LAW ON TAXATIONI. General Principles of Taxation

Two Fold Nature of the Power of Taxation1. It is an inherent attribute of sovereignty2. It is legislative in character

Extent of Taxing PowerSubject to constitutional and inherent restrictions, the power of taxation is

regarded as comprehensive, unlimited, plenary and supreme.

SCOPE OF LEGISLATIVE TAXING POWER1. Amount or rate of tax2. Apportionment of the tax3. Kind of tax4. Method of collection5. Purpose/s of its levy, provided it is for public purpose6. Subject to be taxed, provided it is within its jurisdiction7. Situs of taxation

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

As a process, it is a means by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of the government. It is merely a way of apportioning the costs of government among those who in some measures are privileged to enjoy its benefits and must bear its burdens.

As a power, taxation refers to the inherent power of the state to demand enforced contributions for public purpose or purposes.

Rationale of Taxation - The Supreme Court held:“It is said that taxes are what we pay for civilized society. Without taxes,

the government would be paralyzed for lack of the motive power to activate and

operate it. Hence, despite the natural reluctance to surrender part of one’s hard-earned income to the taxing authorities, every person who is able must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. The symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

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

CHARACTERISTICS OF TAXES1. forced charge;2. pecuniary burden payable in money;3. levied by the legislature;4. assessed with some reasonable rule of apportionment; 5. imposed by the State within its jurisdiction;6. levied for public purpose

A. Definition and concept of taxation

- A mode of raising revenue for public purpose; the exercise of sovereign power to raise revenue for the expense of the government.

- Power by which an Independent State, through its lawmaking body, raises and accumulates revenue from its inhabitants to pay the necessary expenses of the government. [51 AM JUR 341]

- Process or act of imposing a charge by governmental authority on property, individuals or transactions to raise money for public purposes. [ Black’s Law Dictionary]

- Taxation is described as a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government. (Paseo Realty &

Development Corporation v. Court of Appeals, GR No. 119286, October 13, 2004)

- Taxation is merely a way of apportioning the cost of government among those who in some measure areprivileged to enjoy its benefits and must bear itsburdens. [71 AM JUR 2ND 342]

- The process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government; a method of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must, therefore, bear its burdens, (see 51 Am. Jur. 341; 1 Cooley 72-93.)

B. Nature of taxation

- Taxation is inherent in nature, being an attribute of sovereignty. (Chamber of Real Estate and Builders’ Association, Inc. v. Romulo, 614 SCRA 605 (2010))

- The power to tax is inherent in the State, such power being inherently legislative, based on the principle that taxes are a grant of the people who are taxed, and the grant must be made by the immediate representative of the people, and where the people have laid the power, there it must remain and be exercised. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, 559 SCRA 160 (2008))

- As an incident of sovereignty, the power to tax has been described as unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it. (Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667 (1996))

- The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government, without being expressly conferred by the people. (Pepsi-Cola Bottling Company of the Phil. V. Mun. of Tanauan, Leyte, 69 SCRA 460)

- The power to tax is peculiarly and exclusively legislative and cannot be exercised by the executive or judicial branch of the government (1 Cooley 160-161). Hence, only Congress, our national legislative body, can impose

taxes. The levy of a tax, however, may also be made by a local legislative body subject to such limitations as may be provided by law.

C. Characteristics of taxation

- It is generally payable in the form of money, although the law may provide payment in kind (e.g. backpay certificates under Sec. 2, R.A. No. 304, as amended)

- It is a forced charge, imposition or contribution. As such, it operates ad invitum; it is in no way dependent upon the will or contractual assent, express or implied, of the person taxed. It is not contractual, either express or implied, but postive acts of government. (Panay Electric Co. v Collector of Internal Revenue, L-10574, May 28, 1958)

- It is levied on persons, property, rights, acts, privileges, or transactions.- It is levied by the State which has jurisdiction or control over the subject to

be taxed. (Vera vs Fernandez, 89 SCRA 199)- It is levied by the law-making body of the State. The power to tax is a

legislative power but is also granted to local governments, subject to such guidelines and limitations as law may provide. [Sec. 5, Art. X, Constitution]

- It is levied for public purpose. Revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private persons. [Gaston v. Republic Planters Bank, 158 SCRA 626, March 15, 1988].

- It is assessed in accordance with some reasonable rule of apportionment which means that conformably with the constitutional mandate for Congress to evolve a progressive tax system, taxes must be based on taxpayer’s ability to pay(Sec 28(a), Art VI, 1987 Constitution)

D. Power of taxation compared with other powers

1. Police power- Police Power is the power to make, ordain and establish all manner of

wholesome and reasonable laws, statutes and ordinances whether with penalties or without, not repugnant to the Constitution, the good and welfare of the commonwealth, and for the subjects of the same. (Metropolitan Manila Development Authority v. Garin, GR No. 130230, April 15, 2005)

- The main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue generation. The "lawful subjects" and

"lawful means" tests are used to determine the validity of a law enacted under the police power. The power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations. (PLANTERS PRODUCTS, INC. v. FERTIPHIL CORPORATION, G.R. No. 166006, March 14, 2008)

- If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does not make the imposition a tax. (GEROCHI v. DEPARTMENT OF ENERGY, 527 SCRA 696 (2007))

- The “lawful subjects” and “lawful means” tests are used to determine the validity of a law enacted under the police power. While police power is inherent in the state, it is not in municipal corporations. (Balacuit vs CFI of Agusan del Norte, 163 SCRA 182)

- A zoning ordinance, reclassifying residential into commercial or light industrial area, is a valid exercise of the police power. (Ortigas vs Feati Bank, 94 SCRA 533)

- The Manila ordinance prohibiting barbershop shops from conduction massage business in another room was held valid, as it was passed for the protection of public morals. (Velasco vs Villegas, 120 SCRA 568)

- The act of the Municipal Mayor in opening Jupiter and Orbit Streets, Bel Air Subdivision, to the buplic was deemed a val id exercise of police power (Sangalang vs Gaston, G.R. No. 71169, Dec. 22, 1988)

- Coco-levy funds are not only affected with public interest; they are, infact, prima facie public funds. They were raised with the use of thepolice and taxing powers of the State for the benefit of the coconutindustry and its farmers in general

2. Power of eminent domain

The ordinance requiring owners of commercial cemeteries to reserve 6% of their burial lots for burial grounds of paupers was held invalid; it was not an exercise of the police power, but of eminent domain. (Quezon City vs Ericta, 122 SCRA 759)

E. Purpose of taxation

1. Revenue-raising

- Primary purpose of taxation is to provide funds or property with which to promote the general welfare and protection it its citizens. Fees may be properly regarded as taxes even though they also serve as an instrument of regulation if the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. [PAL v. Edu, G.R. No. L- 41383 August 15, 1988] Caltex Phil. Inc. vs Commission on Audit, 208 SCRA 726(1992)

- Osmena vs Secretary Oscar Orbos GR L99886 March 31, 1993

2. Non-revenue/special or regulatory - Taxes may be levied with a regulatory purpose to provide means for

rehabilitation and stabilization of a threatened industry which is imbued with public interest as to be within the police power of the State. [Caltex v. COA, G.R. No. 92585 May 8, 1992]

- As long as a tax is for a public purpose, its validity is not affected by collateral purposes or motives of the legislature in imposing the levy, or by the fact that it has a regulatory effect [51 Am. Jur. 381-382.] or it discourages or even definitely deters the activities taxed.

- The principle applies even though the revenue obtained from the tax appears very negligible or the revenue purpose is only secondary. [see United States vs. Sanchez, 340 U.S. 42; Tio vs. Videogram Regulatory Board, 151 SCRA 208, 1987]

- The Sugar Adjustment Act is an act enacted primarily under the police power and designed to obtain a readjustment of the benefits derived by people interested in the sugar industry as well as to rehabilitate and stabilize the industry which constitutes one of the great sources of the country's wealth and, therefore, affects a great portion of the population of the country. (Lutz v Araneta, 78 PHIL 148)

- The Court was satisfied that the coco-levy funds were raised pursuant to law to support a proper governmental purpose. They were raised with the use of the police and taxing powers of the State for the benefit of the coconut industry and its farmers in general. (PAMBANSANG KOALISYON NG MGA SAMAHANG MAGSASAKA AT MANGGAGAWA SA NIYUGAN v. EXECUTIVE SECRETARY G.R. Nos. 147036-37 April 10, 2012)

- In relation to the regulatory purpose of the imposed fees, “the imposition questioned must relate to an occupation or activity that so engages the public interest, morals, safety and development as to require regulation for

the protection and promotion of such public interest; the imposition must also bear a reasonable relation to the probable expenses of regulation, taking into account not only the costs of direct regulation, but also its incidental consequences. (CHEVRON PHILIPPINES, INC. v. BASES CONVERSION DEVELOPMENT AUTHORITY, 630 SCRA 519 (2010))

- As an elementary principle of law, license taxation must not be “so onerous to show a purpose to prohibit a business which is not injurious to health or morals.” (TERMINAL FACILITIES AND SERVICES CORPORATION v. PHILIPPINE PORTS AUTHORITY, 378 SCRA 82 (2002))

F. Principles of sound tax system

1. Fiscal adequacy - Certainly, to continue collecting real property taxes based on valuations

arrived at several years ago, in disregard of the increases in the value of real properties that have occurred since then, is not in consonance with a sound tax system. Fiscal adequacy, which is one of the characteristics of a sound tax system, requires that sources of revenues must be adequate to meet government expenditures and their variations. (FRANCISCO I. CHAVEZ v. JAIME B. ONGPIN, G.R. No. 76778, June 6, 1990)

2. Administrative feasibility- Tax laws should be capable of convenient, just and effective administration.

Each tax should be capable of uniform enforcement by government officials, convenient as to the time, place, and manner of payment, and not unduly burdensome upon, or discouraging to business activity.

3. Theoretical justice- The tax burden should be in proportion to the taxpayer’s ability to pay. This

is the so-called ability to pay principle. Taxation should be uniform as well as equitable

TAXATION POLICE POWER EMINENT DOMAINPurposeTo raise revenue To promote public

purpose through regulations

To facilitate the State‘s need of property for public use

Amount of ExactionNo limit Limited to the cost of

regulation, issuance of the license or surveillance

No exaction; but private property is taken by the State for public purpose

3. Benefits ReceivedNo special or direct benefit is received by the taxpayer; merely general benefit of protection

No direct benefit is received; a healthy economic standard of society is attained

A direct benefit results in the form of just compensation to the property

4. Non-impairment of ContractsContracts may not be impaired

Contracts may be impaired

Contracts may be impaired

5. Transfer of Property RightsTaxes paid become part of public funds

No transfer but only restraint in its exercise

Transfer is effected in favor of the State

6. Scope

All persons, property and excises

All persons, property, rights and privileges

Only upon a particular property

G. Theory and basis of taxation

1. Lifeblood theory - Taxes are the lifeblood of the government and their prompt and certain

availability is an imperious need. [CIR v. Pineda] - Taxes are the lifeblood of the government and so should be collected

without unnecessary hindrance... It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. [CIR v. Algue, G.R. No. L-28896, February 17, 1988]

- Taxes being the lifeblood of the government should be collected promptly. No court shall have the authority to grant an injunction to restrain the collection of any internal revenue tax, fee or charge imposed by the National Internal Revenue Code. (Angeles City v Angeles Electric Corp 622 SCRA 43 (2010))

- We are not unaware of the doctrine that taxes are the lifeblood of the government, without which it cannot properly perform its functions; and that appeal shall not suspend the collection of realty taxes. However, there is an exception to the foregoing rule, i.e., where the taxpayer has shown a clear and unmistakable right to refuse or to hold in abeyance the payment of taxes. (Emerlinda S. Talento vs Hon. Remigio M. Escalada, JR., G.R. No. 180884, June 27, 2008)

2. Necessity theory - The power to tax, an inherent prerogative, has to be availed of to assure

the performance of vital state functions. It is the source of the bulk of public funds. [Sison v. Ancheta, G.R. No. L- 59431, July 25, 1984]

- The obligation to pay taxes rests… upon the necessity of money for the support of the state. For this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him can be pointed out. [Lorenzo v. Posadas, G.R. No. L-43082, June 18, 1937].

3. Benefits-protection theory (Symbiotic relationship) - Despite the natural reluctance to surrender part of one's hard earned

income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. [CIR v. Algue]

4. Jurisdiction over subject and objects- The limited powers of sovereignty are confined to objects within the

respective spheres of governmental control. These objects are the proper subjects or objects of taxation and none else.

H. Doctrines in taxation

1. Prospectivity of tax laws

- Tax laws are prospective in operation. Nature and amount of the tax could not be foreseen and understood by the taxpayer at the time the transaction.

Exception: Tax laws may be applied retroactively provided it is expressly declared or clearly the legislative intent.(e.g increase taxes on income already earned) when retroactive application would be so harsh and oppressive [Republic v. Fernandez, G.R. No. L-9141. September 25, 1956].- It is a cardinal rule that laws shall have no retroactive effect, unless the

contrary is provided/ (citing Art. 4 of the Civil Code) [Hydro Resources v.CA]- Note that the issue on the retroactivity of Section 204(c) of the 1997 NIRC

arose because the last paragraph of Section 204(c) was not found in Section 230 of the old Code. After a thorough consideration of this matter, we find that we cannot give retroactive application to Section 204(c) abovecited. We have to stress that tax laws are prospective in operation, unless the language of the statute clearly provides otherwise. (COMMISSIONER OF INTERNAL REVENUE v. ROSEMARIE ACOSTA G.R. No. 154068 August 3, 2007)

2. Imprescriptibility - Unless otherwise provided by the tax law itself, taxes in general are not

cancelable. (Commissioner vs Ayala Securities Corporation 101 SCRA 231)- Although the NIRC provides for the limitation in the assessment and

collection of taxes imposed, such prescriptive period will only be applicable to those taxes that were returnable. The prescriptive period shall start from the time the taxpayer files the tax return and declares his liablility. (Collector vs Bisaya Land Transportation Co. 1958)

- The law on prescription being a remedial measure should be interpreted liberally in order to protect the taxpayer. (Republic vs Ablaza 108 Phil 1105)

Double taxation

KINDS OF DOUBLE TAXATION

(1) Direct Duplicate Taxation /Obnoxious – double taxation in the objectionable or prohibited sense. This constitutes a violation of substantive due process.

Elements:a. the same property or subject matter is taxed twice when it should be taxed only once.b. both taxes are levied for the samepurposec. imposed by the same taxing authorityd. within the same jurisdictione. during the same taxing periodf. covering the same kind or character of tax.(Villanueva vs. City of Iloilo)

(2) Indirect Duplicate Taxation – not legally objectionable. The absence of one or more of the abovementioned elements makes the double taxation indirect.

(3) Domestic- this arises when the taxes are imposed by the local or national government (within the same state)

(4) International- refers to the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods.

REMEDIES OF DOUBLE TAXATION

1. Tax Sparing Rule – same dividend earned by a NRFC within the Phil. Is reduced by imposing a lower rate of 15% (in lieu of the 35%), on the condition that the country to which the NRFC is domiliced shall allow a credit against the tax due from the NRFC, taxes deemed to have been paid in the Phil. (Sec.28 B 5b) (CIR vs Procter & Gamble) (GR No. 66838, Dec. 2, 1991)

2. Tax deductions

Example: vanishing deduction under Section 86(A)(2), NIRC

3. Tax creditsInstances under the NIRC:

- For VAT purposes, the tax on inputs or items that go into the manufacture of finished products (which are eventually sold) may be credited against or deducted from the output tax or tax on the finished product.

- Foreign income taxes may be credited against the Phil. Income tax, subject to certain limitations, by citizens, including members of general professional partnerships or beneficiaries of estates or trusts (pro rata), as well as domestic corporations.

- A tax credit is granted for estate taxes paid to a foreign country on the estate of citizens and resident aliens subject to certain limitations.

- The donor’s tax imposed upon a citizen or a resident shall be credited with the amount of any donor‘s tax imposed by the authority of a foreign country, subject to certain limitations.

