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TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

COVERAGE OF TAXATION LAW REVIEW

I.

Basic Principles of Constitutional Limitations

a)

Due process clause which could be either substantive due process and procedural due process clause

b)

Equal protection clause Read:

 

Ormoc Sugar Central vs. City Treasurer 22 SCRA

 

603

 

Tiu vs. CA 301 SCRA 178

 

c)

Article III sec. 1 of the 1987 Constitution non- impairment clause

d)

Article III sec. 5 freedom of religion

e)

Article III sec. 20 non- payment of poll tax

f)

Article VI sec. 28 par. 2 flexible tariff clause

g)

Article VI sec. 28 par. 3 exemption from real property tax Read:

Herrera vs. Quezon SCRA 186

City

3

Abra vs. Hernando 107 SCRA

 

104

 

Abra

Valley

vs.

Aquino

52

 

SCRA 106

 
 

Philippine Lung Center vs. Quezon City 433 SCRA 119

h) Article VI sec. 28 par. 4 qualified majority in tax exemption

i) International double taxation

CIR vs. Johnson 309 SCRA

 

87

j)

Doctrine of equitable recoupment

 

k)

Doctrine of Set-off or compensation in

taxation

Republic vs. Mambulao 4 SCRA 622

 

Domingo vs. Garlitos 8 SCRA 443

Francia vs. IAC 162 SCRA 753

 

Caltex vs. COA 208 SCRA 726

Philex vs. CIR 294 SCRA 687

II.

Income Tax Law

 

Section 22-26 of the National Internal Revenue Code a) Read in the commentaries or magic notes the different kinds of:

1. Income Taxpayers

2. Income Taxes

3. Sources of Income sec. 42 of NIRC

- Income Taxpayers

a) Individuals

b) Corporation

c) Estates and Trusts

-Individuals are classified

Resident Citizens sec. 23 (A), sec

24 (A) (a)

Non-Resident Citizens sec 23 (B),

24 (A) (b) 22 (E)

Overseas Contract Workers Sec.

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

Resident Aliens Rev. Reg. sec 5,

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

Non-Resident Aliens Engaged in trade or business sections 25 (A)

(1)

Non-Resident Aliens Not Engaged in trade or business sec. 25 (B)

Aliens Employed in Multi- National Corporations sec. 25 (C) and Rev. Reg. 12-2001

Aliens Employed in Offshore Banking Units sec 25 (D)

Aliens Employed in petroleum Service Contractors & Subcontractors sec. 25 (E) -Corporate Income Taxpayers

Domestic Corporations sec. 23 (E), and sec 27 of NIRC

Resident Foreign Corporations sec. 22 (H) and (28)A

Non-Resident Foreign Corporations sec. 22 (1) and 28 (B) -Estates and Trusts sec. 60-66 of NIRC

Different Kinds of Income Tax

1. Net Income Tax secs. 24 (A), 25 (A) (1), 26, 27 (A) (B) (C), 28 (A) up to 3 rd par. 31 and 32 (A)

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

part and 28 (B) (1)

3. Final Income Taxes sec. 57 (A)

4. Minimum Corporate Income Tax of 2% of the Gross Income secs. 27 (E), 28 (A) (2)

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

5. Improperly Accumulated Earnings

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

Tax of 10% of its taxable income

(b)

sec. 29 NIRC Rev. Reg. 2-2001

Marubeni vs. CIR 177 SCRA 500

Optional Corporate Income Tax of

Proctor & Gamble vs. Comm 160 SCRA

15% of its gross income sections

560

27 (A) 4 th to 10 th par. And 28 A(1) but only up to the 4 th paragraph

Same case Proctor and Gamble on the Motion for Reconsideration 204 SCRA

 

377

-Proceed to section 42 and 23 of the NIRC

Wonder vs. Comm 160 SCRA 573

NDC vs. Comm 151 SCRA 472

Comm. Vs. IAC 127 SCRA 9

-Then go to sec. 39 of NIRC

Calazans vs. Comm. 144 SCRA 664 RR 7-2003 -Then proceed to sec. 24 (A), 25 (A) (1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1), 28 (A) (6) and sec 51 (D) -Then continue to sec 24 B 1, 25 B,C,D,E; 27 (D) (1) -Then go to se. 24 (B) (2) sec. 73 Comm. Vs. Manning 66 SCRA 14

Anscor vs. Comm. 301 SCRA 152

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

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

- Then you go to sec. 24 C, 25A (3); 25 B, C, D, E, 27 D (2); 28 (A) (7) (C); 28 B (5) (C) RA 7717 sec. 127 NIRC

- Then you go to sec. 24 D (1); 25 (A) (3); 25 (B) last par. 27 (D) (5)

