfer taxation. The rate of deduction gradually diminishes and entirely vanishes depending upon the time interval between the two successive transfers.

Medical expenses deductions from gross estateMedical expenses (evidence by receipts) incurred by the decedent within one (1) year prior to his death, not to exceed Five Hundred Thousand Pesos (P500,000).

Deductions allowed to Non-resident-EstatesThe deductions from section 86(A)(1) to (3) are also available to non-resident estates namely:

1. Ordinary deductions(a) Funeral expenses(b) Judicial expenses of proceedings(c) Claims against the estate(d) Claims against insolvent persons(e) Unpaid mortgages(f) Unpaid taxes(g) Casualty losses

2. Vanishing deductions3. Transfer for exclusively public use

However, deductions under (4) to (7) are not available to said non-resident estates.

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NoteThe share of the surviving spouse in the conjugal partnership (now absolute community property) is included in computing the gross estate of the decedent, but only for the purposes of determining the first P200,000 exemption (Sec. 84) and also the five percent (5%) under funeral expenses (Sec. 86(A)(1)(a))

FILING OF ESTATE TAXES

When and with whom must the return be filed for purposes of estate tax

Time Within six (6) months from the decedent’s death.

A certified copy of the schedule of partition and the order of the court approving the same shall be furnished the Commissioner within 30 days after the promulgation of the order.

PlaceExcept in cases where the Commissioner of Internal Revenue otherwise permits, with an authorized agent bank or the revenue district officer, revenue collection officer or duly authorized treasurer of the city or municipality where the decedent domiciled at the time of his death, or if there be no legal residence in the Philippines, with the Office of the Commissioner of Internal Revenue.

When and where is the estate tax due and payable

General ruleIt shall be due and payable at the time the return is filed by the executor, administrator or the heirs.

It shall be paid at the place where the return is filed.

ExceptionThe Commissioner of Internal Revenue may grant extension when he finds that the payment on the due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs.

The extension cannot exceed five (5) years in case the estate is settled through the courts, or two (2) years in case it is settled extra-judicially.

The running of the statute of limitations for assessment as provided in Section 203 is suspended for the period of any such extension.

Conditions for the grant of the CIR of extension to pay the estate taxes1. The taxpayer is not guilty of negligence, intentional disregard of rules

and regulations, or fraud; otherwise, no extension may be granted and

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2. The executor, administrator, or beneficiary, may be required to furnish a performance bond in an amount not exceeding double the amount of the tax due conditioned upon the payment of said tax in accordance with the terms of the extension.

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Donor’s Tax

Gift tax definedGift tax is the tax imposed on the transfer without consideration of property between two or more persons who are living at the time of the transfer is made; or the tax imposed on the transfer of property by gift inter vivos without relation to the death of the donor.

Formula:

Gross donation (Sec. 98(B) . . . . . . . . . . . . . . . . PxxxxxxxLess: Deductions (Sec. 101 (A)(B). . . . . . . . . . . . . xxxxxxxNet gift . . . . . . . . . . . . . . . . . . . . . . . . . PxxxxxxxLess: Exemptions (First P100,000). . . . . . . . . . . . . 100,000Taxable net gift . . . . . . . . . . . . . . . . . . . . . PxxxxxxxMultiply by: Tax rate . . . . . . . . . . . . . . . . . . xx%Donor’s tax due . . . . . . . . . . . . . . . . . . . . . PxxxxxxxLess: Tax credit (if any) Sec. 101 last paragraph. . . . . xxxxxxxDonor’s tax payable. . . . . . . . . . . . . . . . . . . . Pxxxxxxx

=========

Property included in “gift”1. Real and personal property, whether tangible or intangible, or mixed,

wherever situated, where the donor is a resident or citizen of the Philippines at the time of the donation; and

2. Real and personal property situated in the Philippines where the donor is a non-resident alien at the time of the donation.

Property excluded in “gift”Real and personal property situated outside the Philippines where the donor is a non-resident alien at the time of donation;

Gifts which are exempt from donor’s tax1. Gifts made by a resident:

(1) Dowries or gifts made on account of marriage and before its celebration or within one (1) year thereafter of parents to each of their legitimate, recognized or adopted children to the extent of the first P10,000.

(2) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit; or to any political subdivision of the said Government; and

(3) Gifts in favor of an educational and/ or charitable or religious corporation, institution, accredited non-government organization subject to the condition that not more than 30% of said gifts shall be used by the donee for administration purposes.

2. Gifts made by a non-resident alien

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In the case of non-resident alien, only gifts mentioned in letters (b) and (c) are exempt from the donor’s tax.

3. Specific exemption of P100,000. The Tax Code imposes a donor’s tax on net gifts exceeding P100,000. The consequence is that net gifts of amount of P100,000 or less are exempt from the tax.

2000 Bar 12 (b)Question:What conditions must occur in order that all grants, donations and contributions to non-stock, non profit private educational institutions may be exempt from donor’s tax under Section 101 (a) of the Tax Code.

Answer:Under the NIRC the following conditions must be present in order that donations and contributions to non-stock, non profit private education institutions may be exempt from donor’s tax:1. The donor is a resident Filipino Citizen;2. The donee is a non-stock, non profit private

educational institution;3. Not more than 30% of said gifts shall be used by the

donee for administration purposes.

Upon which is the donor’s tax imposed and computedIt is imposed and computed upon the basis of the total net gifts made during the calendar year.