4. Tax Exemptions

5. Principle of Reciprocity

6. Treaties with other states

Strict sense Double taxation means taxing the same property twice when it should be

taxed only once; that is, "taxing the same person twice by the same jurisdiction for the same thing." It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as "direct duplicate taxation," the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character. (COMMISSIONER OF INTERNAL REVENUE v. SOLIDBANK CORPORATION G.R. No. 148191 November 25, 2003)

Broad sense Subjecting interest income to a 20% FWT and including it in the

computation of the 5% GRT is clearly not double taxation: First, the taxes herein are imposed on two different subject matters; Second, although both taxes are national in scope because they are imposed by the same taxing authority -- the national government under the Tax Code -- and operate within the same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different; Third, these

two taxes are of different kinds or characters. (CIR v SOLIDBANK CORPORATION G.R. No. 148191 November 25, 2003)

Constitutionality of double taxation- Regulation and taxation are two different things, the first being an exercise

of police power, whereas the latter involves the exercise of the power of taxation. While R.A. 2264 provides that no city may impose taxes on forest products and although lumber is a forest product, the tax in question is imposed not on the lumber but upon its sale; thus, there is no double taxation and even if there was, it is not prohibited. (SERAFICA v. CITY TREASURER OF ORMOC, G.R. No. L- 24813, April 28, 1968)

- Both a license fee and a tax may be imposed on the same business or occupation, or for selling the same article. This is not being in violation of the rule against double taxation. (COMPANIA GENERAL DE TABACOS DE FILIPINAS v. CITY OF MANILA, 8 SCRA 367)

Modes of eliminating double taxation- Double taxation usually takes place when a person is resident of a

contracting state and derives income from, or owns capital in the other contracting state and both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited.

- The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two methods of relief- the exemption method and the credit method. In the exemption method, the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer’s remaining income or capital. On the other hand, in the credit method, although the income or capital which is

taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax. (COMMISSIONER OF INTERNAL REVENUE v. S.C. JOHNSON AND SON, INC. G.R. No. 127105 June 25, 1999)

- In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the other country. Thus, if the rates of tax are lowered by the state of source, in this case, by the Philippines, there should be a concomitant commitment on the part of the state of residence to grant some form of tax relief, whether this be in the form of a tax credit or exemption. (COMMISSIONER OF INTERNAL REVENUE v. S.C. JOHNSON AND SON, INC. G.R. No. 127105 June 25, 1999)

4. Escape from taxation

a) Shifting of tax burden- Section 135(a) should be construed as prohibiting the shifting of the burden

of the excise tax to the international carriers who buy petroleum products from the local manufacturers. Said international carriers are thus allowed to purchase the petroleum products without the excise tax component which otherwise would have been added to the cost or price fixed by the local manufacturers or distributors/sellers. (COMMISSIONER OF INTERNAL REVENUE v. PILIPINAS SHELL PETROLEUM CORPORATION, G.R. No. 188497, February 19, 2014)

i) Ways of shifting the tax burden- It may indeed be that the economic burden of the tax finally falls on the

purchaser; when it does the tax becomes a part of the price which the purchaser must pay. It does not matter that an additional amount is billed as tax to the purchaser. The method of listing the price and the tax separately and defining taxable gross receipts as the amount received less the amount of the tax added, merely avoids payment by the seller of a tax on the amount of the tax. (PHILIPPINE ACETYLENE CO., INC. v. COMMISSIONER OF INTERNAL REVENUE, G.R. No. L- 19707, August 17, 1967)

(ii) Taxes that can be shifted(iii) Meaning of impact and incidence of taxationIn indirect taxation, a distinction is made between the liability for the tax and burden of the tax: The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods, properties or services to the buyer. In such a case, what is transferred is not the seller's liability but merely the burden of the VAT. (RENATO V. DIAZ and AURORA MA. F. TIMBOL v. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

b) Tax avoidance- Tax avoidance is the tax saving device within the means sanctioned by law.

This method should be used by the taxpayer in good faith and at arm’s length. (COMMISSIONER OF INTERNAL REVENUE v. THE ESTATE OF BENIGNO P. TODA, JR. G.R. No. 147188 September 14, 2004)

c) Tax evasion

- Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. (COMMISSIONER OF INTERNAL REVENUE v. THE ESTATE OF BENIGNO P. TODA, JR. G.R. No. 147188 September 14, 2004)

- Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful. (COMMISSIONER OF INTERNAL REVENUE v. THE ESTATE OF BENIGNO P. TODA, JR. G.R. No. 147188 September 14, 2004)

- It is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonaga’s sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. (COMMISSIONER OF INTERNAL REVENUE v. THE ESTATE OF BENIGNO P. TODA, JR. G.R. No. 147188 September 14, 2004)

5. Exemption from taxation a) Meaning of exemption from taxation

- It is the legislature, unless limited by a provision of the state constitution, that has full power to exempt any person or corporation or class of property from taxation, its power to exempt being as broad as its power to tax. Other than Congress, the Constitution may itself provide for specific tax exemptions, or local governments may pass ordinances on exemption only from local taxes. (JOHN HAY PEOPLES ALTERNATIVE COALITION, et al. v. VICTOR LIM, et al., G. R. No. 119775, October 24, 2003)

b) Nature of tax exemption - Taxation is the rule and exemption is the exception. (FELS ENERGY, INC. v.

PROVINCE OF BATANGAS, 516 SCRA 186 (2007))- Since the power to tax includes the power to exempt thereof which is

essentially a legislative prerogative, it follows that a municipal mayor who is an executive officer may not unilaterally withdraw such an expression of a policy thru the enactment of a tax. (PHILIPPINE PETROLEUM CORPORATION v. MUNICIPALITY OF PILILLA, G.R. No. 90776, June 3, 1991)

- A tax exemption being enjoyed by the buyer cannot be the basis of a claim for tax exemption by the manufacturer or seller of the goods for any tax due to it as the manufacturer or seller. The excise tax imposed on petroleum products under Section 148 is the direct liability of the manufacturer who cannot thus invoke the excise tax exemption granted to its buyers who are international carriers; nevertheless, the manufacturer, as the statutory taxpayer who is directly liable to pay the excise tax on its petroleum products, is entitled to a refund or credit of the excise taxes it paid for petroleum products sold to international carriers

- (COMMISSIONER OF INTERNAL REVENUE v. PILIPINAS SHELL PETROLEUM CORPORATION, G.R. No. 188497, February 19, 2014)

- Manila Electric Company vs Vera 67 SCRA 351- Commissioner vs Guerrero, 21 SCRA 180

c) Kinds of tax exemption (i) Express

Sec. 27 D (4), NIRC (ii) Implied

It bears repeating that the law looks with disfavor on tax exemptions and he who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted. (WESTERN MINOLCO CORPORATION v. COMMISSIONER OF INTERNAL REVENUE, G.R. No. L-61632, August 16, 1983)

(iii) Contractual- Nevertheless, since taxation is the rule and exemption

therefrom the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. The only exception to this rule is where the exemption was granted to private parties based on material consideration of a mutual nature, which then becomes contractual and is thus covered by the non-impairment clause of the Constitution. (MCIAA v. Marcos, G.R. No. 120082 September 11, 1996)Cagayan Electronic Co. vs Commissioner 138 SCRA 629

- Manila Electric Company vs Prov of Laguna 306 SCRA 750 (1999)

d) Rationale/grounds for exemption- In recent years, the increasing social challenges of the times

expanded the scope of state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives. Taxation assumes even greater significance with the ratification of the 1987 Constitution. (BATANGAS POWER CORPORATION v. BATANGAS CITY and NATIONAL POWER CORPORATION, G.R. No. 152675, April 28, 2004)

- The PPI says that the discriminatory treatment of the press is highlighted by the fact that transactions, which are profit oriented, continue to enjoy exemption under R.A. No. 7716 but an enumeration of some of these transactions will suffice to show that by and large this is not so and that the exemptions are granted for a purpose. As the Solicitor General says, such exemptions are granted, in some cases, to encourage agricultural production and, in other cases, for the personal benefit of the end-user rather than for profit. (ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE and THE

COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995)

e) Revocation of tax exemption- Since the law granted the press a privilege, the law could take back the

privilege anytime without offense to the Constitution. The reason is simple: by granting exemptions, the State does not forever waive the exercise of its sovereign prerogative; indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to which other businesses have long ago been subject. (ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995)

- The rule is that a special and local statute applicable to a particular case is not repealed by a later statute which is general in its terms, provisions and application even if the terms of the general act are broad enough to include the cases in the special law unless there is manifest intent to repeal or alter the special law. (THE PROVINCE OF MISAMIS ORIENTAL, represented by its PROVINCIAL TREASURER v. CAGAYAN ELECTRIC POWER AND LIGHT COMPANY, INC., G.R. No. L-45355, January 12, 1990)

- This Court recognized the removal of the blanket exclusion of government instrumentalities from local taxation as one of the most significant provisions of the 1991 LGC. Specifically, we stressed that Section 193 of the LGC, an express and general repeal of all statutes granting exemptions from local taxes, withdrew the sweeping tax privileges previously enjoyed by the NPC under its Charter. (BATANGAS POWER CORPORATION v. BATANGAS CITY and NATIONAL POWER CORPORATION, G.R. No. 152675, April 28, 2004)

6. Compensation and set-off 7. Compromise 8. Tax amnesty a) Definition

b) Distinguished from tax exemption 9. Construction and interpretation of: a) Tax laws

(i) General rule (ii) Exception b) Tax exemption and exclusion (i) General rule

- But since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax exemptions are thus construed in strictissimi juris against the taxpayers and liberally in favor of the taxing authority. (MCIAA v. Marcos, G.R. No. 120082 September 11, 1996)

- Entrenched in our jurisprudence is the principle that tax refunds are in the nature of tax exemptions which are construed in strictissimi juris against the taxpayer and liberally in favor of the government. As tax refunds involve a return of revenue from the government, the claimant must show indubitably the specific provision of law from which her right arises; it cannot be allowed to exist upon a mere vague implication or inference nor can it be extended beyond the ordinary and reasonable intendment of the language actually used by the legislature in granting the refund. (COMMISSIONER OF INTERNAL REVENUE v. ROSEMARIE ACOSTA G.R. No. 154068 August 3, 2007)

- Well-settled in this jurisdiction is the fact that actions for tax refund, as in this case, are in the nature of a claim for exemption and the law is construed in strictissimi juris against the taxpayer. The pieces of evidence presented entitling a taxpayer to an exemption are also strictissimi scrutinized and must be duly proven. (KEPCO PHILIPPINES CORPORATION v. COMMISSIONER OF INTERNAL REVENUE G.R. No. 179961 January 31, 2011)

- The legislative intent, as shown by the discussions in the Bicameral Conference Meeting, is to require PAGCOR to pay corporate income tax; hence, the omission or removal of PAGCOR from exemption from the payment of corporate income tax. It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius. (PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR) v. THE BUREAU OF INTERNAL REVENUE G.R. No. 172087 March 15, 2011)

- It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius. Not being a local

water district, a cooperative registered under R.A. No. 6938, or a non-stock and non-profit hospital or educational institution, petitioner clearly does not belong to the exception and it is therefore incumbent upon it to point to some provisions of the LGC that expressly grant its exemption from local taxes. (NATIONAL POWER CORPORATION v. CITY OF CABANATUAN G.R. No. 149110 April 9, 2003)

- Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad, pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer due to diminution of much needed funds. While international comity is invoked in this case on the nebulous representation that the funds involved in the loans are those of a foreign government, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax laws. (COMMISSIONER OF INTERNAL REVENUE v. MITSUBISHI METAL CORPORATION G.R. No. L-54908 January 22, 1990)

- The claimed statutory exemption of the John Hay SEZ from taxation should be manifest and unmistakable from the language of the law on which it is based; it must be expressly granted in a statute stated in a language too clear to be mistaken. If it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption and incentives given to the Subic SEZ, it would have so expressly provided in the R.A. No. 7227. (JOHN HAY PEOPLES ALTERNATIVE COALITION, et al. v. VICTOR LIM, et al., G. R. No. 119775, October 24, 2003)

- The Court in PLDT v. City of Davao, held that in approving Section 23 of RA No. 7925, Congress did not intend it to operate as a blanket tax exemption to all telecommunications entities. The Court also clarified the meaning of the word "exemption" in Section 23 of RA 7925: that the word "exemption" as used in the statute refers or pertains merely to an exemption from regulatory or reporting requirements of the Department of Transportation and Communication or the National Transmission Corporation and not to an exemption from the grantee’s tax liability. (SMART COMMUNICATIONS, INC. v. THE CITY OF DAVAO, G.R. No. 155491, July 21, 2009)

- In Philippine Long Distance Telephone Company (PLDT) v. Province of Laguna, the issue that the Court had to resolve was whether PLDT was liable to pay franchise tax to the Province of Laguna in view of the "in lieu of all taxes" clause in its franchise and Section 23 of RA 7925. Applying the

rule of strict construction of laws granting tax exemptions and the rule that doubts are resolved in favor of municipal corporations in interpreting statutory provisions on municipal taxing powers, the Court held that Section 23 of RA 7925 could not be considered as having amended petitioner's franchise so as to entitle it to exemption from the imposition of local franchise taxes. (SMART COMMUNICATIONS, INC. v.THE CITY OF DAVAO, G.R. No. 155491, July 21, 2009)

- The "in lieu of all taxes" clause in a legislative franchise should categorically state that the exemption applies to both local and national taxes; otherwise, the exemption claimed should be strictly construed against the taxpayer and liberally in favor of the taxing authority. (SMART COMMUNICATIONS, INC. v.THE CITY OF DAVAO, G.R. No. 155491, July 21, 2009)

- PLDT’s contention that the “in-lieu-of-all-taxes” clause does not refer to “tax exemption” but to “tax exclusion” and hence, the strictissimi juris rule does not apply. The Supreme Court explains that these two terms actually mean the same thing, such that the rule that tax exemption should be applied in strictissimi juris against the taxpayer and liberally in favor of the government applies equally to tax exclusions. (PHILIPPINE LONG DISTANCE TELEPHONE COMPANY vs PROVINCE OF LAGUNA G.R. No. 151899, August 16, 2005)

Exception- However, if the grantee of the exemption is a political subdivision or

instrumentality, the rigid rule of construction does not apply because the practical effect of the exemption is merely to reduce the amount of money that has to be handled by the government in the course of its operations. (MCIAA v. Marcos, G.R. No. 120082, September 11, 1996)

- There is parity between tax refund and tax exemption only when the former is based either on a tax exemption statute or a tax refund statute. Obviously, that is not the situation here since Fortune Tobacco’s claim for refund is premised on its erroneous payment of the tax, or better still, the government’s exaction in the absence of a law. (COMMISSIONER OF INTERNAL REVENUE v. FORTUNE TOBACCO CORPORATION, G.R. Nos. 167274-75, July 21, 2008)

- A claim for tax refund may be based on statutes granting tax exemption or tax refund and in such case, the rule of strict interpretation against the

taxpayer is applicable as the claim for refund partakes of the nature of an exemption, a legislative grace, which cannot be allowed unless granted in the most explicit and categorical language. Tax refunds (or tax credits), on the other hand, are not founded principally on legislative grace but on the legal principle which underlies all quasi-contracts abhorring a person’s unjust enrichment at the expense of another. (COMMISSIONER OF INTERNAL REVENUE v. FORTUNE TOBACCO CORPORATION, G.R. Nos. 167274-75, July 21, 2008)

- As a necessary corollary, when the taxpayer’s entitlement to a refund stands undisputed, the State should not misuse technicalities and legalisms, however exalted, to keep money not belonging to it. The government is not exempt from the application of solutio indebiti, a basic postulate proscribing one, including the State, from enriching himself or herself at the expense of another. (COMMISSIONER OF INTERNAL REVENUE v. FORTUNE TOBACCO CORPORATION, G.R. Nos. 167274-75, September 11, 2013)

c) Tax rules and regulations (i) General rule only

- While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to implement statutes, they are without authority to limit the scope of the statute to less than what it provides, or extend or expand the statute beyond its terms, or in any way modify explicit provisions of the law. Hence, in case of discrepancy between the basic law and an interpretative or administrative ruling, the basic law prevails.