China Bank vs. Court of Appeals 336

SCRA

; RR 7-2003

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

1999

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

Batangas vs. Collector 102 Phil. 822

Evangelista vs. Collector 102 Phil 140

Reyes vs. Comm. 24 SCRA 198

Ona vs. Bautista 45 SCRA 74

Obillos vs. Comm 139 SCRA 436

Pascua vs. Comm. 166 SCRA 560

Afisco vs. Comm. 302 SCRA 1

-Upon reading sec. 27 (C) of NIRC see RA 9337 then go to sec. 32 (B) (7) (b) of NIRC, sec. 133 par (o) of LGC, sec. 154 of the LGC. Pagcor vs. Basco 197 SCRA 52 Mactan vs. Cebu 261 SCRA 667 LRT vs. City of Manila 342 SCRA 692

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

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

-Proceed to sec. 27(D) (5) then sections 27 (E) and 28 (A) (2) -Go to sec. 28 (A) (3) read RR 15-2002 -Go to sec. 28 (A) (4) see RA 9337 -Then see sec 28 (A) (5) see Marubeni vs. Comm 177 SCRA 500 -Proceed to sec. 28(B) (5) (a) and sec 32 (B) (7) (a)

Read Mitsubishi vs. Comm 181 SCRA

214

-Then go to sec. 29 and Rev. Reg. 2-2001 -Upon reading sec. 32 (B) 1 and 2, read sec. 85 par (e), sec. 108A and sec. 123 of the NIRC -Proceed to sec. 33 read Rev. Reg. 3-98 -then go to sec. 34 (A) (1) (a) see Aguinaldo vs. Comm. 112 SCRA 136, RR 10-2002 -Under Sec. 34 (B) read RR 13-2000 -Upon reading sec. 49 read Banas vs. CA 325 SCRA 259 and Filipina vs. Comm. 316

SCRA 480 -Upon reading sec. 60-66, read Ona vs. Bautista 45 SCRA 74

III. Estate Tax -Sections 84-97 see sec. 104 -Upon reading sec. 85 (B) read Vidal de Roces vs. Posadas 58 Phil. 108 Dizon vs. Posadas 57 Phil 465 -Sec. 85 (G) compare with sec. 100 -sec. 85 (H) compare with sec. 86 (C) -Upon reading sec. 86 see RR 2-2003 -Upon reading sec. 94 see Marcos vs. Sandiganbayan 273 SCRA 47

IV. Donors Tax Law

- Sections 98-104

- G and Cumulative methods of filing donor’s tax returns sections 99 (A), 103 (A) (1) and RR 2-2003

- Sections 100 and 85 (9)

V. Value Added Tax - Sections 105-115

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

-Read RA 9337 -Read ABAKADA vs Comm. GR 168056, Sept. 1, 2005

VI. Remedies Under the Internal Revenue Code -Sections 202-229 -RR 12-99

Phoenix vs Comm 14 SCRA 52

Basilan vs. Comm. 21 SCRA 17

Yabut vs. Flojo 115 SCRA 278

Union Shipping vs. Comm 185 SCRA

547

Comm. vs. TMX 205 SCRA 184

Comm. vs. Philamlife 244 SCRA

Comm. vs. CA & BPI 301 SCRA 435

- Under sec. 150 of the LGC read the following:

Phil. Match vs. Cebu 81 SCRA 99

Allied Thread vs. Manila 133 SCRA 338

Sipocat vs. Shell 105 Phil. 1263

Iloilo Bottles vs. Iloilo City 164 SCRA 607

VIII. Real Property Tax

- Sections 197-294

- Sec. 235

LRT vs. Manila 342 SCRA 692

Cebu City vs. Mactan 261 SCRA 667

IX. Tariff & Customs Code

BPI vs. Comm. 363 SCRA 840

-

Special Customs Duty sec. 301-304 of

Regukar Customs Duty sec. 104 of TCC

-Prescription sections 203 and 222 of NIRC, sec. 194 of the LGC, sec. 270 of

-

TCC

the LGC, sec. 1603 of Tariff and Customs Code -Protest sec. 228 of NIRC and RR 12-99

-

RA 7631

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

X.

Court of Tax Appeals

Tariff & Customs Code and RA 7651

-

RA 1125 as amended by RA 9282

VII. Local Taxation - Sections 128-196 of LGC -Proceed 1 st to sec. 186 read Bulacan vs. CA 299 SCRA 442 -Then proceed to 187 -Then to 151

-128

-Under sec. 133 (e) read Palma vs. Malangas 413 SCRA 572

-Under 133 (h) read Pililia vs. Petron

198 SCRA 82

-Under 133 (i) read First Holdings Co. vs. batangas City 300 SCRA 661 -Under 133 (l) read Butuan vs. LTO

322 SCRA 805

-Under 137 read sec. 193 of LGC

Misamis vs. Cagayan de Oro 181 SCRA 38

Reyes vs. San Pablo City 305 SCRA 353

Meralco vs. Laguna 306 SCRA

750

PLDT vs. Davao City 363 SCRA

522

- Co-relate sec. 139 and 147 of LGC

- Under sec. 140 of the LGC see sec.