2001 Bar 17Question:Your bachelor client, a Filipino residing in Quezon City, wants to give his sister a gift of P200,000.00. He seeks your advice, for purposes of reducing if not eliminating the donor’s tax on the gift, on whether it is better for him to give all of the P200,000 on Christmas 2001 or to give P100,000.00 on Christmas 2001 and the other P100,000.00 on January 1, 2002. Please explain your advice. (5%)

Answer:I will advice him to giver her sister P100,000.00 on Christmas 2001 and the other P100,000.00 on January 1, 2002 on the following reasons:1. Donor’s is imposed and computed on the total net gifts

made during the calendar year.2. A calendar year means a period which starts on January

1 and ends on December 31.3. Nets gifts made during the calendar of not over

P100,000.00 is exempt from donor’s tax.

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What is a stranger for purposes of donor’s taxA stranger is a person who is not:

1. a brother, sister (whether by whole or half blood), spouse, ancestor, and lineal descendant; or

2. a relative by consanguinity in the collateral line within the forth degree of relationship.

2000 Bar 12 (a)Question:When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net gifts. For purposes of this tax, who is a stranger.

Answer:A stranger is a person who is not:1. a brother, sister (whether by whole or half blood), spouse,

ancestor, and lineal descendant; or2. a relative by consanguinity in the collateral line within the forth

degree of relationship.

Rule of political contributionsAny contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes, shall be governed by the Election Code.

BIR Ruling on political contributionsDonations to any candidate, political party or coalition of parties is subject to donor’s tax considering that there is no provision in the election code expressly exempting such donations from tax.

Who is required to file the donor’s returnAny individual who makes any transfer by gift, except that which under the Tax Code are exempt from tax, shall, for the purpose of the donor’s tax, made a return under oath in duplicate.

Time and place of the filing of the donor’s return and payment of taxThe return of the donor shall file within 30 days after the gift is made and the tax thereon shall be paid at the time of filing.

Except in cases where the Commissioner otherwise permits, the return shall be filed with and the tax paid to an authorized agent bank, or the RDO, revenue collection officer, or duly authorized treasurer of the city or municipality where the donor is domiciled at the time of transfer or if there be no legal residence in the Philippines, with the Office of the CIR.

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In the case of gifts made by a non-resident, the return may be filed with the Philippine Embassy or Consulate in the country where he is domiciled at the time of transfer or directly with the Office of the Commissioner.

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PART 3

TAX REMEDIES

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I. REMEDIES OF THE GOVERNMENT

ASSESSMENT AND COLLLECTION

General Rule:Assessment precedes collection.

Exceptions:When the unpaid tax is a tax due per return as in the case of a self-assessed income tax under the pay-as-you-file system in which case collection may be instituted without need of assessment pursuant to Sec. 56 of the NIRC.

Kinds of Assessment1. Pre-assessment; and2. Final assessment.

When pre-assessment is required1. Failure to file a return;2. Failure to pay the tax;3. Failure to pay the correct tax or payment of insufficient amount.

Period of assessment

Kind Basis PeriodOrdinary period 1. Failure to file a

return;2. Failure to pay the

tax;3. Insufficient

payment(no intent to evade)

3 years from1. Filed on or before

deadline

Last day of filing.

2. Filed after deadline

Actual filing.Extra-ordinary period 1. False return;

2. Fraudulent return with intent to evade tax;

3. Failure to file a return with intent to evade tax

10 years from discovery of falsity, fraud or omission.

(Sec. 222(a))

Rules on filing of Amended Return (Supreme Court Ruling)

Amendment is not SUBSTANTIAL The period shall run from date of filing of original return.

Amendment is SUBSTANTIAL The period shall run from date of amended return.

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KINDS OF COLLECTION (Sec. 205)1. Administrative collection2. Judicial collection

Classes of Administrative Collection1. Distraint2. Levy3. Tax Lien

Classes of Judicial Collection1. Criminal action2. Civil action

Administrative and judicial action can be pursued simultaneously or alternatively.

Administrative action Always require assessmentJudicial action Does not require assessment

Payment of Tax

In general: The total amount of tax imposed shall be paid by the person subject thereto at the time the return is filed.

Installment Payment: When the tax due is in excess of Two thousand Pesos (P2,000.00), the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and second installment, on or before July 15 following the close of the calendar year.

CIR vs. PASCOR309 SCRA 402

An assessment contains not only a computation of tax liabilities but also demand for payment within a prescribed period. It also signals the time when the penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by taxpayer.

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PROCEDURES FLOWCHART

89

Self-Assessment Investigation/ Report of informer

Payment / collection

BIR AUDIT

Tax Deficiency

Administrative Collection Judicial Collection

Notice of Pre-

conference

Cases where no pre-assessment is required

Cases where pre-assessment is required

Pre-Assessment

Assessment

Assessment becomes final and executory

Distraint Levy Lien Civil Action

Criminal Action

Has 15 days to reply

Has 15 days to pay or appeal

Has 15 days to pay or file an administrative protest and if denied appeal to CTA, CA, to SC otherwise the assessment becomes final and executory

Outline of Procedurals in Protesting an Assessment

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BIRAudit

Pre-assessment notice

Service to

taxpayer

Taxpayer is given fifteen (15) days from receipt of the pre-assessment notice, extendible for not more than ten (10) days

Reply

Yes

No

Assessment of tax deficiency

Service to

taxpayer

Taxpayer is given thirty (30) days from receipt of the assessment to file administrative protest.

Within 60 days from filing of administrative protest, all relevant documents should be submitted otherwise, the assessment shall become final and unappealable.