- (FORT BONIFACIO DEVELOPMENT CORPORATION v. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 173425, September 4, 2012)

- Revenue Memorandum Circulars (RMCs) must not override, supplant, or modify the law, but must remain consistent and in harmony with the law they seek to apply and implement. (COMMISSIONER OF INTERNAL REVENUE v. SM PRIME HOLDINGS, INC. 613 SCRA 774 (2010))

- Admittedly the government is not estopped from collecting taxes legally due because of mistakes or errors of its agents. But like other principles of law, this admits of exceptions in the interest of justice and fair play, as where injustice will result to the taxpayer. (COMMISSIONER OF INTERNAL REVENUE v. COURT OF APPEALS, G.R. No. 117982, February 6, 1997)

- "When a statute is susceptible of the meaning placed upon it by a ruling of the government agency charged with its enforcement and the [l]egislature

thereafter [reenacts] the provisions [without] substantial change, such action is to some extent confirmatory that the ruling carries out the legislative purpose." (COMMISSIONER OF INTERNAL REVENUE v. AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), G.R. No. 152609, June 29, 2005)

- BIR Ruling No. DA-489-03 is a general interpretative rule because it is a response to a query made, not by a particular taxpayer, but by a government agency tasked with processing tax refunds and credits. Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are mandatory and jurisdictional. (TEAM ENERGY CORPORATION (Formerly MIRANT PAGBILAO CORPORATION) v. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 197760, January 13, 2014)

d) Penal provisions of tax laws- In criminal cases, statutes of limitations are acts of grace, a surrendering by

the sovereign of its right to prosecute. They receive strict construction in favor of the Government and limitations in such cases will not be presumed in the absence of clear legislation. (LIM, et al. v. COURT OF APPEALS, G.R. No. 48134-37, October 18, 1990)

e) Non-retroactive application to taxpayers- Revenue statutes are substantive laws and in no sense must their

application be equated with that of remedial laws. As well said in a prior case, revenue laws are not intended to be liberally construed. (COMMISSIONER OF INTERNAL REVENUE v. ROSEMARIE ACOSTA, G.R. No. 154068, August 3, 2007)

Exceptions- While it is a settled principle that rulings, circulars, rules and regulations

promulgated by the BIR have no retroactive application if to so apply them would be prejudicial to the taxpayers, this rule does not apply: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c)

where the taxpayer acted in bad faith. Not being the taxpayer who, in the first instance, sought a ruling from the CIR, however, FDC cannot invoke the foregoing principle on non-retroactivity of BIR rulings. (COMMISSIONER OF INTERNAL REVENUE v. FILINVEST DEVELOPMENT CORPORATION, G.R. No. 163653, July 19, 2011)

I. Scope and limitation of taxationLIMITATIONS ON THE TAXING POWERA. INHERENT LIMITATIONS (KEY: SPINE)

1. Territoriality or Situs of taxation2. Public purpose of taxes3. International comity4. Non-delegability of the taxing power5. Tax Exemption of the government

1. Inherent limitations a) Public purpose

TESTS IN DETERMINING PUBLIC PURPOSEa. Duty Test – whether the thing to be furthered by the appropriation of public revenue is something, which is the duty of the State, as a government, to provide.

b. Promotion of General Welfare Test– whether the proceeds of the tax will directly promote the welfare of the community in equal measure.

- Section 2 of P.D. 755, Article III, Section 5 of P.D. 961, and Article III, Section 5 of P.D. 1468 completely ignore the fact that coco-levy funds are public funds raised through taxation. And since taxes could be exacted only for a public purpose, they cannot be declared private properties of individuals although such individuals fall within a distinct group of persons. (PAMBANSANG KOALISYON NG MGA SAMAHANG MAGSASAKA AT MANGGAGAWA SA NIYUGAN v. EXECUTIVE SECRETARY G.R. Nos. 147036-37 April 10, 2012)

- The Court of course grants that there is no hard-and-fast rule for determining what constitutes public purpose. But the assailed provisions, which removed the coco-levy funds from the general funds of the government and declared them private properties of coconut farmers, do

not appear to have a color of social justice for their purpose. (PAMBANSANG KOALISYON NG MGA SAMAHANG MAGSASAKA AT MANGGAGAWA SA NIYUGAN v. EXECUTIVE SECRETARY G.R. Nos. 147036-37 April 10, 2012)

- It would be a robbery for the State to tax its citizens and use the funds generated for a private purpose. When a tax law is only a mask to exact funds from the public when its true intent is to give undue benefit and advantage to a private enterprise, that law will not satisfy the requirement of "public purpose." (PLANTERS PRODUCTS, INC. v. FERTIPHIL CORPORATION, G.R. No. 166006, March 14, 2008)

- Jurisprudence states that "public purpose" should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. (PLANTERS PRODUCTS, INC. v. FERTIPHIL CORPORATION, G.R. No. 166006, March 14, 2008)

b) Inherently legislative (i) General rule

- The power to tax is purely legislative, and which the central legislative body cannot delegate either to the executive or judicial department of the government without infringing upon the theory of separation of powers. (Pepsi-Cola Bottling Company of the Phil. V. Mun. of Tanauan, Leyte, 69 SCRA 460)

- The powers which Congress is prohibited from delegating are those which are strictly, or inherently and exclusively, legislative. Purely legislative power, which can never be delegated, has been described as the authority to make a complete law –complete as to the time when it shall take effect and as to whom it shall be applicable –and to determine the expediency of its enactment. (ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S. ALBANO v. THE HONORABLE EXECUTIVE SECRETARY G.R. No. 168056 September 1, 2005)

(ii) Exceptions

A) Delegation to local governments

- The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution. (MCIAA v. Marcos, G.R. No. 120082 September 11, 1996)

- The power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities of local government units. It may also be relevant to recall that the original reasons for the withdrawal of tax exemption privileges granted to government-owned and controlled corporations and all other units of government were that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises. (MCIAA v. Marcos, G.R. No. 120082 September 11, 1996)

- Taxation assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution. (NATIONAL POWER CORPORATION v. CITY OF CABANATUAN G.R. No. 149110 April 9, 2003)

- Clearly then, while a new slant on the subject of local taxation now prevails in the sense that the former doctrine of local government units’ delegated power to tax had been effectively modified with Article X, Section 5 of the 1987 Constitution now in place, the basic doctrine on local taxation remains essentially the same. For as the Court stressed in Mactan, "the power to tax is [still] primarily vested in the Congress." (QUEZON CITY, et al. v. ABS-CBN BROADCASTING CORPORATION, G.R. No. 162015, March 6, 2006)

- Section 5, Article X of the Constitution does not change the doctrine that municipal corporations do not possess inherent powers of taxation; what it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue and they no longer have to wait for a statutory grant of these powers and the power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations; henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of

municipal corporations. (QUEZON CITY, et al. v. ABS-CBN BROADCASTING CORPORATION, G.R. No. 162015, March 6, 2006)

b) Delegation to the President

- Assuming that Section 28(2) Article VI did not exist, the enactment of the SMA [Safeguard Measure Act] by Congress would be voided on the ground that it would constitute an undue delegation of the legislative power to tax. The constitutional provision shields such delegation from constitutional infirmity, and should be recognized as an exceptional grant of legislative power to the President, rather than the affirmation of an inherent executive power. (SOUTHERN CROSS CEMENT CORPORATION v. CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005)

- When Congress tasks the President or his/her alter egos to impose safeguard measures under the delineated conditions, the President or the alter egos may be properly deemed as agents of Congress to perform an act that inherently belongs as a matter of right to the legislature. It is basic agency law that the agent may not act beyond the specifically delegated powers or disregard the restrictions imposed by the principal. (SOUTHERN CROSS CEMENT CORPORATION v. CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005)

- Delegation of legislative powers to the President is permitted in Sections 23 (2) and 28 (2) of Article VI of the Constitution. By virtue of a valid delegation of legislative power, it may also be exercised by the President and administrative boards, as well as the lawmaking bodies of all municipal levels, including the barangay. (Camarines North Electric Cooperative v. Torres, GR No. 127249, February 27, 1998)

c) Delegation to administrative agencies- Clearly, the legislature may delegate to executive officers or bodies the

power to determine certain facts or conditions, or the happening of contingencies, on which the operation of a statute is, by its terms, made to depend, but the legislature must prescribe sufficient standards, policies or limitations on their authority. While the power to tax cannot be delegated to executive agencies, details as to the enforcement and administration of an exercise of such power may be left to them, including the power to

determine the existence of facts on which its operation depends. (ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S. ALBANO v. THE HONORABLE EXECUTIVE SECRETARY G.R. No. 168056 September 1, 2005)

- In the present case, in making his recommendation to the President on the existence of either of the two conditions, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate; he is acting as the agent of the legislative department, to determine and declare the event upon which its expressed will is to take effect. Thus, being the agent of Congress and not of the President, the President cannot alter or modify or nullify, or set aside the findings of the Secretary of Finance and to substitute the judgment of the former for that of the latter. (ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S. ALBANO v. THE HONORABLE EXECUTIVE SECRETARY G.R. No. 168056 September 1, 2005)

c) Territorial

KIND OF TAX SITUS

Personal or Community tax Residence or domicile of the taxpayer

Real property tax -tangible: where it is physically located or permanently kept (Lex rei sitae) -intangible: subject to Sec. 104 of the NIRC and the principle of mobilia sequuntur personam

Business tax Place of business

Excise or Privilege tax Where the act is performed or where occupation is pursued

Sales tax Where the sale is consummated

Transfer tax Residence or citizenship of the taxpayer or location of

propertyFranchise Tax State which granted the

franchise

Situs of taxation

SITUS OF TAXATION OF INTANGIBLE PERSONAL PROPERTY(a) Meaning

General Rule: Domicile of the owner pursuant to the principle of the mobilia sequuntur personam or movables follow the person.

Exceptions:1. When the property has acquired a business situs in another jurisdiction;2. When an express provision of the statute provide for another rule.Illustration: For purposes of estate and donor‘s taxes, the followingintangible properties are deemed with a situs in the Philippines:

(1) franchise which must be exercised in the Philippines;(2) shares, obligations or bonds issued by any corporation organized or constituted in the Philippines in accordance with its laws;(3) shares, obligations or bonds by any foreign corporation eighty five percent (85%) of the business of which is located in the Philippines;(4) shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; and(5) shares or rights in any partnership, business or industry established in the Philippines. (Sec. 104, 1997 NIRC).

(b) Situs of income tax

- The important factor therefore which determines the source of income of personal services is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually rendered. (COMMISSIONER OF INTERNAL REVENUE v. JULIANE BAIER-NICKEL, G.R. No. 153793, August 29, 2006)

1) From sources within the Philippines

- The reinsurance premiums remitted to appellants by virtue of the reinsurance contracts, accordingly, had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability. Said undertaking is the activity that produced the reinsurance premiums, and the same took place in the Philippines. (Alexander Howden & Co., Ltd. v. Collector of Internal Revenue as cited in COMMISSIONER OF INTERNAL REVENUE v. JULIANE BAIER-NICKEL, G.R. No. 153793, August 29, 2006)

- The "sale of tickets" in the Philippines is the "activity" that produced the income and therefore BOAC should pay income tax in the Philippines because it undertook an income producing activity in the country. The tickets exchanged hands here and payments for fares were also made here in Philippine currency; thus, the situs of the source of payments is the Philippines. (Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC) as cited in COMMISSIONER OF INTERNAL REVENUE v. JULIANE BAIER-NICKEL, G.R. No. 153793, August 29, 2006)

- For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activities within this country regardless of the absence of flight operations within Philippine territory. Indeed, the sale of tickets is the very lifeblood of the airline business, the generation of sales being the paramount objective. (COMMISSIONER OF INTERNAL REVENUE v. JAPAN AIR LINES, INC., G.R. No. 60714, March 6, 1991)

(2) From sources without the Philippines (3) Income partly within and partly without the Philippines

(c) Situs of property taxes (1) Taxes on real property

(2) Taxes on personal property (d) Situs of excise tax

- Since it partakes of the nature of an excise tax, the situs of taxation is the place where the privilege is exercised, in this case in the City of Iriga, where CASURECO III has its principal office and from where it operates, regardless of the place where its services or products are delivered. (CITY OF IRIGA v.

CAMARINES SUR III ELECTRIC COOPERATIVE, INC., G.R. No. 192945, September 5, 2012)

(1) Estate tax (2) Donor’s tax

(e) Situs of business tax

(1) Sale of real property (2) Sale of personal property

- It is not the place where the contract was perfected, but the place of delivery which determines the taxable situs of the property sought to be taxed. In the cases of Soriano y Cia. v. Collector of Internal Revenue, 51 O.G. 4548; Vegetable Oil Corporation v. Trinidad, 45 Phil. 822; and Earnshaw Docks and Honolulu Iron Works vs. Collector of Internal Revenue, 54 Phil. 696, it has been ruled that for a sale to be taxed in the Philippines it must be consummated there; thus indicating that the place of consummation (associated with the delivery of the things subject matter of the contract) is the accepted criterion in determining the situs of the contract for purposes of taxation, and not merely the place of the perfection of the contract. (THE MUNICIPALITY OF JOSE PANGANIBAN, PROVINCE OF CAMARINES NORTE, ETC. v. THE SHELL COMPANY OF THE PHILIPPINES, LTD., G.R. No. L-18349, July 30, 1966)

(3) Value-Added Tax (VAT)- As a general rule, the VAT system uses the destination principle as a basis

for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are consumed; thus, exports are zero-rated, while imports are taxed. (COMMISSIONER OF INTERNAL REVENUE v.AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), G.R. No. 152609, June 29, 2005)

- Consumption is "the use of a thing in a way that thereby exhausts it,” and applied to services, the term means the performance or "successful completion of a contractual duty, usually resulting in the performer’s release from any past or future liability." The services rendered by respondent are performed or successfully completed upon its sending to its

foreign client the drafts and bills it has gathered from service establishments here; thus, its services, having been performed in the Philippines, are also consumed in the Philippines. (COMMISSIONER OF INTERNAL REVENUE v.AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), G.R. No. 152609, June 29, 2005)

- Unlike goods, services cannot be physically used in or bound for a specific place where their destination is determined but instead, there can only be a "predetermined end of a course" when determining the service "location or position for legal purposes." Respondent’s facilitation service has no physical existence, yet takes place upon rendition, and therefore upon consumption, in the Philippines. (COMMISSIONER OF INTERNAL REVENUE v.AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), G.R. No. 152609, June 29, 2005)

d) International comityThese principles limit the authority of the government to effectively impose

taxes on a sovereign state and its instrumentalities, as well as on its property held and activities undertaken in that capacity. Even where one enters the territory of another, there is an implied understanding that the former does not thereby submit itself to the authority and jurisdiction of the other.

e) Exemption of government entities, agencies, and instrumentalities As a matter of public policy, property of the State and of its

municipal subdivisions devoted to government uses and purposes is deemed to be exempt from taxation although no express provision in the law is made therefor.

- General Rule: The Government is tax exempt.- However, it can also tax itself.

RULES:1. Administrative Agencies

a. Governmental function – tax exempt unless when the law expressly provides for tax. (Sec.32 B7)

b. Proprietary function – taxable unless exempted by law. (Sec.27C) 2. GOCCs

General Rule: Income is taxable at the rate imposed upon corporations or associations engaged in a similar business, industry, or activity. Exception: GSIS, SSS, PHIC, PCSO

and PAGCOR. (Sec. 27(C), NIRC)

3. Government Educational Institutionsa. Property or real estate tax –property actually, directly and exclusively

used for educational purposes – exempt but income of whatever kind and character from any of their properties, real or personal, regardless of the disposition, is taxable. (Sec.30, last par., NIRC)

b. Income received by them as such are exempt from taxes. However, their income from any of their activities conducted for profit regardless of the disposition, is taxable. (Sec. 30,last par., NIRC)

4. 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 is not included in gross income and exempt from taxation. (Sec. 32(B)(7)(b), NIRC)

5. Donations in favor of governmental institutions are considered as income on the part of the donee. However, it is not considered as taxable income because it is an exclusion from the computation of gross income. (Sec.32 (B)(3), NIRC)

6. The amount of all bequests,legacies, devises or transfers to or for the use of the Government or any political subdivision for exclusively public purposes is deductible from the gross estate. (Sec.86 (A)(3), NIRC)

7. 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 are exempt from donor‘s tax. (Sec. 101(A)(2), NIRC)

8. Local government units are expressly prohibited by the LGC from levying tax upon National Government, its agencies, and instrumentalities, and local government units. [Sec. 133 (o), LGC]

9. Unless otherwise provided in the Local Government Code (LGC), tax exemptions granted to all persons, whether natural or juridical, including GOCC, except local water districts, cooperatives duly registered under RA No. 6938,

nonstick and non-profit institutions, are withdrawn upon effectivity of the LGC. (Sec. 193, LGC)

10. 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 shall be exempt from payment of real property tax. (Sec. 234, LGC)

- The Court rules that the Authority [PFDA] is not a GOCC but an instrumentality of the national government which is generally exempt from payment of real property tax. However, said exemption does not apply to the portions of the IFPC which the Authority leased to private entities. (Philippine Fisheries Development Authority v. Court of Appeals, G.R. No. 169836, 31 July 2007)

- As property of public dominion, the Lucena Fishing Port Complex is owned by the Republic of the Philippines and thus exempt from real estate tax. (PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY (PFDA) v. CENTRAL BOARD OF ASSESSMENT APPEALS, G.R. No. 178030, December 15, 2010)

2. Constitutional limitations

a) Provisions directly affecting taxation (i) Prohibition against imprisonment for non-payment of poll tax

(ii) Uniformity and equality of taxation- Equality and uniformity in taxation means that all taxable articles or kinds

of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation; inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation. (KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC. v. HON. BIENVENIDO TAN, G.R. No. 81311, June 30, 1988)

(iii) Grant by Congress of authority to the president to impose tariff rates

- It is Congress which authorizes the President to impose tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts. Thus, the authority cannot come from the Finance Department,

the National Economic Development Authority, or the World Trade Organization, no matter how insistent or persistent these bodies may be. (SOUTHERN CROSS CEMENT CORPORATION v. CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005)

- The authorization granted to the President must be embodied in a law. Hence, the justification cannot be supplied simply by inherent executive powers. (SOUTHERN CROSS CEMENT CORPORATION v. CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005)

- The authorization to the President can be exercised only within the specified limits set in the law and is further subject to limitations and restrictions which Congress may impose. Consequently, if Congress specifies that the tariff rates should not exceed a given amount, the President cannot impose a tariff rate that exceeds such amount. (SOUTHERN CROSS CEMENT CORPORATION v. CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005)

- Assuming there is a conflict between the specific limitation in Section 28 (2), Article VI of the Constitution and the general executive power of control and supervision, the former prevails in the specific instance of safeguard measures such as tariffs and imposts, and would thus serve to qualify the general grant to the President of the power to exercise control and supervision over his/her subalterns. (SOUTHERN CROSS CEMENT CORPORATION v. CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005)

(iv) Prohibition against taxation of religious, charitable entities, and educational entities

- The word "charitable" is not restricted to relief of the poor or sick. The test whether an enterprise is charitable or not is whether it exists to carry out a purpose recoganized in law as charitable or whether it is maintained for gain, profit, or private advantage. (LUNG CENTER OF THE PHILIPPINES v.QUEZON CITY, G.R. No. 144104, June 29, 2004)

- Even as we find that the petitioner is a charitable institution, we hold that those portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes. On the other hand, the portions of the land occupied by the hospital and portions of the hospital used for its

patients, whether paying or non-paying, are exempt from real property taxes. (LUNG CENTER OF THE PHILIPPINES v.QUEZON CITY, G.R. No. 144104, June 29, 2004)

- To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center. Charity is essentially a gift to an indefinite number of persons which lessens the burden of government. In other words, charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulders of government. (COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)

- In Lung Center, this Court declared: "exclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitution and the law. Solely is synonymous with exclusively.(COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)

- Services to paying patients are activities conducted for profit. There is a "purpose to make profit over and above the cost" of services. (COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)

- Section 30(E) and (G) of the NIRC requires that an institution be "operated exclusively" for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B). (COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)

- A gift tax is not a property tax, but an excise tax imposed on the transfer of property by way of gift inter vivos, the imposition of which on property used exclusively for religious purposes, does not constitute an impairment

of the Constitution. The phrase "exempt from taxation," as employed in the Constitution should not be interpreted to mean exemption from all kinds of taxes. (REV. FR. CASIMIRO LLADOC v. The COMMISSIONER OF INTERNAL REVENUE, G.R. No. L-19201, June 16, 1965)

(v) Prohibition against taxation of non-stock, non-profit institutions- An organization may be considered as non-profit if it does not distribute

any part of its income to stockholders or members. However, despite its being a tax exempt institution, any income such institution earns from activities conducted for profit is taxable, as expressly provided in the last paragraph of Section 30. (COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)

(vi) Majority vote of Congress for grant of tax exemption- The incentives under R.A. No. 7227 are exclusive only to the Subic SEZ,

hence, the extension of the same to the John Hay SEZ finds no support therein. The challenged grant of tax exemption would circumvent the Constitution's imposition that a law granting any tax exemption must have the concurrence of a majority of all the members of Congress. (JOHN HAY PEOPLES ALTERNATIVE COALITION, et al. v. VICTOR LIM, et al., G. R. No. 119775, October 24, 2003)

(vii) Prohibition on use of tax levied for special purpose

- The coco-levy funds, on the other hand, belong to the government and are subject to its administration and disposition. Thus, these funds, including its incomes, interests, proceeds, or profits, as well as all its assets, properties, and shares of stocks procured with such funds must be treated, used, administered, and managed as public funds; the coco-levy funds are evidently special funds. (PAMBANSANG KOALISYON NG MGA SAMAHANG MAGSASAKA AT MANGGAGAWA SA NIYUGAN v. EXECUTIVE SECRETARY G.R. Nos. 147036-37 April 10, 2012)

(viii) President’s veto power on appropriation, revenue, tariff bills- An "item" in a revenue bill does not refer to an entire section imposing a

particular kind of tax, but rather to the subject of the tax and the tax rate; thus, in the portion of a revenue bill which actually imposes a tax, a section identifies the tax and enumerates the persons liable therefor with the corresponding tax rate. To construe the word "item" as referring to the whole section would tie the President's hand in choosing either to approve

the whole section at the expense of also approving a provision therein which he deems unacceptable or veto the entire section at the expense of foregoing the collection of the kind of tax altogether. (COMMISSIONER OF INTERNAL REVENUE v. HON. COURT OF TAX APPEALS, G.R. No. L-47421, May 14, 1990)

(ix) Non-impairment of jurisdiction of the Supreme Court (x) Grant of power to the local government units to create its own sources of revenue

- For a long time, the country's highly centralized government structure has bred a culture of dependence among local government leaders upon the national leadership. The only way to shatter this culture of dependence is to give the LGUs a wider role in the delivery of basic services, and confer them sufficient powers to generate their own sources for the purpose. (NATIONAL POWER CORPORATION v. CITY OF CABANATUAN G.R. No. 149110 April 9, 2003)

- Republic Act No. 7716, otherwise known as the "Expanded VAT Law," did not remove or abolish the payment of local franchise tax; it merely replaced the national franchise tax that was previously paid by telecommunications franchise holders and in its stead VAT. The imposition of local franchise tax is not inconsistent with the advent of the VAT, which renders functus officio the franchise tax paid to the national government for VAT inures to the benefit of the national government, while a local franchise tax is a revenue of the local government unit. (SMART COMMUNICATIONS, INC. v.THE CITY OF DAVAO, G.R. No. 155491, July 21, 2009)

(xi) Flexible tariff clause (xii) Exemption from real property taxes

- For real property taxes, the incidental generation of income is permissible because the test of exemption is the use of the property and this test requires that the institution use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung Center of the Philippines did not lose its charitable character when it used a portion of its lot for commercial purposes since the effect of failing to meet the use requirement is simply to remove from the tax exemption that portion of the property not devoted to charity. (COMMISSIONER OF INTERNAL

REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)

- The Constitution exempts charitable institutions only from real property taxes while the NIRC extends the exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution: Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax while Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that the institution "actually, directly and exclusively" use the property for a charitable purpose. (COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)

- To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a charitable institution use the property "actually, directly and exclusively" for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be "organized and operated exclusively" for charitable purposes. (COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)

(xiii) No appropriation or use of public money for religious purposes

b) Provisions indirectly affecting taxation (i) Due process (Art. III, Sec. 1, 1987 Constitution)

Requisites:a. The interests of the public as distinguished from those of a

particular class require the intervention of the State.(Substantive limitation)

b. The means employed must be reasonably necessary to the accomplishment of the purpose and not unduly oppressive.

(Procedural limitation)

- The constitutionality of a legislative taxing act questioned on the ground of denial of due process requires the existence of an actual case or controversy.

- In Sison, Jr. v. Ancheta, et al., we held that the due process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure when it amounts to a confiscation of property. But in the same case, we

also explained that we will not strike down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness by the taxpayer. (Chamber of Real Estate and Builders’ Association, Inc. v. Romulo, 614 SCRA 605 (2010))

- The support for the poor is generally recognized as a public duty and has long been an accepted exercise of police power in the promotion of the common good but, in the instant case, the declarations do not distinguish between wealthy coconut farmers and the impoverished ones. Consequently, such declarations are void since they appropriate public funds for private purpose and, therefore, violate the citizens’ right to substantive due process. (PAMBANSANG KOALISYON NG MGA SAMAHANG MAGSASAKA AT MANGGAGAWA SA NIYUGAN v. EXECUTIVE SECRETARY G.R. Nos. 147036-37 April 10, 2012)

(ii) Equal protection(Art. III, Sec. 1, 1987 Constitution Requisites of a Valid Classification: a. based upon substantial distinctions

b. germane to the purposes of the law c. not limited to existing conditions only d. apply equally to all members of the class

- The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises. What distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT, is not their production processes but the prices of their goods sold and the number of transactions involved. (Chamber of Real Estate and Builders’ Association, Inc. v. Romulo, 614 SCRA 605 (2010))

- PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records of the Bicameral Conference Meeting dated October 27, 1997, of the Committee on Ways and Means, show that PAGCOR’s exemption from payment of corporate income tax, as provided in Section 27 (c) of R.A. No. 8424, or the National Internal Revenue Code of 1997, was not made pursuant to a valid classification based on substantial distinctions. The legislative records show that the basis of the grant of exemption to PAGCOR from corporate income tax was PAGCOR’s own request to be exempted. (PHILIPPINE AMUSEMENT AND

GAMING CORPORATION (PAGCOR) v. THE BUREAU OF INTERNAL REVENUE G.R. No. 172087 March 15, 2011)

iii) Religious freedom

ART. XIV, SEC 4(3) ART. VI, SEC 28(3)Grantee Non- stock, non

profit educational institution

Religious, educational, charitable institutions

Taxes covered Income tax Custom Duties Property tax (DECS Order No. 137-187)

Property Tax

- The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the right to disseminate religious information. Any restraints of such right can only be justified like other restraints of freedom of expression on the grounds that there is a clear and present danger of any substantive evil which the State has the right to prevent. (AMERICAN BIBLE SOCIETY v. CITY OF MANILA, G.R. No. L-9637, April 30, 1957)

- It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was in some instances a little bit higher than the actual cost of the same but this cannot mean that appellant was engaged in the business or occupation of selling said "merchandise" for profit. For this reason We believe that the City of Manila Ordinance No. 2529 requiring the payment of license fee cannot be applied to appellant, for in doing so it would impair its free exercise and enjoyment of its religious profession and worship as well as its rights of dissemination of religious beliefs. (AMERICAN BIBLE SOCIETY v. CITY OF MANILA, G.R. No. L-9637, April 30, 1957)

- With respect to Ordinance No. 3000 which requires the obtention of the Mayor's permit before any person can engage in any of the businesses, trades or occupations enumerated therein, We do not find that it imposes any charge upon the enjoyment of a right granted by the Constitution, nor tax the exercise of religious practices. But as the City of Manila is powerless

to license or tax the business of plaintiff Society, We find that Ordinance No. 3000 is also inapplicable to said business, trade or occupation of the plaintiff. (AMERICAN BIBLE SOCIETY v. CITY OF MANILA, G.R. No. L-9637, April 30, 1957)

- The Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds derived from the sales are used to subsidize the cost of printing copies which are given free to those who cannot afford to pay so that to tax the sales would be to increase the price, while reducing the volume of sale. Granting that to be the case, the resulting burden on the exercise of religious freedom is so incidental as to make it difficult to differentiate it from any other economic imposition that might make the right to disseminate religious doctrines costly. (ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995)

- On the other hand the registration fee of P1,000.00 imposed by Sec. 107 of the NIRC, as amended by Sec. 7 of R.A. No. 7716, although fixed in amount, is really just to pay for the expenses of registration and enforcement of provisions such as those relating to accounting in Sec. 108 of the NIRC. That the PBS distributes free bibles and therefore is not liable to pay the VAT does not excuse it from the payment of this fee because it also sells some copies. (ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995)

- The withdrawal of the exemption did not also violate freedom of religion as regards the activities of PBS on religious articles, as the Free Exercise of Religious clause does not prohibit imposing a generally applicable sale and use tax on the sale of religious materials by a religious organization as held by the US Supreme Court in Jimmy Swaggart Ministries v. Board of Equalization (1990).

- The VAT registration fee does not constitute censorship of such freedom as held in the American Bible Society case. The fee is a mere administrative fee and not imposed on the exercise of a privilege, much less a constitutional right. But for the purpose of defraying cost of registration which is a requirement and a central feature in the VAT system so as to provide record of tax credits of the taxpayer. (ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995)

(iv) Non-impairment of obligations of contracts- No law impairing the obligation of contract shall be passed. (Sec. 10,

Art. III, 1987 Constitution) The rule, however, does not apply to public utility franchises or right since they are subject to amendment, alteration or repeal by the Congress when the public interest so requires. (Cagayan Electric & Light Co., Inc. v.Commissioner, GR No. 60216, September 25, 1985)

RULES:a. When the exemption is bilaterally agreed upon between the government and the taxpayer – it cannot be withdrawn withoutviolating the non-impairment clause.b. When it is unilaterally granted by law, and the same is withdrawn by virtue of another law – no violation.c. When the exemption is granted under a franchise – it may be withdrawn at any time thus, not a violation of the non-impairment of contracts

- Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts. but these contractual tax exemptions are not to be confused with tax exemptions granted under franchises—the latter partakes the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. (PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR) v. THE BUREAU OF INTERNAL REVENUE G.R. No. 172087 March 15, 2011)

- Even though such taxation may affect particular contracts, as it may increase the debt of one person and lessen the security of another, or may impose additional burdens upon one class and release the burdens of another, still the tax must be paid unless prohibited by the Constitution, nor can it be said that it impairs the obligation of

any existing contract in its true legal sense." Indeed not only existing laws but also "the reservation of the essential attributes of sovereignty, is read into contracts as a postulate of the legal order." (ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995)

DUE PROCESS EQUAL PROTECTION UNIFORMITYTaxpayer may not be deprived of life, liberty or property without due process of law. Notice must, therefore , be given in case of failure to pay taxes

Taxpayers shall be treated alike under like circumstances and conditions both in the privileges conferred and liabilities imposed.

Taxable articles, or kinds of property of the same class, shall be taxed at the same rate. There should therefore, be no direct double taxation

J. Stages of taxation 1. Levy

- Levy is an exercise of the power to tax, which is exclusively legislative in nature and character. Clearly, taxes are not levied by the executive branch of government. (NPC v. Albay, 186 SCRA 198 (1990))

2. Assessment and collection3. Payment 4. Refund

K. Definition, nature, and characteristics of taxes- Taxes are enforced proportional contributions from persons and property,

levied by the State by virtue of its sovereignty for the support of the government and for all its public needs. (PAMBANSANG KOALISYON NG MGA SAMAHANG MAGSASAKA AT MANGGAGAWA SA NIYUGAN v. EXECUTIVE SECRETARY G.R. Nos. 147036-37 April 10, 2012)

L. Requisites of a valid tax

REQUISITES OF A VALID TAX1. should be for a public purpose2. the rule of taxation shall be uniform3. that either the person or property taxed be within the jurisdiction of the taxing authority4. that the assessment and collection of certain kinds of taxes guarantees against injustice to individuals, especially by way of notice and opportunity for hearing be provided5. the tax must not impinge on the inherent and Constitutional limitations on the power of taxation

M. Tax as distinguished from other forms of exactions 1. Tariff

2. Toll- A tax is imposed under the taxing power of the government principally for

the purpose of raising revenues to fund public expenditures; toll fees, on the other hand, are collected by private tollway operators as reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the tollways. Taxes may be imposed only by the government under its sovereign authority, toll fees may be demanded by either the government or private individuals or entities, as an attribute of ownership. (RENATO V. DIAZ and AURORA MA. F. TIMBOL v. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

- Fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an indirect tax. (RENATO V. DIAZ and AURORA MA. F. TIMBOL v. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

3. License fee- To be considered a license fee, the imposition must relate to an

occupation or activity that so engages the public interest in health, morals, safety and development as to require regulation for the protection and promotion of such public interest; the imposition must also bear a reasonable relation to the probable expenses of regulation, taking into account not only the costs of direct regulation but also its

incidental consequences as well. Accordingly, a charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held to be a tax rather than an exercise of police power. (PROGRESSIVE DEVELOPMENT CORP. v. QUEZON CITY, G.R. No. L-36081, April 24, 1989)

- If the purpose is primarily revenue, or if revenue is at least, one of the real and substantial purposes, then the exaction is properly called a tax. (LAND TRANSPORTATION OFFICE v. CITY OF BUTUAN, G.R. No. 131512, January 20, 2000)

4. Special assessment

5. Debt

- Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. (CALTEX PHILIPPINES, INC. v. THE HONORABLE COMMISSION ON AUDIT, G.R. No. 92585, May 8, 1992)

N. Kinds of taxes 1. As to object a) Personal, capitation, or poll tax b) Property tax c) Privilege tax

- A contractor's tax is generally in the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on products; and is directly collectible from the person exercising the privilege. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges or business are done or performed within the jurisdiction of said authority. (COMMISSIONER OF INTERNAL REVENUE v. MARUBENI CORPORATION, G.R. No. 137377, December 18, 2001)