Administrative Protest

Protest

NO

Yes

Assessment shall become final and unappealable

Appeal to CIR FAVORABLE TO

Taxpayer:

UnfavorableService

to taxpaye

r

Appeal to CTA

Despite the response, the BIR still opines that the taxpayer to be assessed for deficiency taxes

CTA

(1) From receipt of adverse decision of CIR or

(2) 180 days from submission of the documents,

the Taxpayer may appeal to the CTA within thirty (30) days, otherwise, the decision or assessment shall become final.

How administrative protest is filed1. By filing a request for reconsideration;2. by filing a request for reinvestigation.

Suspension of the running of the running of the period for assessment (Sec. 223)The running of the period for assessment is suspended when the taxpayer is living abroad.

1. Distraint and Levy

Distraint and Levy DefinedDistraint is a remedy whereby the collection of the tax is enforced on the goods, chattels, or effects of the taxpayer including other personal property of whatever character as well as stocks and other securities, debts, credits, bank accounts, and interest in and rights to personal property.

Levy refers to the seizure of real properties and interest in or rights to such properties for the satisfaction of taxes due from the delinquent taxpayer.

Note: Levy can be made before, simultaneously, or after the distraing of personal property.

Both remedies are summary in nature and either may be pursued in the discretion of the authorities charged with the collection of tax independently, or simultaneousl with civil and criminal action once the assessment becomes final and demandable.

Kinds of distraint1. Constructive2. Actual

Constructive distraint shall be effected by requiring the taxpayer or any person having possession or control of such property to sign a receipt covering the property distrained and obligate himself to preserve the same intact and unaltered and not to dispose of the same in any manner whatever without the express authority of the commissioner.

Actual distraint consist of the seizure of the goods, chattels, or effects, and the personal property, including stocks and other securities, debts, credits, bank accounts, and interests in and rights to personal property of such person in sufficient quantity to satisfy the tax, or charge, together with any increment thereto incident to delinquency, and the expenses of the distraint and the cost of the subsequent sale.

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Who shall exercise the distraint

Authorized personnel ScopeCommissioner or duly authorized representative

Amount involved is in excess of one million pesos (P1,000,000.00)

Revenue District Officer Amount involved is one million pesos (P1,000,000.00) or less.

When constructive distraint may be availedWhen the taxpayer is

1. Retiring from any business subject to the tax;2. intending to leave the Philippines or to remove his property therefrom

or to hide or conceal his property;3. intending to perform any act tending to obstruct the proceedings for

collecting the tax due or which may be due from him.

When actual distraint may be availedFailure of the person owing any delinquent tax or delinquent revenue to pay the same at the time required.

Flowchart of Actual Distraint

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Distraint

Public Auction

With Bidder Without Bidder

Will be purchased by the Government

Schedule another bidding

Delivery to the winning bidder

Taxpayer’s remedyRight of pre-emption exercised before the public auction.

Taxpayer has no right of redemption

Publication.

The publication and notice is important to establish the period of pre-emption

How right of pre-emption is exercisedRight of pre-emption is exercised by payment of the tax due, penalties, interest and other cost.

How Levy is availedLevy is effected by writing upon said certificate (TCT) a description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the Register of Deeds of the province or the city where the property is located and upon the delinquent taxpayer, or if he be absent from the Philippines, to his agent or the manager of the business in respect to which the liability arose, or if there be none, to the occupant of the property in question.

Levy on Real Property

Two ways of disposal after forfeiture (Sec. 216)1. Public auction;

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Warrant of Levy

Register of Deeds

Annotation on TCT

Public Auction

With Bidder

Without Bidder

Will be purchased by the Government

Schedule another bidding

Taxpayer’s remedyRight of pre-emption exercised before the public auction.

Taxpayer has no right of redemption

Publication.

The publication and notice is important to establish the period of pre-emption

Proceeds is in excess of

tax liability

Proceeds is insufficient

of tax liability

Taxpayer is entitled for the excess

Further levy or distraint

Delinguent amount is deemed

satisfied

2. Private sale.

In private sale, there must be an approval of the Secretary of Finance.2. Civil Action

A civil action is resorted to when a tax liability becomes collectible, that is, (1) the assessment becomes final and unappealable, or (2) the decision of the Commissioner has become final, executory, and

demandable.

When assessment becomes final and unappealableA tax is assessed and the taxpayer fails to file and administrative protest by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of assessment.

When is decision of the Commissioner becomes final, executor and demandableA protest against the assessment is filed by the taxpayer but the Commissioner’s decision denying in whole or in part the said protest, was not appealed to the Court of Tax Appeals (CTA) within thirty (30) days from receipt of such decision.

Sec. 220, NIRCA civil action for tax collection filed with the regular courts cannot be instituted without the approval of the Commissioner.

Note: The approval by the Commissioner of Internal Revenue of a civil action for the collection of taxes is not jurisdictional, but one relating to capacity to sue or affecting the cause of action only.

RA 8424 Sec. 7 of the present code authorizes the BIR Commissioner to delegate the powers vested in him under the pertinent provisions of the Code to any subordinate official with the rank equivalent to a division chief or higher, subject to several exceptions.

1999 Bar 4Yabes vs. Flojo, 15 SCRA 278

Question:A Co., a Philippine corporation, received an income tax deficiency assessment from the BIR on May 5, 1995. On May 31, 1995, A Co. filed its protest with the BIR. On July 30, 1995, A Co. submitted to the BIR all relevant supporting documents. The CIR did not formally rule on the protest but on January 25, 1996, A Co. was served a summons and a copy of the complaint for collection of the tax deficiency filed by the BIR with the RTC. On February 20, 1996, A Co. brought a Petition for Review before the CTA. The BIR contended that the Petition is premature since there was no formal denial of the protest of A Co. and should therefore be dismissed.