- A franchise tax is a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state. It is not levied on the corporation simply for existing as a corporation, upon its property or its income, but on its exercise of the rights or privileges granted to it by the

government. (CITY OF IRIGA v. CAMARINES SUR III ELECTRIC COOPERATIVE, INC., G.R. No. 192945, September 5, 2012)

-2. As to burden or incidence

a) Direct b) Indirect

- In context, direct taxes are those that are exacted from the very person who, it is intended or desired, should pay them; they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in. On the other hand, indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else. (COMMISSIONER OF INTERNAL REVENUE VS PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, G.R. No. 140230, December 15, 2005)

- Indirect taxes, like VAT and excise tax, are different from withholding taxes: To distinguish, in indirect taxes, the incidence of taxation falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. On the other hand, in case of withholding taxes, the incidence and burden of taxation fall on the same entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely collects, by withholding, the tax due from income payments to entities arising from certain transactions and remits the same to the government. (ASIA INTERNATIONAL AUCTIONEERS, INC. v. COMMISSIONER OF INTERNAL REVENUE G.R. No. 179115 September 26, 2012)

- The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive since what it simply provides is that Congress shall "evolve a progressive system of taxation." The constitutional provision has been interpreted to mean simply that "direct taxes are to be preferred [and] as much as possible, indirect taxes should be minimized." (ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995)

- The seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden since the amount of VAT paid by the former is

added to the selling price. Once shifted, the VAT ceases to be a tax and simply becomes part of the cost that the buyer must pay in order to purchase the good, property or service. (RENATO V. DIAZ and AURORA MA. F. TIMBOL v. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

3. As to tax rates a) Specific

b) Ad valorem c) Mixed

4. As to purposes a) General or fiscal

b) Special, regulatory, or sumptuary

5. As to scope or authority to imposea) National – internal revenue taxes b) Local – real property tax, municipal tax

6. As to graduation a) Progressive

b) Regressive c) Proportionate

II. National Internal Revenue Code (NIRC) of 1997, as amendedA. Income taxation 1. Income tax systems a) Global tax system

- Global treatment is a system where the tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer. (TAN v. DEL ROSARIO, JR. 237 SCRA 324)

b) Schedular tax system- Schedular approach is a system employed where the income tax treatment

varies and made to depend on the kind or category of taxable income of the taxpayer. (TAN v. DEL ROSARIO, JR. 237 SCRA 324)

c) Semi-schedular or semi-global tax system

2. Features of the Philippine income tax lawa) Direct tax

b) Progressive c) Comprehensive

d) Semi-schedular or semi-global tax system

3. Criteria in imposing Philippine income tax a) Citizenship principle b) Residence principle c) Source principle

- A non-resident German citizen, president of a domestic corporation, filed a claim for refund with the BIR, contending that her sales commission income is not taxable in the Philippines because the same was a compensation for her services rendered in Germany and therefore considered as income from sources outside the Philippines. While it is the rule that “source of income” relates to the property, activity or service that produced the income, the documents presented by respondent did not constitute substantial evidence that it was in Germany where she performed the income-producing service and thus the tax refund should be denied. (Commissioner of Internal Revenue vs. Juliane Baier-Nickel, G.R. No. 153793, August 29, 2006)

4. Types of Philippine income tax 5. Taxable period a) Calendar period

b) Fiscal period c) Short period

6. Kinds of taxpayers

a) Individual taxpayers (i) Citizens (a) Resident citizens

(b) Non-resident citizens (ii) Aliens (a) Resident aliens (b) Non-resident aliens

(1) Engaged in trade or business (2) Not engaged in trade or business

(iii) Special class of individual employees (a) Minimum wage earners

b) Corporations (i) Domestic corporations

(ii) Foreign corporations- Marubeni Japan claimed a refund for excess taxes it had paid, contending

that since it had a Philippine branch, it is a resident foreign corporation liable to pay only 10% intercorporate final tax on dividends received from a domestic corporation (and not to the branch profit remittance tax) following the principal-agent theory. Marubeni Japan is considered a non-resident foreign corporation as to the dividends because when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. (Marubeni Corp. vs. Commissioner of Internal Revenue, et al., G.R. No. 76573, September 14, 1989) BOAC is a resident foreign corporation because it maintained a general sales agent in the Philippines. There is no specific criterion as to what constitutes “doing” or “engaging in” or "transacting” business. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of

(a) Resident foreign corporations (b) Non-resident foreign corporations

(iii) Joint venture and consortium

c) Partnerships- Pursuant to “reinsurance treaties,” a number of local insurance firms

formed themselves into a “pool” in order to facilitate the handling of business contractedwith a nonresident foreign reinsurance company. The insurance pool is deemed a partnership or association taxable as a corporation under the NIRC because Section 24 (on tax on corporations) [now Sec. 27 of the 1997 NIRC] covered these unregistered partnerships

and even associations or joint accounts, which had no legal personalities apart from their individual members; moreover, the insurance pool, though unregistered, satisfies the requisites of a partnership: (1) mutual contribution to a common stock, and (2) joint interest in the profits. (Afisco Insurance Corp., et al. vs. Court of Appeals, et al., G.R. No. 112675, January 25, 1999)

- The original purpose of the co-owners of the two lots was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property (Obillos Jr. vs CIR, G.R. No. L- 68118, October 29, 1985)

d) General professional partnerships

e) Estates and trusts f) Co-ownerships

7. Income taxationa) Definition

b) Nature c) General principles8. Income a) Definition b) Nature

c) When income is taxable

(i) Existence of income (ii) Realization of income

(a) Tests of realization (b) Actual vis-à-vis constructive receipt

(iii) Recognition of income (iv) Methods of accounting

(a) Cash method vis-à-vis accrual method- This accrual method relies upon the taxpayer’s right to receive amounts or

its obligation to pay them, in opposition to actual receipt or payment,

which characterizes the cash method of accounting. Amounts of income accrue where the right to receive them become fixed, where there is created an enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy merely of time of payment. For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability. (CIR vs Isabela Cultural Corp., GR 172231, February 12, 2007 )

- (b) Installment payment vis-à-vis deferred payment vis-à-vis percentage completion (in long-term contracts)

d) Tests in determining whether income is earned for tax purposes (i) Realization test (ii) Claim of right doctrine or doctrine of ownership, command, or control (iii) Economic benefit test, doctrine of proprietary interest (iv) Severance test

(v) All events test

9. Gross income a) Definition b) Concept of income from whatever source derived c) Gross income vis-à-vis net income vis-à-vis taxable income d) Classification of income as to source (i) Gross income and taxable income from sources within the Philippines

(ii) Gross income and taxable income from sources without the Philippines(iii) Income partly within or partly without the Philippines

e) Sources of income subject to tax (i) Compensation income (ii) Fringe benefits

(a) Special treatment of fringe benefits (b) Definition (c) Taxable and non-taxable fringe benefits

(iii) Professional income (iv) Income from business

(v) Income from dealings in property (a) Types of properties

(1) Ordinary assets (2) Capital assets

- The proceeds from the inherited land of petitioners, which they subdivided into small lots and in the process converted into a residential subdivision and given the name Don Mariano Subdivision, is taxable as ordinary income. Property initially classified as a capital asset may thereafter be treated as an ordinary asset if a combination of the factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayer's trade or business; thus, a sale of inherited real property usually gives capital gain or loss even though the property has to be subdivided or improved or both to make it salable--however, if the inherited property is substantially improved or very actively sold or both it may be treated as held primarily for sale to customers in the ordinary course of the heir's business. (Tomas Calasanz, et al. vs. Commissioner of Internal Revenue, et al., G.R. No. L- 26284, October 9, 1986)

(b) Types of gains from dealings in property(1) Ordinary income vis-à-vis capital gain (2) Actual gain vis-à-vis presumed gain (3) Long term capital gain vis-à-vis short-term capital gain (4) Net capital gain, net capital loss (5) Computation of the amount of gain or loss (6) Income tax treatment of capital loss

(a) Capital loss limitation rule (applicable to both corporations and individuals)(b) Net loss carry-over rule (applicable only to individuals)

(7) Dealings in real property situated in the Philippines(8) Dealings in shares of stock of Philippine corporations (a) Shares listed and traded in the stock exchange (b) Shares not listed and traded in the stock exchange

(9) Sale of principal residence

(vi) Passive investment income

(a) Interest income (b) Dividend income

(1) Cash dividend(2) Stock dividend

- Stock dividends, strictly speaking, represent capital and do not constitute income to its recipient. So that the mere issuance thereof is not yet subject to income tax as they are nothing but an enrichment through increase in value of capital investment. However, the redemption or cancellation of stock dividends, depending on the time and manner it was made, is essentially equivalent to a distribution of taxable dividends, making the proceeds thereof taxable income to the extent it represents profits. The exception was designed to prevent the issuance and cancellation or redemption of stock dividends, which is fundamentally not taxable, from being made use of as a device for the actual distribution of cash dividends, which is taxable. (CIR vs CA, G.R. No. 108576 January 20, 1999)

(3) Property dividend(4) Liquidating dividend

(c) Royalty income (d) Rental income (1) Lease of personal property (2) Lease of real property (3) Tax treatment of

(a) Leasehold improvements by lessee (b) VAT added to rental/paid by the lessee (c) Advance rental/long term lease

(vii) Annuities, proceeds from life insurance or other types of insurance (viii) Prizes and awards (ix) Pensions, retirement benefit, or separation pay (x) Income from any source whatever

(a) Forgiveness of indebtedness(b) Recovery of accounts previously written-off – when taxable/when not taxable (c) Receipt of tax refunds or credit (d) Income from any source whatever (e) Source rules in determining income from within and without

(1) Interests

(2) Dividends (3) Services (4) Rentals (5) Royalties (6) Sale of real property (7) Sale of personal property (8) Shares of stock of domestic corporation

(f) Situs of income taxation (g) Exclusions from gross income

(1) Rationale for the exclusions (2) Taxpayers who may avail of the exclusions (3) Exclusions distinguished from deductions and tax credit (4) Under the Constitution

(a) Income derived by the government or its political subdivisions from the exercise of any essential governmental function

(5) Under the Tax Code (a) Proceeds of life insurance policies (b) Return of premium paid (c) Amounts received under life insurance, endowment or annuity contracts (d) Value of property acquired by gift, bequest, devise or descent (e) Amount received through accident or health insurance (f) Income exempt under tax treaty

(g) Retirement benefits, pensions, gratuities, etc.- Respondent terminated petitioner’s services due to her illness, rendering

her incapable of continuing to work, and gave her retirement benefits but withheld the tax due thereon. The retirements benefits are taxable because the petitioner was only 41 yrs old at the time of retirement and had rendered only 8 years of service; for these benefits to be exempt from tax, the following requisites must concur: (1) a reasonable private benefit plan is maintained by the employer; (2) the retiring official or employee has been in the service of the same employer for at least ten (10) years; (3) the retiring official or employee is not less than fifty (50) years of age at the time of his retirement; and (4) the benefit had been availed of only once.

(Ma. Isabel T. Santos vs. Servier Phil., Inc., et al., G.R. No. 166377, November 28, 2008)

- Respondents contend that petitioner did not withhold the taxes due on their retirement benefits because it had obliged itself to pay the taxes due thereon. This was done to induce respondents to agree to avail of the optional retirement scheme. It was only when respondents demanded the payment of their salary differentials that petitioner alleged, for the first time, that it had failed to present the 1993 CBA to the BIR for approval, rendering such retirement benefits not exempt from taxes; consequently, they were obliged to refund to it the amounts it had remitted to the BIR in payment of their taxes. Petitioner used this “failure” as an afterthought, as an excuse for its refusal to remit to the respondents their salary differentials. Patently, petitioner is estopped from doing so. It cannot renege on its commitment to pay the taxes on respondents’ retirement benefits on the pretext that the “new management” had found the policy disadvantageous. (Intercontinental Broadcasting Corp. vs. Noemi B. Amarilla, et al., G.R. No. 162775, October 27, 2006 )

- Severance of employment is a condition sine qua non for the release of retirement benefits. Retirement benefits are not meant to recompense employees who are still in the employ of the government. (Dev’t. Bank of the Phil. vs. Commission on Audit, G.R. No. 144516, February 11, 2004)

(h) Winnings, prizes, and awards, including those in sports

competition(6) Under special laws (a) Personal Equity and Retirement Account

(h) Deductions from gross income

(1) General rules (a) Deductions must be paid or incurred in connection with the taxpayer’s trade, business or profession (b) Deductions must be supported by adequate receipts or invoices (except standard deduction) (c) Additional requirement relating to withholding

(2) Return of capital (cost of sales or services)

(a) Sale of inventory of goods by manufacturers and dealers of properties(b) Sale of stock in trade by a real estate dealer and dealer in securities (c) Sale of services

(3) Itemized deductions(a) Expenses

(1) Requisites for deductibility (a) Nature: ordinary and necessary

- The expenses paid by Atlas for the services rendered by a public relations firm, aimed at creating a favorable image for Atlas, is not an allowable deduction as business expense under the NIRC. Efforts to establish reputation are akin to acquisition of capital assets and, therefore, expenses related thereto are not business expense but capital expenditures. (Atlas Consolidated Mining & Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No. L-26911, January 27, 1981 )

- A stock listing fee paid annually to a stock exchange for the privilege of having a corporation’s stock listed is an ordinary and business expense. This is distinguished from a single payment made to the stockexchange, which is considered a capital expenditure. (Atlas Consolidated Mining & Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No. L-26911, January 27, 1981)

- The subject media advertising expense for “Tang” incurred by respondent corporation was not an ordinary and necessary expense, but rather a capital expenditure because it failed the two conditions set by U.S. jurisprudence in determining whether or not it is an “ordinary” expense: first, reasonableness of the amount incurred and second, the amount incurred must not be a capital outlay to create “goodwill” for the product and/or private respondent’s business. The subject expense for the advertisement of a single product is inordinately large; furthermore, the corporation’s venture to protect its brand franchise was tantamount to efforts to establish a reputation and was akin to the acquisition of capital assets. (Commissioner of Internal Revenue vs. General Foods, Inc., G.R. No. 143672, April 24, 2003 )

(b) Paid and incurred during taxable year

(2) Salaries, wages and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of the fringe benefit subjected to fringe benefit tax which tax should have been paid

- Payment by the taxpayer-corporation to its controlling stockholder (Hoskins) of 50% of its supervision fees (paid by a client of the corporation for the latter's services as managing agent of a subdivision project) or the amount of P99,977.91 is not a deductible ordinary and necessary expense because it does not pass the test of reasonable compensation. If independently, a one-time P100,000.00-fee to plan and lay down the rules for supervision of a subdivision project were to be paid to an experienced realtor such as Hoskins, its fairness and deductibility by the taxpayer could be conceded; however, the fee paid to Hoskins continued every year since 1955 up to 1963 and for as long as its contract with the subdivision owner subsisted, regardless of whether services were actually rendered by Hoskins. (C. M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue, G.R. No. L-24059, November 28, 1969)

(3) Travelling/transportation expenses (4) Cost of materials

(5) Rentals and/or other payments for use or possession of property (6) Repairs and maintenance

(7) Expenses under lease agreements (8) Expenses for professionals (9) Entertainment/Representation expenses (10) Political campaign expenses (11) Training expenses

(b) Interest (1) Requisites for deductibility (2) Non-deductible interest expense

(3) Interest subject to special rules (a) Interest paid in advance (b) Interest periodically amortized (c) Interest expense incurred to acquire property for use in trade/business/profession(d) Reduction of interest expense/interest arbitrage

(c) Taxes- Margin fees paid by the petitioner to the Central Bank on its profit

remittances to its New York head office are not allowable deductions as taxes because it is not a tax but an exaction designed to curb the excessive demands upon our international reserve. Margin fees are also not ordinary and necessary business expenses because they are not expenses in connection with the production or earning of petitioner's incomes in the Philippines; they were expenses incurred in the disposition of said incomes. (Esso Standard Eastern, Inc. vs. Commissioner of Internal Revenue, G.R. Nos. 28508-9, July 7, 1989)

(1) Requisites for deductibility (2) Non-deductible taxes

(3) Treatments of surcharges/interests/fines for delinquency (4) Treatment of special assessment (5) Tax credit vis-à-vis deduction

(d) Losses (1) Requisites for deductibility (2) Other types of losses

(a) Capital losses (b) Securities becoming worthless (c) Losses on wash sales of stocks or securities (d) Wagering losses (e) Net Operating Loss Carry-Over (NOLCO)