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1. Has the CTA jurisdiction over the case?2. Has the RTC jurisdiction over the collection case filed

by the BIR? Explain.

Answer:1. Yes, the CTA has jurisdiction over the case. The

Supreme Ruled in Yabes vs. Flojo, 15 SCRA 278, that the filing of a civil action in court to collect a tax which was the subject of a pending protest in the BIR was a justifiable basis for the taxpayer to appeal to the Court of Tax Appeals and to move for the dismissal in the trial court of the Government’s action to collection the tax under dispute.

2. No, the RTC has no jurisdiction over the collection case not yet demandable. The action of the BIR is still premature and the RTC should take cognizance of the action when the amount due becomes demandable.

3. Criminal Action

A criminal action cannot be instituted without the approval of the Commissioner of Internal Revenue.

Sec. 221, NIRCThe remedy of criminal action is resorted to not only for collection of taxes but also for enforcement of statutory penalties of all sorts.

4. Compromise

A compromise is an agreement between two or more persons who, to avoid a lawsuit, amicably settle their differences on such terms as they can agree on.

Compromise penalty is a certain amount of money which the taxpayer pays to compromise a tax violation.

Compromise penalties are paid in lieu of criminal prosecution, and cannot be imposed in the absence of a showing that the taxpayer consented thereto.

If an offer of compromise is rejected by the taxpayer, the compromise penalty cannot be enforced thru an action in court or by distraint and levy. The CIR should file a criminal action if he believes that the taxpayer is criminally liable for violation of the tax law as the only way to enforce penalty.

Cases which may be compromised1. Delinquent accounts;2. Cases under administrative protest after issuance of the final

assessment notice to the taxpayer which are still pending in the

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Regional Officers, Revenue District Offices, Legal Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the National Office;

3. Civil tax cases being disputed before the courts (MTC to SC);4. Collection cases filed in courts;5. Criminal violations other than those already filed in court or those

involving criminal tax fraud; and6. Cases covered by pre-assessment notices but taxpayer is not

agreeable to the findings of the audit office as confirmed by the review office.

Sec. 204, NIRCThe Commissioner may compromise any internal revenue tax when:

1. A reasonable doubt as to the validity of the claim against the taxpayer exists; or

2. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.

2000 Bar 16 (a)Question:Under what conditions may the Commissioner of Internal Revenue be authorized to Compromise the payment of any internal revenue tax?

Answer:The Commissioner may compromise any internal revenue tax when:1. A reasonable doubt as to the validity of the claim

against the taxpayer exists; or2. The financial position of the taxpayer demonstrates a

clear inability to pay the assessed tax.

Instances when the CIR may cancel a Tax Liability1. The tax appears unjustly or excessively assessed; or2. The administration and collection costs do not justify the collection.

Cases which cannot be compromised1. Withholding tax cases2. Criminal tax fraud cases3. Criminal violation already filed in court4. Delinquent accounts with duly approved schedule of installment

payments5. Cases where final reports of reinvestigation or reconsiderations have

been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose.

6. Cases which become final and executory after final judgment of a court, where compromise is requested on the ground of doubtful validity of the assessement

7. Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer.

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Tax Lien

A tax lien is a legal claim or charge on property (whether real or personal) established by law as a sort of security for the payment of tax obligations.

An unpaid internal revenue tax, together with related interest, penalties and costs, constitutes a lien in favor of the government from the time an assessment therefore is made and until paid, upon all property and rights to property belonging to the taxpayer.

A tax lien created in favor of the government is superior to all other claims or preferences.

Sec. 219, NIRCThe lien is not valid against any mortgagee, purchaser, or judgment creditor until notice of such lien shall have been filed in the register of deeds of the province or city where the property of the taxpayer is located.

1995 Bar 5It is settled that the claim of the government predicated on a tax lien is superior to the claim of a private litigant predicated on a judgment. The tax lien attaches not only from the service of the warrant of distraint of personal property but from the time the tax became due and payable.

6. Forfeiture

The forfeiture of chattels and removable fixtures of any sort shall be enforced by the seizure and sale, or destruction, of the specific forfeited property. The forfeiture of real property shall be enforced by a judgment of condemnation and sale in the legal action or proceeding, civil or criminal, as the case may require.

Forfeiture and seizure distinguished (1968 Bar)

Forfeiture SeizureFor the enforcement of tax lien, the residue, after deducting the tax liability and expenses, will go to the taxpayer.

All proceeds of the sale will go to the coffers of the government.

A taxpayer in forfeiture or seizure cases to enforce tax lien may still be subject to criminal action even if his property has been forfeited.

7. Civil Penalties

Sec. 248. Covering civil penalties. Surcharges imposed ranging from 25% to 50% of the total tax due.

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NO INJUNCTION TO RESTRAIN TAX COLLECTION

218, NIRCAn injunction is not available to restrain collection of tax. No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee, or charge imposed by the NIRC.

2001 Bar 3(b)Question:May the courts enjoin the collection of revenue taxes? Explain your answer.

Answer:No, as a general rule, collection of revenue taxes cannot be enjoined.

The NIRC provides that injunction is not not available to restrain collection of tax. No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee, or charge imposed.

Exceptions to the general rule (1996 Bar 12):When the decision of the Commissioner is pending appeal before the Court of Tax Appeals, the said court may enjoin the collection of taxes if such collection will jeopardize the interest of the government and/or the taxpayer.

In such case, the Court at any stage of the proceeding may suspend the collection of the tax and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the court. The posting of the bond is not an absolute requirement, its imposition lies within the sound discretion of the Tax Court.

II. STATUTE OF LIMITATIONS2001 Bar 3(b), 1996 Bar 12, 1997 Bar 4, Bar. 1999 1

Remedy Period Required

Assessment of Internal Revenue Taxes

3 Years after the last day of filing of the return.

If the return is filed beyond the period prescribed:The three (3) year period shall be counted from the day the return is filed.

In case of a false or fraudulent return with intent to evade tax or failure to file a return.Any time within ten (10) years after the

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discovery of the falsity, fraud or omission

Collection 5 years following the assessment of the tax, may be collected by distraint or levy or proceeding in court.

10 years – without assessment, and in case of false or fraudulent returns with intent to evade the tax or failure to file a return.

Criminal liability 5 years – from commission or discovery of the violation, whichever is later.

Fraudulent or False Return (1996 Bar 7)

Fraudulent Return False ReturnFraudulent return is intentional and deceitful with the aim of evading correct tax due.

False return merely implies a deviation from the truth or fact whether intentional or not.

III. REMEDIES OF TAXPAYER

Kinds of Remedies for the Taxpayer1. Administrative protest – which is a protest against the assessment and is

filed before payment.2. Claim for Refund – file with the Commissioner of Internal Revenue after

payment.

1. Administrative Protest

Sec. 228, NIRCWhen the CIR or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings.

Exceptions: No pre-assessment notice shall be required:1. When the finding for any deficiency tax is the result of mathematical

error in the computation of the tax as appearing on the face of the return; or

2. When the discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or

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3. When the taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liability for the taxable quarter or quarters of the succeeding taxable year; or

4. When the excise tax due on excisable articles has not been paid; or5. when an article locally purchased or imported by an exempt person,

such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt person.

Meralco Securities Corporation vs. Savellano117 SCRA 805

Mandamus does not lie to compel the Commissioner of Internal Revenue to impose a tax assessment not found by him to be proper. A judge of a regular court has no jurisdiction to take cognizance of a mandamus case raising the question of whether or not to impose a deficiency tax assessment. This undoubtedly comes within the purview of the words “disputed assessment” or “of other matters arising under the National Internal Revenue code”, thus belonging to the jurisdiction of the CTA.

2. Claim for Refund

Sec. 229, NIRCNo suit or proceeding shall be maintained in any court for the recovery of any national revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of a penalty claimed to have been collected without authority or of sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty, regardless of an supervening cause that may arise after payment.

The Commissioner may, even without written claim therefore, refund or credit a tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid.

Tax refund and Tax Credit distinguished

Tax refund there is actual reimbursement of the tax.

Tax credit, the reimbursable amount is applied against the sum that may be due or collectible from the taxpayer.

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What covers tax refund1. Erroneous or illegally assessed or collected internal revenue taxes;2. Penalties imposed without authority;3. Any sum alleged to have been excessive or in any manner wrongfully

collected.

Requirements for Tax Refund1. There must be a written claim for refund filed by the taxpayer with

the Commissioner;2. The claim for refund must be a categorical demand for reimbursement;3. The claim for refund must be filed within two (2) years from date of

payment of the tax or penalty regardless of any supervening cause.

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IV. COURT OF TAX APPEALS

Court of Tax AppealsThe Court of Tax Appeals is a highly specialized body which reviews tax cases. The proceedings therein are judicial in nature although it is not bound by the technical rules of evidence.

QuorumConsisting of a Presiding Judge and two Associate Judges, the presence of any two of them shall constitute a quorum, and the concurrence of two judges shall be necessary to promulgate any decision thereof.

Powers of the CTA1. To administer oaths. (Sec. 10)2. To received evidence (Sec. 12)3. To summon witnesses by subpoena and require the production of

documents by subpoena duces tecum (Sec. 10)4. To punish for contempt for the same cases under the same procedure

and with the same penalties provided for in the Rules of Court (Sec. 10)

5. To prescribe the form of writs and other processes (Sec. 8)6. To promulgate rules and regulations for the conduct of its business

(Sec. 8)

Jurisdiction of the CTAThe Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal the following:1. Decision of the Commissioner of Internal Revenue (CIR) in cases involving

disputed(a) Assessment,(b) Refund of internal revenue taxes, fees, or other charges(c) Penalties imposed in relation thereto, or(d) Other matters arising under the NIRC or (e) Other laws or part of law administered by the BIR

2. Decision of the Commissioner of Customs in cases involving liability for(a) customs duties, fees or other money charges;(b) seizure, detention or release of property affected;(c) fines, forfeitures or other penalties imposed in relation thereto;(d) other matters arising under the Customs Law or other law or

part of law administered by the Bureau of Customs3. Decision of the Secretary of Finances, such as the imposition of dumping

or countervailing duty;4. Decision of the Secretary of Finance in automatic review cases where

such decision of the Secretary of Finance is adverse to the taxpayer.

Automatic Review CasesIn a case involving the assessment of customs duties, the decision of the Commissioner is automatically elevated to, and reviewed by, the Secretary of Finance. It is the decision of the Secretary of Finance adverse to the taxpayer which is appealable to the CTA within thirty (30) days from receipt

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thereof. A decision of the Secretary which is favorable to the taxpayer is no longer appealable.