(e) Bad debts- In claiming deductions for bad debts, the only evidentiary support

given by PRC was the explanation posited by its accountant, whose allegations were not supported by any documentary evidence. One of the requisites to qualify as “bad debt” is that the debt must be

actually ascertained to be worthless and uncollectible during the taxable year, and the taxpayer must prove that he exerted diligent efforts to collect the debts by (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filing a collection case in court. (Philippine Refining Company vs. Court of Appeals, et al., G.R. No. 118794, May 8, 1996)

(1) Requisites for deductibility(2) Effect of recovery of bad debts

(f) Depreciation- Depreciation is the gradual diminution in the useful value of tangible

property resulting from wear and tear and normal obsolescense. The term is also applied to amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration. Depreciation commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement. (Basilan Estates, Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L- 22492, September 5, 1967)

- Both depletion and depreciation are predicated on the same basic promise of avoiding a tax on capital. The allowance for depletion is based on the theory that the extraction of minerals gradually exhausts the capital investment in the mineral deposit. The purpose of the depiction deduction is to permit the owner of a capital interest in mineral in place to make a tax-free recovery of that depleting capital asset. A depletion is based upon the concept of the exhaustion of a natural resource whereas depreciation is based upon the concept of the exhaustion of the property, not otherwise a natural resource, used in a trade or business or held for the production of income. Thus, depletion and depreciation are made applicable to different types of assets. And a taxpayer may not deduct that which the Code allows as of another. (Consolidated Mines, Inc. vs. Court of Tax Appeals, et al., G.R. Nos. L- 18843 & 18844, August 29, 1974 )

(1) Requisites for deductibility

(2) Methods of computing depreciation allowance

(a) Straight-line method (b) Declining-balance method (c) Sum-of-the-years-digit method

(g) Charitable and other contributions (1) Requisites for deductibility (2) Amount that may be deducted

(h) Contributions to pension trusts(1) Requisites for deductibility

(i) Deductions under special laws

(4) Optional standard deduction (a) Individuals, except non-resident aliens (b) Corporations, except non-resident foreign corporations (c) Partnerships

(5) Personal and additional exemption (R.A. No. 9504, Minimum Wage Earner Law)

- The increased personal and additional exemptions under the NIRC cannot be availed of by the petitioner for purposes of computing his income tax liability for the taxable year 1997. Since the NIRC took effect on January 1, 1998, the increased amounts of personal and additional exemptions under Section 35, can only be allowed as deductions from the individual taxpayer’s gross or net income, as the case maybe, for the taxable year 1998 to be filed in 1999; the NIRC made no reference that the personal and additional exemptions shall apply on income earned before January 1, 1998, and it is a rule that tax laws are to be applied prospectively unless its retroactive application is expressly provided. (Carmelino F. Pansacola vs. CIR, G.R. No. 159991, November 16, 2006)

(a) Basic personal exemptions (b) Additional exemptions for taxpayer with dependents (c) Status-at-the-end-of-the-year rule (d) Exemptions claimed by non-resident aliens

(6) Items not deductible (a) General rules

(b) Personal, living or family expenses (c) Amount paid for new buildings or for permanent improvements (capital expenditures) (d) Amount expended in restoring property (major repairs) (e) Premiums paid on life insurance policy covering life or any other officer or employee financially interested(f) Interest expense, bad debts, and losses from sales of property between related parties(g) Losses from sales or exchange or property(h) Non-deductible interest(i) Non–deductible taxes(j) Non-deductible losses(k) Losses from wash sales of stock or securities

(7) Exempt corporations(a) Propriety educational institutions and hospitals(b) Government-owned or controlled corporations(c) Others

10. Taxation of resident citizens, non-resident citizens, and resident aliensa) General rule that resident citizens are taxable on income from all sourceswithin and without the Philippines

(i) Non-resident citizens b) Taxation on compensation income

(i) Inclusions

(a) Monetary compensation (1) Regular salary/wage (2) Separation pay/retirement benefit not otherwise exempt (3) Bonuses, 13th month pay, and other benefits not exempt (4) Director’s fees

(b) Non-monetary compensation (1) Fringe benefit not subject to tax

(ii) Exclusions (a) Fringe benefit subject to tax

(b) De minimis benefits (c) 13th month pay and other benefits, and payments specificallyexcluded from taxable compensation income

(iii) Deductions

(a) Personal exemptions and additional exemptions (b) Health and hospitalization insurance (c) Taxation of compensation income of a minimum wage earner

(1) Definition of statutory minimum wage (2) Definition of minimum wage earner (3) Income also subject to tax exemption: holiday pay, overtime pay, night-shift differential, and hazard pay

c) Taxation of business income/income from practice of professiond) Taxation of passive income

(i) Passive income subject to final tax(a) Interest income

(i) Treatment of income from long-term deposits (b) Royalties (c) Dividends from domestic corporations

(d) Prizes and other winnings

(ii) Passive income not subject to final tax

e) Taxation of capital gains (i) Income from sale of shares of stock of a Philippine corporation (a) Shares traded and listed in the stock exchange (b) Shares not listed and traded in the stock exchange

(ii) Income from the sale of real property situated in the Philippines (iii) Income from the sale, exchange, or other disposition of other capital Assets

- The acquisition by the Government of private properties through the exercise of the power of eminent domain, said properties being justly compensated, is embraced within the meaning of the term “sale” or

“disposition of property” and the definition of gross income. Profit from the transaction constitutes capital gain. (Gonzales vs CTA, GR L-14532, May 26, 1965)

11. Taxation of non-resident aliens engaged in trade or business a) General rules b) Cash and/or property dividends c) Capital gains

Exclude: non-resident aliens not engaged in trade or business 12. Individual taxpayers exempt from income tax

a) Senior citizens b) Minimum wage earners c) Exemptions granted under international agreements

13. Taxation of domestic corporations a) Tax payable

(i) Regular tax (ii) Minimum Corporate Income Tax (MCIT)

- For its fiscal year ending 31 March 2001 (FY 2000-2001), PAL incurred zero taxable income and did not pay MCIT, for which BIR assessed PAL for deficiency MCIT. PAL is not liable to pay MCIT because under its franchise, PAL has the option to pay basic corporate income tax or franchise tax, whichever is lower; and the tax so paid shall be in lieu of all other taxes, except real property tax. MCIT falls within the category of “all other taxes” from which PAL is exempted because although both are income taxes, the MCIT is different from the basic corporate income tax, not just in the rates, but also in the bases for their computation. (Commissioner of Internal Revenue vs. PAL, Inc., G.R. No. 180066, July 7, 2009)

a) Imposition of MCIT- MBC being a new thrift bank is not yet liable to the MCIT since it will apply

only beginning on the 4th years from commencement of its operations. The date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date it was granted authority by BSP to operate as such, whichever comes later. As newly operated thrift bank it is entitled to a grace period of 4 years counted from the date when it was

authorized by BSP to operate as thrift bank. MBC is entitled to the refund of the taxes paid under the MCIT. The intent of Congress relative to the MCIT is to grant a 4 year suspension of tax payment to newly formed corporations. Corporations still starting have to stabilize their venture in order to obtain stronghold in the industry. It is not a surprise when many corporations reported losses in their initial years of operations. (Manila Banking Corp. v. CIR, 499 SCRA 782)

(b) Carry forward of excess minimum tax (c) Relief from the MCIT under certain conditions (d) Corporations exempt from the MCIT (e) Applicability of the MCIT where a corporation is governed both under the regular tax system and a special income tax system

b) Allowable deductions (i) Itemized deductions (ii) Optional standard deduction

c) Taxation of passive income (i) Passive income subject to tax

(a) Interest from deposits and yield, or any other monetary benefit from deposit substitutes and from trust funds and similar arrangementsand royalties (b) Capital gains from the sale of shares of stock not traded in the stock Exchange (c) Income derived under the expanded foreign currency deposit system (d) Inter-corporate dividends (e) Capital gains realized from the sale, exchange, or disposition of lands and/or buildings (ii) Passive income not subject to tax d) Taxation of capital gains (i) Income from sale of shares of stock (ii) Income from the sale of real property situated in the Philippines (iii) Income from the sale, exchange, or other disposition of other capital assets e) Tax on proprietary educational institutions and hospitals

St. Luke’s is a proprietary non-stock and non-profit hospital catering to non-paying patients but also derives profit from paying patients. It is subject to the preferential tax rate of 10% for its profit-generating activities under sec. 27(B) of NIRC; it cannot be exempt from income tax under sec. 30(E) and (G) because it is not “organized and operated exclusively” for charitable purposes, which is a requirement under the aforementioned provision. (CIR vs. St. Luke's Medical Center, Inc., G.R. Nos. 195909 & 195960, September 26, 2012) f) Tax on government-owned or controlled corporations, agencies or instrumentalities 14. Taxation of resident foreign corporations a) General rule b) With respect to their income from sources within the Philippines c) Minimum Corporate Income Tax d) Tax on certain income (i) Interest from deposits and yield, or any other monetary benefit from deposit substitutes, trust funds and similar arrangements and royalties (ii) Income derived under the expanded foreign currency deposit system (iii) Capital gains from sale of shares of stock not traded in the stock exchange (iv) Inter-corporate dividends Exclude: (i) International carrier (ii) Offshore banking units (iii) Branch profits remittances(iv) Regional or area headquarters and regional operatingheadquarters of multinational companies 15. Taxation of non-resident foreign corporations a) General rule b) Tax on certain income (i) Interest on foreign loans (ii) Inter-corporate dividends(iii) Capital gains from sale of shares of stock not traded in the stock exchange Exclude: (i) Non-resident cinematographic film-owner, lessor or distributor (ii) Non-resident owner or lessor of vessels chartered by Philippinenationals

(iii) Non-resident owner or lessor of aircraft machineries and otherEquipment16. Improperly accumulated earnings of corporationsPetitioner cannot avoid paying surtax on improperly accumulated earnings because the purchase of the U.S.A. Treasury bonds were in no way related to petitioner’s business of importing and selling wines liquors. The “immediacy test” determines the “reasonable needs” of the business in order to justify an accumulation of earnings—that is, if the corporation did not prove an immediate need for the accumulation of the earnings and profits, the accumulation was not for the reasonable needs of the business, and the penalty tax would apply; investment of the earnings and profits of the corporation in stock or securities of an unrelated business usually indicates an accumulation beyond the reasonable needs of the business (Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue, G.R. No. L-26145, February 20, 1984)

BIR assessed petitioner for surtax on improperly accumulated profits, which petitioner contested. In order to determine whether profits are accumulated for the reasonable needs of the business, it must be shown that: (1) the controlling intention of the taxpayer is manifest at the time of accumulation, not intentions declared subsequently, which are mere afterthoughts; and (2) the accumulated profits must be used within a reasonable time after the close of the taxable year. (Cyanamid Philippines, Inc. vs. Court of Appeals, et al., G.R. No. 108067, January 20, 2000)

Previous accumulations should be considered in determining unreasonable accumulations for the year concerned. In determining whether accumulations of earnings or profits in a particular year are within the reasonable needs of a corporation, it is necessary to take into account prior accumulations, since accumulations prior to the year involved may have been sufficient to cover the business needs and additional accumulations during the year involved would not reasonably be necessary. (Basilan Estates, Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L-22492, September 5, 1967)17. Exemption from tax on corporationsYMCA, a non-stock non-profit corporation with charitable objectives, claimed exemption from payment of income tax by invoking the NIRC and the Constitution. While the income received by the organizations enumerated in Section 26 of the NIRC is, as a rule, exempted from the payment of tax “in respect

to income received by them as such,” the exemption does not apply to income derived “from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income”; Moreover, charitable institutions under Art. VI, sec. 28 of the Constitution are only exempted from property taxes, and YMCA is not an educational institution under Article XIV, Section 4 of the Constitution. (Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. No. 124043, October 14, 1998) Lung Center, charitable institution, does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. However, it is not exempt from real property tax as to the portions of the land leased to private entities as well as those parts of the hospital leased to private individuals because under the Constitution, it is only exempt when its real properties are actually, directly, and exclusively used for charitable purposes. (Lung Center of the Phil. vs. Quezon City, et al., G.R. No. 144104, June 29, 2004)18. Taxation of partnerships19. Taxation of general professional partnerships20. Withholding tax a) Concept

b) Kinds (i) Withholding of final tax on certain incomes (ii) Withholding of creditable tax at source

c) Withholding of VAT d) Filing of return and payment of taxes withheld

(i) Return and payment in case of government employees (ii) Statements and returns

e) Final withholding tax at sourceCitytrust and Asianbank are domestic corporations which paid gross receipts tax and claimed a refund on the basis of a CTA ruling that the 20% FWT on a bank’s passive income does not form part of the taxable gross receipts. The 20% FWT on a bank’s interest income forms part of the taxable gross receipts because “gross receipts” means “the entire receipts without any deduction”; moreover, the imposition of the 20% FWT and 5% GRT does not constitute double taxation

because GRT is a percentage tax while FWT is an income tax, and the two concepts are different from each other. (Commissioner of Internal Revenue vs. Citytrust Investment Phils., Inc., G.R. Nos. 139786 & 140857, September 27, 2006) f) Creditable withholding tax (i) Expanded withholding tax (ii) Withholding tax on compensation g) Timing of withholdingB. Estate tax 1. Basic principles 2. Definition 3. Nature 4. Purpose or object 5. Time and transfer of propertiesPost-mortem dispositions typically

(1) Convey no title or ownership to the transferee before the death of the transferor; or, what amounts to the same thing, that the transferor should retain the ownership (full or naked) and control of the property while alive;

(2) That before the [donor’s] death, the transfer should be revocable by the transferor at will, ad nutum; but revocability may be provided for indirectly by means of a reserved power in the donor to dispose of the properties conveyed; (3) That the transfer should be void if the transferor should survive the transferee; [4] [T]he specification in a deed of the causes whereby the act may be revoked by the donor indicates that the donation is inter vivos, rather than a disposition mortis causa; [5] That the designation of the donation as mortis causa, or a provision in the deed to the effect that the donation is “to take effect at the death of the donor” are not controlling criteria; such statements are to be construed together with the rest of the instrument, in order to give effect to the real intent of the transferor; and (6) That in case of doubt, the conveyance should be deemed donation inter vivos rather than mortis causa, in order to avoid uncertainty as to the ownership of the property subject of the deed. (GONZALO VILLANUEVA vs. SPOUSES FROILAN, G.R. No. 172804, January 24, 2011)

The conveyance in question is not, first of all, one of mortis causa, which should be embodied in a will. In this case, the monies subject of savings account were in the nature of conjugal funds. In the case relied on, Rivera v. People's Bank and

Trust Co., we rejected claims that a survivorship agreement purports to deliver one party's separate properties in favor of the other, but simply, their joint holdings. (ROMARICO G. VITUG vs. THE HONORABLE COURT OF APPEALS and ROWENA FAUSTINO-CORONA, G.R. No. 82027, March 29, 1990)

But although the survivorship agreement is per se not contrary to law its operation or effect may be violative of the law. For instance, if it be shown in a given case that such agreement is a mere cloak to hide an inofficious donation, to transfer property in fraud of creditors, or to defeat the legitime of a forced heir, it may be assailed and annulled upon such grounds. (ROMARICO G. VITUG vs. THE HONORABLE COURT OF APPEALS and ROWENA FAUSTINO- CORONA, G.R. No. 82027, March 29, 1990) 6. Classification of decedent7. Gross estate vis-à-vis net estate8. Determination of gross estate and net estate9. Composition of gross estate10. Items to be included in gross estate11. Deductions from estateAs held in Propstra v. U.S., where a lien claimed against the estate was certain and enforceable on the date of the decedent's death, the fact that the claimant subsequently settled for lesser amount did not preclude the estate from deducting the entire amount of the claim for estate tax purposes. These pronouncements essentially confirm the general principle that post-death developments are not material in determining the amount of the deduction. (RAFAEL ARSENIO S. DIZON vs. COURT OF TAX APPEALS, G.R. No. 140944, April 30, 2008)

We express our agreement with the date-of-death valuation rule. There is no law, nor do we discern any legislative intent in our tax laws, which disregards the date-of-death valuation principle and particularly provides that post-death developments must be considered in determining the net value of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being construed strictissimi juris against the government. (RAFAEL ARSENIO S. DIZON vs. COURT OF TAX APPEALS, G.R. No. 140944, April 30, 2008)

Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term "claims" required to be presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death. Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions. (RAFAEL ARSENIO S. DIZON vs. COURT OF TAX APPEALS, G.R. No. 140944, April 30, 2008)

Administration expenses, as an allowable deduction from the gross estate of the decedent for purposes of arriving at the value of the net estate, have been construed by the federal and state courts of the United States to include all expenses "essential to the collection of the assets, payment of debts or the distribution of the property to the persons entitled to it." In other words, the expenses must be essential to the proper settlement of the estate and expenditures incurred for the individual benefit of the heirs, devisees or legatees are not deductible. (COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, G.R. No. 123206, March 22, 2000)