PART 4

TARIFF AND CUSTOMS LAWS

And

LOCAL TAXATION

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Customs Laws

Imported articles subject to customs dutyAll imported articles, when imported from any foreign country into the Philippines, are subject to duty upon each importation, even though previously exported from the Philippines, except as otherwise provided in the Tariff and Customs Code or in other laws.

Liability of Importer for dutiesUnless otherwise relieved by laws or regulations, the liability of duties, taxes, fees and other charges attaching on importation constitutes a personal debt due from the importer to the government which can be discharged only by payment in full of said duties and charges. It also constitute a lien upon the articles imported which may be enforced while such articles are in custody or subject to the control of the government.

Duties, powers and jurisdiction of the Bureau of Customs1. The assessment and collection of the lawful revenues from imported

articles and all other dues, fees, charges, fines and penalties accruing under the tariff and customs laws;

2. the prevention and suppression of smuggling and other frauds upon the customs;

3. the supervision and control over the entrance and clearance of vessels and aircraft engaged in foreign commerce;

4. the enforcement of tariff and customs laws and all other laws, rules and regulations relating to tariff and customs administration;

5. the supervision and control over the handling of foreign mails arriving in the Philippines, for the purpose of the collection of the lawful duty on the dutiable articles thus imported and the prevention of smuggling through the medium of such mails;

6. supervision and control over all import and export cargoes, landed or stored in piers, airports, terminal facilities, including container yards and freight stations, for the protection of government revenue; and

7. Exclusive original jurisdiction on seizure and forfeiture cases under the tariff and customs laws.

Pascual vs. Comm. Of CustomsL-12219, April 25, 1962

Proceedings in seizure cases are actions in rem directed against the property seized, not against the owner thereof.

The forfeiture may be enforced against the goods independently of the criminal prosecution against the offender.

In a seizure case, the government seeks the transfer of the title to the property from the owner to the state as a punishment to the property itself.

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Jurisdiction of Seizure and Forfeiture CasesIt is well-settled that the exclusive jurisdiction over seizure and forfeiture cases vested in the Collector of Customs precludes a Court of First Instance from assuming cognizance over such cases.

Auyong Hian vs. CTA, et.al.19 SCRA 10

The Collector of Customs when sitting in forfeiture proceedings constitutes a tribunal expressly vested by law with jurisdiction to hear and determine the subject matter of such proceedings without interference from the Court of First Instance.

Supervisory authority of Commissioner of Customs and Secretary of Finance

(1) In cases involving assessment of duties.

If in any case involving the assessment of duties, the Collector renders a decision adverse to the government, such decision shall automatically be elevated to, and reviewed by the Commissioner; and if the Collector’s decision would be affirmed by the Commissioner, such decision shall be automatically elevated to, and finally reviewed by the Secretary of Finance.

However, if within thirty (30) days from receipt of the record of the case by the Commissioner or by the Secretary of Finance, as the case may be, no decision is rendered by either of them, the decision under review shall become final and executory.

Any party aggrieved by either decision of the Commissioner or of the Secretary of Finance may appeal to the Court of Tax Appeals within thirty (30) days from receipt of a copy of such decision.

Except as provided above, the supervisory authority of the Secretary of Finance over the Bureau of Customs does not extend to the administrative review of the ruling of the Commissioner in matters appealed to the Court of Tax Appeals.

(2) In seizure cases

Supervisory authority exercised by the Commissioner while the case is pending in the Office of the Collector of Customs and before the decision of the Collector becomes final.

2000 Bar 20

Question:On the basis of a warrant of seizure and detention issued by the Collector of Customs for the purposes of enforcing Tariff and Customs Laws, assorted brands of cigarettes said to have been illegally imported into the Philippines were

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seized from a store where they were openly offered for sale. Dissatisfied with the decision rendered after hearing by the Collector of Customs on the confiscation of the articles, the importer filed a petition for review with the Court of Tax Appeals. The Collector moved to dismiss the petition for lack of jurisdiction. Rule on the motion?

Answer:The motion should be granted. The aggrieved party should have elevated this matter to the commissioner of customs. The Customs code provides that supervisory authority exercised by the Commissioner while the case is pending in the Office of the Collector of Customs and before the decision of the Collector becomes final.

2002 Bar 14

Question:The Collector of Customs of the Port of Cebu issued warrants of seizure and detention against the importation of machineries and equipment by LLD Import and Export Co., (LLD) for alleged non-payment of tax and customs duties in violation of customs laws. LLD was notified of the seizure but before it could be heard, the Collector of Customs issued a notice of sale of the articles. In order to restrain the Collector from carrying out the order to sell, LLD filed with the Court of Tax Appeals a petition for review with the application for the issuance of a writ of prohibition. It also filed with the CTA an appeal for refund of overpaid taxes on its other importations of raw materials which has been pending with the Collector of Customs. The Bureau of Customs moved to dismiss the case for lack of jurisdiction of the Court of Tax Appeals.

A. Does the Court of Tax Appeals have jurisdiction over the petition for review and writ of prohibition? Explain.

B. Will an appeal to the CTA for tax refund be possible? Explain.

Answer:A. No, the Court of Tax Appeals have no jurisdiction over

the petition for review and writ of prohibition. The aggrieved party should have elevated the case to the Commissioner of customs.

B. No, the appeal to the CTA for tax refund is not possible. The aggrieved party should have made a request for a tax refund from the Commissioner of Customs. Any adverse decision of the Commissioner may be appealed to the Secretary of Finance or Court of Tax Appeals.

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Local Taxation

Nature of Taxing Power of Local Governments1. Not inherent – unlike a sovereign state, municipal corporations have no

inherent power to tax. Being mere creatures of law, they may exercise the power only if delegated to them by the national legislature or conferred by the Constitution itself.

2. Limited – the new Constitution declares that “each local government shall have the power to create its own sources of revenue and to levy taxes, fees, and charges, subject to such limitations and guidelines as the Congress may provide.”

Fundamental Principles governing local taxation(a) Taxation shall be uniform in each local government unit; (b) Taxes, fees, charges and other impositions shall:

(2) be equitable and based as far as practicable on the taxpayer's ability to pay;

(3) be levied and collected only for public purposes; (4) not be unjust, excessive, oppressive, or confiscatory; (5) not be contrary to law, public policy, national economic policy,

or in the restraint of trade; (c) The collection of local taxes, fees, charges and other impositions shall in

no case be let to any private person; (d) The revenue collected pursuant to the provisions of this Code shall inure

solely to the benefit of, and be subject to the disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and,

(e) Each local government unit shall, as far as practicable, evolve a progressive system of taxation.

Common limitations on the taxing powers of local governments(a) Income tax, except when levied on banks and other financial

institutions; (b) Documentary stamp tax; (c) Taxes on estates, inheritance, gifts, legacies and other acquisitions

mortis causa, except as otherwise provided herein; (d) Customs duties, registration fees of vessel and wharfage on wharves,

tonnage dues, and all other kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by the local government unit concerned;

(e) Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees, or charges in any form whatsoever upon such goods or merchandise;

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(f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen;

(g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively from the date of registration;

(h) Excise taxes on articles enumerated under the national Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products;

(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein;

(j) Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code;

(k) Taxes on premiums paid by way or reinsurance or retrocession; (l) Taxes, fees or charges for the registration of motor vehicles and for the

issuance of all kinds of licenses or permits for the driving thereof, except tricycles;

(m) Taxes, fees, or other charges on Philippine products actually exported, except as otherwise provided herein;

(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938) otherwise known as the "Cooperative Code of the Philippines" respectively; and

(o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units.

Local authority that shall exercise taxing powerThe power shall be exercised by the sangguniang panlalawigan in the case of provinces, the sangguniang panlungsod in the case of cities, the sangguniang bayan in the case of municipalities, or the sangguniang Barangay in the case of barangays through an appropriate ordinance.

The exercise of the power to tax by the local legislative assembly is subject to the veto power of the local chief executive.

Taxing and other revenue raising powers1. Tax on the transfer of real property ownership;2. Tax on the business of printing and publication;3. Franchise tax;4. Tax on sand, gravel and other quarry resources;5. Professional tax;6. Amusement tax; and7. Annual fixed tax per delivery truck or van of manufacturers or

producers and wholesalers of, or dealers in, certain products.

Common revenue-raising powers1. Services fees and charges2. Public utility charges3. Toll fees or charges

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Procedure for Approval and Effectivity of Tax, Ordinances and Revenue Measures; Mandatory Public Hearings.

1. The procedure for approval of local tax ordinances and revenue measures shall be in accordance with the provisions of this Code.

2. Public hearings shall be conducted for the purpose prior to the enactment thereof.

3. Any question on the constitutionality or legality of tax ordinances or revenue measures may be raised on appeal within thirty (30) days from the effectivity thereof to the Secretary of Justice who shall render a decision within sixty (60) days from the date of receipt of the appeal.

4. Appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of the tax, fee, or charge levied therein.

5. Within thirty (30) days after receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction.

2002 Bar 9(b)Question:An ordinance was passed by the Provincial Board of a Province in the North, increasing the rate of basic real property tax from 0.006% to 1% of the assessed value of the real property effective January 1, 2000. Residents of the municipalities of the said providence protested the Ordinance on the ground that no public hearing was conducted, therefore, any increase in the rate of real property tax is void. Is there merit in the protest? Explain your answer.

Answer:Yes, there is merit in the said protest.

The local government code provide that public hearings shall be conducted for the purpose prior to the enactment of local taxes. This requirement is mandatory.

Community Taxes

Individuals Liable to Community Tax.Every inhabitant of the Philippines (1) eighteen (18) years of age or over (2) who has been regularly employed on a wage or salary basis for at least

thirty (30) consecutive working days during any calendar year, or who is engaged in business or occupation, or who owns real property with an aggregate assessed value of One thousand pesos (P1,000.00) or more, or who is required by law to file an income tax return shall pay an annual additional tax of Five pesos (P5.00) and an annual additional tax

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of One peso (P1.00) for every One thousand pesos (P1,000.00) of income regardless of whether from business, exercise of profession or from property which in no case shall exceed Five thousand pesos (P5,000.00).

In the case of husband and wife, the additional tax herein imposed shall be based upon the total property owned by them and the total gross receipts or earnings derived by them.

Juridical Persons Liable to Community Tax.Every corporation no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual community tax of Five hundred pesos (P500.00) and an annual additional tax, which, in no case, shall exceed Ten thousand pesos (P10,000.00) in accordance with the following schedule: (2) For every Five thousand pesos (P5,000.00) worth of real property in the

Philippines owned by it during the preceding year based on the valuation used for the payment of real property tax under existing laws, found in the assessment rolls of the city or municipality where the real property is situated - Two pesos (P2.00); and

(3) For every Five thousand pesos (P5,000.00) of gross receipts or earnings derived by it from its business in the Philippines during the preceding year - Two pesos (P2.00).

The dividends received by a corporation from another corporation however shall, for the purpose of the additional tax, be considered as part of the gross receipts or earnings of said corporation.