Thus, in Lorenzo v. Posadas, the Court construed the phrase "judicial expenses of the testamentary or intestate proceedings" as not including the compensation paid to a trustee of the decedent's estate when it appeared that such trustee was appointed for the purpose of managing the decedent's real estate for the benefit of the testamentary heir. In another case, the Court disallowed the premiums paid on the bond filed by the administrator as an expense of administration since the giving of a bond is in the nature of a qualification for the office, and not necessary in the settlement of the estate. Neither may attorney's fees incident to litigation incurred by the heirs in asserting their respective rights be claimed as a deduction from the gross estate. (COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, G.R. No. 123206, March 22, 2000)

The notarial fee paid for the extrajudicial settlement is clearly a deductible expense since such settlement effected a distribution of Pedro Pajonar's estate to his lawful heirs. Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro Pajonar's property should also be considered as a deductible administration expense as PNB provided a detailed accounting of decedent's property and gave advice as to the proper settlement of the latter's estate, acts

which contributed towards the collection of decedent's assets and the subsequent settlement of the estate. (COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, G.R. No. 123206, March 22, 2000)12. Exclusions from estate13. Tax credit for estate taxes paid in a foreign country14. Exemption of certain acquisitions and transmissions15. Filing of notice of death16. Estate tax return

C. Donor’s tax 1. Basic principles 2. Definition 3. Nature 4. Purpose or object 5. Requisites of valid donationNeither is the survivorship agreement a donation inter vivos, for obvious reasons, because it was to take effect after the death of one party. Secondly, it is not a donation between the spouses because it involved no conveyance of a spouse's own properties to the other. (ROMARICO G. VITUG vs. THE HONORABLE COURT OF APPEALS and ROWENA FAUSTINO- CORONA, G.R. No. 82027, March 29, 1990) In the case at bar, when the spouses Vitug opened savings account, they merely put what rightfully belonged to them in a money-making venture. They did not dispose of it in favor of the other, which would have arguably been sanctionable as a prohibited donation. (ROMARICO G. VITUG vs. THE HONORABLE COURT OF APPEALS and ROWENA FAUSTINO-CORONA, G.R. No. 82027, March 29, 1990)

The granting clause shows that Diego donated the properties out of love and affection for the donee which is a mark of a donation inter vivos; second, the reservation of lifetime usufruct indicates that the donor intended to transfer the naked ownership over the properties; third, the donor reserved sufficient properties for his maintenance in accordance with his standing in society, indicating that the donor intended to part with the six parcels of land; lastly, the donee accepted the donation. (SPS. AGRIPINO GESTOPA and ISABEL SILARIO GESTOPA vs. COURT OF APPEALS, G.R. No. 111904, October 5, 2000)

In the case of Alejandro vs. Geraldez, 78 SCRA 245 (1977), we said that an acceptance clause is a mark that the donation is inter vivos. Acceptance is a

requirement for donations inter vivos. Donations mortis causa, being in the form of a will, are not required to be accepted by the donees during the donors' lifetime. (SPS. AGRIPINO GESTOPA and ISABEL SILARIO GESTOPA vs. COURT OF APPEALS, G.R. No. 111904, October 5, 2000)

Crucial in resolving whether the donation was inter vivos or mortis causa is the determination of whether the donor intended to transfer the ownership over the properties upon the execution of the deed. (SPS. AGRIPINO GESTOPA and ISABEL SILARIO GESTOPA vs. COURT OF APPEALS, G.R. No. 111904, October 5, 2000)

A remuneratory donation is one where the donee gives something to reward past or future services or because of future charges or burdens, when the value of said services, burdens or charges is less than the value of the donation. (De Luna v. Abrigo, G.R. No. L-57455, January 18, 1990) 6. Transfers which may be constituted as donation

a) Sale/exchange/transfer of property for insufficient consideration b) Condonation/remission of debt

7. Transfer for less than adequate and full consideration 8. Classification of donor 9. Determination of gross gift 10. Composition of gross gift 11. Valuation of gifts made in property 12. Tax credit for donor’s taxes paid in a foreign country 13. Exemptions of gifts from donor’s tax 14. Person liable 15. Tax basisD. Value-Added Tax (VAT) 1. ConceptAs its name implies, the Value-Added Tax system is a tax on the value added by the taxpayer in the chain of transactions. For simplicity and efficiency in tax collection, the VAT is imposed not just on the value added by the taxpayer, but on the entire selling price of his goods, properties or services. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORPORATION, G.R. No. 187485, February 12, 2013) However, the taxpayer is allowed a refund or credit on the VAT previously paid by those who sold him the inputs for his goods, properties, or services. The net effect is that the taxpayer pays the VAT only on the value that he adds to the

goods, properties, or services that he actually sells.(COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORPORATION, G.R. No. 187485, February 12, 2013) VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an economic activity, regardless of whether or not the entity is profit-oriented. (COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, G.R. No. 125355, March 30, 2000)The VAT is not a license tax; it is not a tax on the exercise of a privilege, much less a constitutional right. It is imposed on the sale, barter, lease or exchange of goods or properties or the sale or exchange of services and the lease of properties purely for revenue purposes. (ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995) 2. Characteristics/Elements of a VAT-Taxable transactionVAT is not a singular-minded tax on every transactional level; its assessment bears direct relevance to the taxpayer's role or link in the production chain. Hence, as affirmed by Section 99 [now Sec. 105] of the Tax Code and its subsequent incarnations, the tax is levied only on the sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business.(COMMISSIONER OF INTERNAL REVENUE vs. MAGSAYSAY LINES, INC., G.R. No. 146984. July 28, 2006)The Court rules that given the undisputed finding that the transaction in question was not made in the course of trade or business of the seller, NDC that is, the sale is not subject to VAT pursuant to Section 99 [now Sec. 105] of the Tax Code, no matter how the said sale may hew to those transactions deemed sale as defined under Section 100 [now Sec. 106]. (COMMISSIONER OF INTERNAL REVENUE vs. MAGSAYSAY LINES, INC., G.R. No. 146984. July 28, 2006)Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied. Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony; it was but a dole out by SIS and not in payment for goods or properties sold, bartered or exchanged by Sony. (COMMISSIONER OF INTERNAL REVENUE vs. SONY PHILIPPINES, INC., G.R. No. 178697, November 17, 2010)

Goods or properties must be used directly or indirectly in the production or sale of taxable goods and services. (Kepco Philipppines Corp. v. CIR, G.R. No. 179356, December 14, 2009) it is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT. (COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, G.R. No. 125355, March 30, 2000) 3. Impact of taxUnder Section 105 of the Tax Code, VAT is imposed on any person who, in the course of trade or business, sells or renders services for a fee. In other words, the seller of services, who in this case is the tollway operator, is the person liable for VAT. The latter merely shifts the burden of VAT to the tollway user as part of the toll fees. (RENATO V. DIAZ and AURORA MA. F. TIMBOL vs. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011) 4. Incidence of taxThe seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods, properties or services to the buyer. In such a case, what is transferred is not the seller's liability but merely the burden of the VAT. (RENATO V. DIAZ and AURORA MA. F. TIMBOL vs. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden since the amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases to be a tax and simply becomes part of the cost that the buyer must pay in order to purchase the good, property or service. (RENATO V. DIAZ and AURORA MA. F. TIMBOL vs. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011) A seller who is directly and legally liable for the payment of an indirect tax, such as the VAT on goods or services is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser of consumer of such goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax. (Contex v. CIR, G.R. No. 151135, July 2, 2004)In the case of the VAT, the law minimizes the regressive effects of indirect taxation by providing for zero rating of certain transactions, while granting exemptions to other transactions. On the other hand, the transactions which are

subject to the VAT are those which involve goods and services which are used or availed of mainly by higher income groups. (ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995) 5. Tax credit method 6. Destination principleAccording to the Destination Principle, goods and services are taxed only in the country where these are consumed. In connection with the said principle, the Cross Border Doctrine mandates that no VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT, while those destined for use or consumption within the Philippines shall be imposed with 10% VAT. (ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. Nos. 141104 & 148763, June 8, 2007) Applying the destination principle to the exportation of goods, automatic zero rating is primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller internationally competitive by allowing the refund or credit of input taxes that are attributable to export sales. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005) Under the cross-border principle of the VAT system being enforced by the Bureau of Internal Revenue (BIR), no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and services from the Philippines to a foreign country are free of the VAT, then the same rule holds for such exports from the national territory—except specifically declared areas—to an ecozone. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005) While an ecozone is geographically within the Philippines, it is deemed a separate customs territory and is regulated in laws as foreign soul. Sales by supplies outside the borders of ecozone to this separate customs territory are deemed exports and treated as export sales. (CIR v. Seksui Jushi Phils, Inc. G.R. No. 149671, July 21, 2006)For as long as the goods remain within the zone, whether we call it an economic zone or a freeport zone, for as long as we say in this law that all goods entering this particular territory will be duty-free and tax-free, for as long as they remain

there, consumed there or re-exported or destroyed in that place, then they are not subject to duties and taxes in accordance with the laws of the Philippines. (Coconut Oil Refiners Association v. Executive Secretary, G.R. No. 132527, July 29, 2005) 7. Persons liable 8. VAT on sale of goods or propertiesGoods, as commonly understood in the business sense, refer to the product which the VAT-registered person offers for sale to the public. With respect to real estate dealers, it is the real properties themselves which constitute their goods. Such real properties are the operating assets of the real estate dealer. (Fort Bonifacio Development Corporation vs. CIR, G.R. Nos. 158885 and 170630, April 2, 2009)

Requisites of taxability of sale of goods or propertiesMindanao II’s sale of the Nissan Patrol is said to be an isolated transaction. However, it does not follow that an isolated transaction cannot be an incidental transaction for purposes of VAT liability. Indeed, a reading of Section 105 of the 1997 Tax Code would show that a transaction "in the course of trade or business" includes "transactions incidental thereto." (MINDANAO II GEOTHERMAL PARTNERSHIP vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 193301, March 11, 2013)Prior to the sale, the Nissan Patrol was part of Mindanao II’s property, plant, and equipment. Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course of Mindanao II’s business which should be liable for VAT. (MINDANAO II GEOTHERMAL PARTNERSHIP vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 193301, March 11, 2013)9. Zero-rated sales of goods or properties, and effectively zero-rated sales of goodsor propertiesZero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate is set at zero and when applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output tax, but can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)

Effectively zero-rated transactions, however, refer to the sale of goods or supply of services to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to a zero rate. Again, as applied to the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who charges zero output tax on such transactions can also claim a refund of or a tax credit certificate for the VAT previously charged by suppliers. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005) If respondent is located in an export processing zone within that ecozone, sales to the export processing zone, even without being actually exported, shall in fact be viewed asconstructively exported under EO 226. Considered as export sales, such purchase transactions by respondent would indeed be subject to a zero rate. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)PAGCOR's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly and extensively discussed inCommissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation. Acesite sought the refund of the amount it paid as VAT on the ground that its transaction with PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. The Court ruled that PAGCOR and Acesite were both exempt from paying VAT.(PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR) vs. THE BUREAU OF INTERNAL REVENUE, G.R. No. 172087, March 15, 2011) No prior application for the effective zero rating of its transactions is necessary. The BIR regulations additionally requiring an approved prior application for effective zero rating cannot prevail over the clear VAT nature of respondent's transactions. Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under our VAT law requires an additional application to be made for such taxpayer's transactions to be considered effectively zero-rated. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005) The Omnibus Investments Code of 1987 recognizes as export sales the sales of export products to another producer or to an export trader, provided that the export products are actually exported. For purposes of VAT zero-rating, such

producer or export trader must be registered with the BOI and is required to actually export more than 70% of its annual production. (ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. Nos. 141104 & 148763, June 8, 2007) In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that results from either one of them is not. In both instances of zero rating, there is total relief for the purchaser from the burden of the tax but in an exemption there is only partial relief, because the purchaser is not allowed any tax refund of or credit for input taxes paid. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)10. Transactions deemed sale

a) Transfer, use or consumption not in the course of business ofgoods/properties originally intended for sale or use in the course of

business b) Distribution or transfer to shareholders, investors or creditorsc) Consignment of goods if actual sale not made within 60 days from date

of consignment

d) Retirement from or cessation of business with respect to inventories on hand 11. Change or cessation of status as VAT-registered person

a) Subject to VAT(i) Change of business activity from VAT taxable status to VAT-

exemptstatus

(ii) Approval of request for cancellation of a registration due to reversion to exempt status

(iii) Approval of request for cancellation of registration due to desire to revert to exempt status after lapse of 3 consecutive years b) Not subject to VAT (i) Change of control of a corporation (ii) Change in the trade or corporate name (iii) Merger or consolidation of corporations 12. VAT on importation of goods

a) Transfer of goods by tax exempt persons 13. VAT on sale of service and use or lease of propertiesService has been defined as the art of doing something useful for a person or company for a fee or useful labor or work rendered or to be rendered another for a fee. (CIR v. American Express International, Inc., G.R. No. 152609, June 29, 2005) By qualifying "services" with the words "all kinds," Congress has given the term "services" an all-encompassing meaning. The listing of specific services are intended to illustrate how pervasive and broad is the VAT's reach rather than establish concrete limits to its application; thus, every activity that can be imagined as a form of "service" rendered for a fee should be deemed included unless some provision of law especially excludes it. (RENATO V. DIAZ and AURORA MA. F. TIMBOL vs. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)Tollway operators not only come under the broad term "all kinds of services," they also come under the specific class described in Section 108 as "all other franchise grantees" who are subject to VAT, "except those under Section 119 of this Code." Tollway operators are franchise grantees and they do not belong to exceptions (the low-income radio and/or television broadcasting companies with gross annual incomes of less than P10 million and gas and water utilities) that Section 119 spares from the payment of VAT. (RENATO V. DIAZ and AURORA MA. F. TIMBOL vs. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)In specifically including by way of example electric utilities, telephone, telegraph, and broadcasting companies in its list of VAT-covered businesses, Section 108 opens other companies rendering public service for a fee to the imposition of VAT. Businesses of a public nature such as public utilities and the collection of tolls or charges for its use or service is a franchise. (RENATO V. DIAZ and AURORA MA. F. TIMBOL vs. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)In the case of CIR v. Court of Appeals (CA), the Court had the occasion to rule that services rendered for a fee even on reimbursement-on-cost basis only and without realizing profit are also subject to VAT. In that case, COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the former reimbursement-on-cost which means that it was paid the cost or expense that it incurred although without profit. (COMMISSIONER OF INTERNAL REVENUE vs. SONY PHILIPPINES, INC., G.R. No. 178697, November 17, 2010) Among those included in the enumeration is the “lease of motion picture films, films, tapes and discs.” This, however, is not the same as the showing or exhibition of motion pictures or films. The legislative intent is not to impose VAT

on persons already covered by the amusement tax and this holds true even in the case of cinema/theater operators taxed under the LGC of 1991 precisely because the VAT law was intended to replace the percentage tax on certain services. (CIR v. SM Prime Holdings, Inc. and First Asia Realty Development Corp., G.R. No. 183505, February 26, 2010) a) Requisites for taxability 14. Zero-rated sale of services 15. VAT exempt transactionsAn exempt transaction involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status—VAT-exempt or not—of the party to the transaction. Indeed, such transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005) An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from the VAT. Such party is also not subject to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005) a) VAT exempt transactions, in generalBy extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services subject to VAT. Thus, by extending the tax exemption to entities or individuals dealing with PAGCOR in casino operations, it is exempting PAGCOR from being liable to indirect taxes. (PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR) vs. THE BUREAU OF INTERNAL REVENUE, G.R. No. 172087, March 15, 2011)The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated from the 1987 case of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc., where the absolute tax exemption of the World Health Organization (WHO) upon an international agreement was upheld. We held in said case that the exemption of contractee WHO should be

implemented to mean that the entity or person exempt is the contractor itself who constructed the building owned by contractee WHO, and such does not violate the rule that tax exemptions are personal because the manifest intention of the agreement is to exempt the contractor so that no contractor's tax may be shifted to the contractee WHO. (PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR) vs. THE BUREAU OF INTERNAL REVENUE, G.R. No. 172087, March 15, 2011) Pawnshops- considered as non-bank financial intermediary is exempted from VAT but liable to percentage tax. (Tambunting Pawnshop, Inc. v. CIR, G.R. No. 179085, January 21, 2010) b) Exempt transaction, enumerated 16. Input tax and output tax, definedUnder the present method that relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005) If at the end of a taxable quarter the output taxes charged by a seller are equal to the input taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005) 17. Sources of input tax a) Purchase or importation of goods b) Purchase of real properties for which a VAT has actually been paid c) Purchase of services in which VAT has actually been paid d) Transactions deemed sale e) Presumptive input f) Transitional inputPrior payment of taxes is not necessary before a taxpayer could avail of the 8% transitional input tax credit: first, it was never mentioned in Section 105 of the old NIRC [now Sec. 111] that prior payment of taxes is a requirement; second, since the law (Section 105 of the NIRC) does not provide for prior payment of taxes, to require it now would be tantamount to judicial legislation which, to state the obvious, is not allowed; third, a transitional input tax credit is not a tax refund per se but a tax credit; fourth, if the intent of the law were to limit the input tax to cases where actual VAT was paid, it could have simply said that the tax base shall be the actual value-added tax paid; and fifth, this Court had already declared that