Exemptions.The following are exempt from the community tax: (1) Diplomatic and consular representatives; and(2) Transient visitors when their stay in the Philippines does not exceed

three (3) months.

Real Property Taxes

Fundamental Principles governing appraisal and assessment of real propertyThe appraisal and assessment of real property for taxation purposes shall be guided by the following fundamental principles:

1. Real property shall be appraised at its current and fair value;2. Real property shall be classified for assessment purposes on the basis

of its actual use;3. Real property shall be assessed on the basis of a uniform standard of

value within each local government unit;4. The appraisal, assessment, level and collection of real property tax

shall not be left to any private person; and5. The appraisal and assessment of real property shall be equitable.

2000 Bar 19(a)Question:Give at least two (2) fundamental principles governing real property taxation, which are limitations on the taxing

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power of local governments insofar as the levying of the realty tax is concerned.

Answer:1. Real property shall be appraised at its current and fair value;2. Real property shall be classified for assessment purposes on the

basis of its actual use;3. Real property shall be assessed on the basis of a uniform

standard of value within each local government unit;4. The appraisal, assessment, level and collection of real property

tax shall not be left to any private person; and5. The appraisal and assessment of real property shall be equitable.

Classes of real property for assessment purposesFor purposes of assessment, real property shall be classified as

1. residential2. agricultural3. commercial4. industrial5. mineral,6. timberland, or7. special

The city or municipality within the Metropolitan Manila Area through their respective Sanggunian, shall have the power to classify lands, as residential, agricultural, commercial, industrial, mineral, timberland, or special, in accordance with their zoning ordinances.

Special classes of real propertyAll lands, buildings, and other improvements thereon actually, directly and exclusively used for

(6) hospitals, (7) cultural, or scientific purposes, and (8) those owned and used by local water districts, and government-

owned or controlled corporations rendering essential public services in the supply and distribution of water and or generation and transmission of electric power.

Exemptions from Real Property TaxThe following are exempted from payment of the real property tax: (a) Real property owned by the Republic of the Philippines or any of its

political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person;

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and exclusively used by local water districts and government owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power;

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(d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and

(e) Machinery and equipment used for pollution control and environmental protection.

2002 Bar 10Question:Under the Local Government Code what properties are exempt from real property taxes?

Answer:(a) Real property owned by the Republic of the Philippines

or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person;

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and exclusively used by local water districts and government owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and

(e) Machinery and equipment used for pollution control and environmental protection.

Actual Use of Real Property as Basis for Assessment.Real property shall be classified, valued and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it.

2002 Bar 11

Question:The real property of Mr. And Mrs. Angeles, situated in a commercial area in front of the public market, was declared in their Tax Declaration as residential because it had been used by them as their family residence from the time of its construction in 1990. However, since January 1997, when the spouses left for the United States to stay there

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permanently with their children, the property has been rented to a single proprietor engaged in the sale of appliances and agri-products.

The Provincial Assessor reclassified the property as commercial for tax purposes starting January 1998. Mr. Mrs. Angeles appeal to the Local Board of Assessment Appeals, contending that the Tax Declaration previously classifying their property as residential is binding.

How should be the appeal be decided?

Answer:The appeal will be decided in favor of the government for the Local Government Code provides that Real property shall be classified, valued and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it.

2001 Bar 20Question:Under Article 415 of the Civil Code, in order for machinery and equipment to be considered real property, they must be placed by the owner of the land and, in addition, must tend to directly meet the needs of the industry or works carried on by the owner. Oil Companies, such as Caltex and Shell, install underground tanks in the gasoline stations located on land leased by the oil companies from others. Are those underground tanks, which were not placed there by the owner of the land but which were instead placed there by the lessee of the land, considered real property for purposes of real property taxation under the Local Government Code? Explain your answer.

Answer:Yes, the underground tanks of the oil companies constitute ‘machinery’ for Real Property Tax purposes. It is the “beneficial use” of the tanks that make it part of the taxable real property. In addition, said tanks are used actually and directly in the business of petroleum retailing.

General Revision of Assessment and Property Classification.(Sec. 219 of the Local Government Code_The provincial, city or municipal assessor shall undertake a general revision of real property assessments within two (2) years after the effectivity of this Code and every three (3) years thereafter.

Local Board of Assessment Appeals. Any owner or person having legal interest in the property who is not satisfied with the action of the provincial, city or municipal assessor in the assessment of his property may, within sixty (60) days from the date of

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receipt of the written notice of assessment, appeal to the Board of Assessment Appeals of the provincial or city by filing a petition under oath in the form prescribed for the purpose, together with copies of the tax declarations and such affidavits or documents submitted in support of the appeal.

Additional Levy on Real Property for the Special Education Fund.A province or city, or a municipality within the Metropolitan Manila Area, may levy and collect an annual tax of one percent (1%) on the assessed value of real property which shall be in addition to the basic real property tax. The proceeds thereof shall exclusively accrue to the Special Education Fund (SEF).

Additional Ad Valorem Tax on Idle Lands.A province or city, or a municipality within the Metropolitan Manila Area, may levy an annual tax on idle lands at the rate not exceeding five percent (5%) of the assessed value of the property which shall be in addition to the basic real property tax.

2000 Bar 19b

Question:May local governments impose an annual realty tax in addition to the basic real property tax on idle or vacant lots located in residential subdivisions within their respective territorial jurisdiction?

Answer:Yes, A province or city, or a municipality within the Metropolitan Manila Area, may levy an annual tax on idle lands at the rate not exceeding five percent (5%) of the assessed value of the property which shall be in addition to the basic real property tax.

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