prior payment of taxes is not required in order to avail of a tax credit. (FORT BONIFACIO DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 173425, January 22, 2013) Section 112 of the Tax Code does not prohibit cash refund or tax credit of transitional input tax in the case of zero-rated or effectively zero-rated VAT registered taxpayers, who do not have any output VAT. The phrase "except transitional input tax" in Section 112 of the Tax Code was inserted to distinguish creditable input tax from transitional input tax credit. (FORT BONIFACIO DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 173425, January 22, 2013) It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies. During that period of transition from non-VAT to VAT status, the transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer. (FORT BONIFACIO DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 173425, January 22, 2013) 18. Persons who can avail of input tax creditIn a VAT-exempt transaction, the seller is not allowed to charge VAT to his customer. Since no output tax is shifted by the seller, there is no output tax against which the related input taxes may be credited. Neither can he credit this input tax against the VAT due on other sales. In this case, he is treated as the end user who will shoulder the cost of the input VAT. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORPORATION, G.R. No. 187485, February 12, 2013) Unlike the input taxes related to exempt sales, input taxes related to zero-rated sales may be credited against output taxes on other sales and in case it is not fully utilized, the excess may be carried over to the succeeding quarter or quarters and there is no prescription period for the carry-over. The law gives the taxpayer another option for the recovery of used input taxes: application for refund or tax credit certificate. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORPORATION, G.R. No. 187485, February 12, 2013) 19. Determination of output/input tax; VAT payable; excess input tax credits a) Determination of output tax b) Determination of input tax creditable c) Allocation of input tax on mixed transactions

d) Determination of the output tax and VAT payable and computation of VAT payable or excess tax credits 20. Substantiation of input tax credits 21. Refund or tax credit of excess input taxIf, however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005) While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed. (FORT BONIFACIO DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 173425, January 22, 2013) As regards Section 110, while the law only provides for a tax credit, a taxpayer who erroneously or excessively pays his output tax is still entitled to recover the payments he made either as a tax credit or a tax refund. In this case, since petitioner still has available transitional input tax credit, it filed a claim for refund to recover the output VAT it erroneously or excessively paid for the 1st quarter of 1997. Thus, there is no reason for denying its claim for tax refund/credit. (FORT BONIFACIO DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 173425, January 22, 2013)Even if the law does not expressly state that the Ironcon’s excess creditable VAT withheld is refundable, it may be the subject-of a claim for refund as an erroneously collected tax under Sec. 204 (C) and 229 of the NIRC. It should be clarified that this ruling only refers to creditable VAT withheld pursuant to Sec. 114 of the NIRC prior to its amendment. After its amendment by R.A. 9337, the amount withheld under Sec. 114 of the NIRC is now treated as final VAT, no longer under the creditable withholding tax system (CIR v. Ironcon Builders and Development Corp., G.R. No. 180042, February 8, 2010) The input VAT is not "excessively" collected as understood under Section 229 because at the time the input VAT is collected the amount paid is correct and proper. The person legally liable for the input VAT cannot claim that he overpaid the input VAT by the mere existence of an "excess" input VAT. The term "excess" input VAT simply means

that the input VAT available as credit exceeds the output VAT, not that the input VAT is excessively collected because it is more than what is legally due. Thus, the taxpayer who legally paid the input VAT cannot claim for refund or credit of the input VAT as "excessively" collected under Section 229. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORPORATION, G.R. No. 187485, February 12, 2013) If such "excess" input VAT is an "excessively" collected tax, the taxpayer should be able to seek a refund or credit for such "excess" input VAT whether or not he has output VAT. The VAT System does not allow such refund or credit and such "excess" input VAT is not an "excessively" collected tax under Section 229. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORPORATION, G.R. No. 187485, February 12, 2013)

Who may claim for refund/apply for issuance of tax credit certificateHaving determined that respondent's purchase transactions are subject to a zero VAT rate, the tax refund or credit is in order. To repeat, the VAT is a tax imposed on consumption, not on business. Although respondent as an entity is exempt, the transactions it enters into are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may certainly be refunded or credited. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)Period to file claim/apply for issuance of tax credit certificateThe Court, in San Roque, ruled that equitable estoppel had set in when respondent issued BIR Ruling No. DA-489-03 which was a general interpretative rule, which effectively misled all taxpayers into filing premature judicial claims with the CTA. Thus, taxpayers could rely on the ruling from its issuance on 10 December 2003 up to its reversal on 6 October 2010, when CIR v. Aichi Forging Company of Asia, lnc. was promulgated. (PROCTER & GAMBLE ASIA PTE LTD. vs.COMMISSIONER OF INTERNAL REVENUE, G.R. No. 202071, February 19, 2014)In a nutshell, the rules on the determination of the prescriptive period for filing a tax refund or credit of unutilized input VAT, as provided in Section 112 of the Tax Code, are as follows: (1) An administrative claim must be filed with the CIR within two years after the close of the taxable quarter when the zero-rated or effectively zero-rated sales were made. c) Manner of giving refund d) Destination principle or cross-border doctrine 22. Invoicing requirements

a) Invoicing requirements in general b) Invoicing and recording deemed sale transactions c) Consequences of issuing erroneous VAT invoice or VAT official receipt 23. Filing of return and payment 24. Withholding of final VAT on sales to government

E. Tax remedies under the NIRC 1. Taxpayer’s remedies

a) Assessment (i) Concept of assessment (a) Requisites for valid assessment

(b) Constructive methods of income determination (c) Inventory method for income determination

(d) Jeopardy assessment (e) Tax delinquency and tax deficiency (ii) Power of the Commissioner to make assessments and prescribe additional requirements for tax administration and enforcement (a) Power of the Commissioner to obtain information, and to summon/examine, and take testimony of persons (iii) When assessment is made (a) Prescriptive period for assessment (1) False, fraudulent, and non-filing of returns (b) Suspension of running of statute of limitations (iv) General provisions on additions to the tax (a) Civil penalties

(b) Interest(c) Compromise penalties

(v) Assessment process (a) Tax audit (b) Notice of informal conference (c) Issuance of preliminary assessment notice (d) Notice of informal conference (e) Issuance of preliminary assessment notice (f) Exceptions to issuance of preliminary assessment notice (g) Reply to preliminary assessment notice

(h) Issuance of formal letter of demand and assessment notice/final assessment notice

(i) Disputed assessment (j) Administrative decision on a disputed assessment (vi) Protesting assessment (a) Protest of assessment by taxpayer (1) Protested assessment (2) When to file a protest (3) Forms of protest (4) Content and validity of protest (b) Submission of documents within 60 days from filing of protest

(c) Effect of failure to protest(d) Period provided for the protest to be acted upon

(vii) Rendition of decision by Commissioner (a) Denial of protest

(1) Commissioner’s actions equivalent to denial of protest

(a) Filing of criminal action against taxpayer (b) Issuing a warrant of distraint and levy (2) Inaction by Commissioner (viii) Remedies of taxpayer to action by Commissioner (a) In case of denial of protest (b) In case of inaction by Commissioner within 180 days from submission of documents (c) Effect of failure to appeal b) Collection (i) Requisites

(ii) Prescriptive periods (iii) Distraint of personal property including garnishment (a) Summary remedy of distraint of personal property (1) Purchase by the government at sale upon distraint (2) Report of sale to the Bureau of Internal Revenue (BIR)

(3) Constructive distraint to protect the interest of the government

(iv) Summary remedy of levy on real property (a) Advertisement and sale (b) Redemption of property sold (c) Final deed of purchaser (v) Forfeiture to government for want of bidder (a) Remedy of enforcement of forfeitures (1) Action to contest forfeiture of chattel (b) Resale of real estate taken for taxes

(c) When property to be sold or destroyed (d) Disposition of funds recovered in legal proceedings or obtained from forfeiture (vi) Further distraint or levy (vii) Tax lien (viii) Compromise (a) Authority of the Commissioner to compromise and abate taxes (ix) Civil and criminal actions (a) Suit to recover tax based on false or fraudulent returns c) Refund (i) Grounds and requisites for refund (ii) Requirements for refund as laid down by cases (a) Necessity of written claim for refund (b) Claim containing a categorical demand for reimbursement (c) Filing of administrative claim for refund and the suit/proceeding before the CTA within 2 years from date of payment regardless of

g cause (iii) Legal basis of tax refunds (iv) Statutory basis for tax refund under the tax code (a) Scope of claims for refund (b) Necessity of proof for claim or refund

(c) Burden of proof for claim of refund (d) Nature of erroneously-paid tax/illegally assessed collected (e) Tax refund vis-à-vis tax credit (f) Essential requisites for claim of refund (v) Who may claim/apply for tax refund/tax credit

(a) Taxpayer/withholding agents of non-resident foreign corporation (vi) Prescriptive period for recovery of tax erroneously or illegally collected (vii) Other consideration affecting tax refunds 2. Government remedies a) Administrative remedies (i) Tax lien (ii) Levy and sale of real property (iii) Forfeiture of real property to the government for want of bidder (iv) Further distraint and levy (v) Suspension of business operation (vi) Non-availability of injunction to restrain collection of tax b) Judicial remedies 3. Statutory offenses and penalties a) Civil penalties

(i) Surcharge (ii) Interest (a) In general (b) Deficiency interest (c) Delinquency interest (d) Interest on extended payment 4. Compromise and abatement of taxes a) Compromise b) AbatementF. Organization and Function of the Bureau of Internal Revenue 1. Rule-making authority of the Secretary of Finance a) Authority of Secretary of Finance to promulgate rules and regulations b) Specific provisions to be contained in rules and regulations c) Non-retroactivity of rulings 2. Power of the Commissioner to suspend the business operation of a taxpayer

III. Local Government Code of 1991, as amendedA. Local government taxation 1. Fundamental principles 2. Nature and source of taxing power a) Grant of local taxing power under the local government code b) Authority to prescribe penalties for tax violations c) Authority to grant local tax exemptions d) Withdrawal of exemptions e) Authority to adjust local tax rates f) Residual taxing power of local governments g) Authority to issue local tax ordinances 3. Local taxing authority a) Power to create revenues exercised through Local Government Units b) Procedure for approval and effectivity of tax ordinances 4. Scope of taxing power 5. Specific taxing power of Local Government Units a) Taxing powers of provinces (i) Tax on transfer of real property ownership (ii) Tax on business of printing and publication (iii) Franchise tax (iv) Tax on sand, gravel and other quarry services (v) Professional tax

(vi) Amusement tax (vii) Tax on delivery truck/van b) Taxing powers of cities c) Taxing powers of municipalities (i) Tax on various types of businesses (ii) Ceiling on business tax impossible on municipalities within Metro Manila (iii) Tax on retirement on business (iv) Rules on payment of business tax (v) Fees and charges for regulation & licensing (vi) Situs of tax collected d) Taxing powers of barangays e) Common revenue raising powers (i) Service fees and charges (ii) Public utility charges

(iii) Toll fees or charges f) Community tax 6. Common limitations on the taxing powers of LGUs 7. Collection of business tax a) Tax period and manner of payment b) Accrual of tax c) Time of payment d) Penalties on unpaid taxes, fees or charges e) Authority of treasurer in collection and inspection of books 8. Taxpayer’s remedies a) Periods of assessment and collection of local taxes, fees or charges b) Protest of assessment c) Claim for refund of tax credit for erroneously or illegally collected tax, fee or charge 9. Civil remedies by the LGU for collection of revenues a) Local government’s lien for delinquent taxes, fees or charges b) Civil remedies, in general (i) Administrative action (ii) Judicial action

B. Real property taxation 1. Fundamental principles 2. Nature of real property tax 3. Imposition of real property tax a) Power to levy real property tax b) Exemption from real property tax4. Appraisal and assessment of real property tax a) Rule on appraisal of real property at fair market value b) Declaration of real property c) Listing of real property in assessment rolls d) Preparation of schedules of fair market value (i) Authority of assessor to take evidence (ii) Amendment of schedule of fair market value e) Classes of real property f) Actual use of property as basis of assessment g) Assessment of real property

(i) Assessment levels (ii) General revisions of assessments and property classification (iii) Date of effectivity of assessment or reassessment (iv) Assessment of property subject to back taxes (v) Notification of new or revised assessment h) Appraisal and assessment of machinery 5. Collection of real property tax a) Date of accrual of real property tax and special levies b) Collection of tax (i) Collecting authority (ii) Duty of assessor to furnish local treasurer with assessment rolls (iii) Notice of time for collection of tax c) Periods within which to collect real property tax d) Special rules on payment (i) Payment of real property tax in installments (ii) Interests on unpaid real property tax (iii) Condonation of real property tax e) Remedies of LGUs for collection of real property tax (i) Issuance of notice of delinquency for real property tax payment (ii) Local government’s lien (iii) Remedies in general (iv) Resale of real estate taken for taxes, fees or charges (v) Further levy until full payment of amount due 6. Refund or credit of real property tax a) Payment under protest b) Repayment of excessive collections 7. Taxpayer’s remedies a) Contesting an assessment of value of real property (i) Appeal to the Local Board of Assessment Appeals (ii) Appeal to the Central Board of Assessment Appeals

(iii) Effect of payment of tax b. Payment of real property tax under protest (i) File protest with local treasurer (ii) Appeal to the Local Board of Assessment Appeals (iii) Appeal to the Central Board of Assessment Appeals (iv) Appeal to the CTA (v) Appeal to the Supreme Court

IV. Tariff and Customs Code of 1978, as amendedA. Tariff and duties, definedB. General rule: all imported articles are subject to duty. 1. Importation by the government taxableC. Purpose for impositionD. Flexible tariff clauseE. Requirements of importation 1. Beginning and ending of importation 2. Obligations of importer a) Cargo manifest b) Import entry c) Declaration of correct weight or value d) Liability for payment of duties e) Liquidation of duties f) Keeping of recordsF. Importation in violation of tax credit certificate 1. Smuggling 2. Other fraudulent practicesG. Classification of goods 1. Taxable importation 2. Prohibited importation 3. Conditionally-free importationH. Classification of duties 1. Ordinary/regular duties

a) Ad valorem; methods of valuation (i) Transaction value (ii) Transaction value of identical goods (iii) Transaction value of similar goods (iv) Deductive value (v) Computed value (vi) Fallback value b) Specific 2. Special duties a) Dumping duties b) Countervailing duties c) Marking duties d) Retaliatory/discriminatory duties

e) SafeguardI. Remedies 1. Government a) Administrative/extrajudicial (i) Search, seizure, forfeiture, arrest b) Judicial (i) Rules on appeal including jurisdiction 2. Taxpayer a) Protest b) Abandonment c) Abatement and refundV. Judicial Remedies (R.A. No. 1125, as amended, and the Revised Rules of theCourt of Tax Appeals)A. Jurisdiction of the Court of Tax Appeals 1. Exclusive appellate jurisdiction over civil tax cases a) Cases within the jurisdiction of the court en banc b) Cases within the jurisdiction of the court in divisions 2. Criminal cases a) Exclusive original jurisdiction b) Exclusive appellate jurisdiction in criminal casesB. Judicial procedures 1. Judicial action for collection of taxes a) Internal revenue taxes

b) Local taxes (i) Prescriptive period 2. Civil cases a) Who may appeal, mode of appeal, effect of appeal (i) Suspension of collection of tax a) Injunction not available to restrain collection (ii) Taking of evidence (iii) Motion for reconsideration or new trial b) Appeal to the CTA, en banc c) Petition for review on certiorari to the Supreme Court 3. Criminal cases a) Institution and prosecution of criminal actions (i) Institution of civil action in criminal action b) Appeal and period to appeal

(i) Solicitor General as counsel for the people and government officials

sued in their official capacity c) Petition for review on certiorari to the Supreme CourtC. Taxpayer’s suit impugning the validity of tax measures or acts of taxing authorities 1. Taxpayer’s suit, defined 2. Distinguished from citizen’s suit 3. Requisites for challenging the constitutionality of a tax measure or act of taxing authority a) Concept of locus standi as applied in taxation b) Doctrine of transcendental importance c) Ripeness for judicial determination