125 of the Internal Revenue Code

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

Rules in the Classroom:

1. do not be absent

if you are absent, you have to

transcribe what happened in class when you were out.

The next meeting you attend class,

consider yourself a resident of balic-balic, babalikbalikan ka sa recit.

A: The power to tax is not provided for in the law, statute or constitution; it depends on the existence of the state. No law or legislation for the exercise of the power to tax by the national government.

Q:

inherent power?

Do

local

governments

exercise

this

 

Exception: if you get married.

A:

No.

Only

the

National

Government

2.

read the assignment. Wag zapote ang

exercises

the

inherent

power

to impose

aral.

taxes.

 

3. holiday make up class probably on a

Sunday

4. allowed to glance at your notes, wag lang

pahalata/garapal

5. materials:

codal

commentaries (any author will do)

Q: The taxing power of local governments is a DELAGATED power. Delegated by whom? A: Delegated by Congress through law in case of autonomous regions, and delegated by the constitution in case of LGUs not considered an autonomous region.

notes

magic

(Sababan

Lecture

and

Q&A)

Cities, provinces and municipalities

Book stand

Coverage of Taxation Law Review:

1. Basic Principles including Constitutional

Provisions

2. Income Tax

3. Estate Tax

4. Donor’s Tax

5. Remedies

6. Local Tax

7. Real Property Tax

8. Tariff and Customs Code

9. Court of Tax Appeals

10. VAT (although not part of the coverage of

the Bar Exams, questions have been asked

since 1999)

Title 5,6 and 7 are always included in the coverage

No computations in the bar

There are only 1 or 2 questions in the Bar about Basic Principles

What are the favorite topics in the Bar?

12 questions on Income Tax

8-10 questions on remedies

8-10 questions allocated to the 7 topics

BASIC PRINCIPLES:

State.

Taxation is an inherent

power of the

Q: What do you mean by INHERENT?

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

Autonomous Regions power conferred by Congress through law. Art. X Sec. 20 #2 of the Constitution is a non-self-executing provision. Thus the power is granted by Congress because said provision requires an enabling law.

Article X, Section 5 is self-executing thus

the power is granted by the constitution.

CONSTITUTIONAL LIMITATIONS

Due Process Clause

Q: why is it a limitation to the power to tax? A: The due process clause as a limitation to the power to tax refers both to substantive and procedural due process. Substantive due process requires that a tax statute must be within the constitutional authority of Congress to pass and that it be reasonable, fair and just. Procedural due process, on the other hand, requires notice and hearing or at least the opportunity to be heard. Ex: On Substantive Due Process- when the Congress passes a law exempting the 13 th month pay from tax but with the concurrence only of the majority of the quorum law would be invalid because the Constitution provides that any grant of tax exemption

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

shall be passed with the concurrence of the majority of all the members of the Congress.

There must be substantial distinctions

that make a real difference. 2) It must be germane or relevant to the

1)

Q: Does it follow that the adverse party must always be notified? A: No. As a rule, notice and hearing or the opportunity to be heard is necessary only when expressly required by law. Where there is no such requirement, notice and the opportunity to be heard are dispensable. Ex. Before Oct. 1, 1995, you can secure a TRO without notifying the adverse party. If you are a suspect in a criminal case, you have the right to have an opportunity to be heard (if there is a law). Before July 1, 1998, no notice need be given to a party declared in default. After the amendment, the party declared in default has to be notified of subsequent proceedings albeit without the right to participate therein. In the case of a search warrant, the person to be searched was not notified. The person searched cannot claim that there was a violation of due process because there is no law requiring that the person to be searched should be notified. Regarding delinquent tax payers, before levy, there must be notice.

REASON:

 

purpose of the law.

 

3) The distinction or classification must apply not only to the present but also to future situations.

4) The distinction

must

apply

to

persons, things and transactions

belonging to the same class.

 

Ex: In one case, a tax ordinance was assailed on the ground that the ordinance failed to distinguish a worker form casual, permanent or temporary. The SC said that the ordinance was invalid because of the failure to state the said classification.

In

PEOPLE

v.

CAYAT

the

Supreme

Court

mandated

the

requisites

for

a

valid

classification.

 

TIU v. COURT OF APPEALS (301 SCRA 278) Q: what happened in the city of Olonggapo? A: The Congress, with the approval of the President, passed RA 7227, an act creating the conversion of the military bases into other productive uses. Q: Who was the President at that time? A: President Ramos Q: What were signed? A: RA 7227, EO 97 and EO 97-A

No provision of law requires notice to the

adverse party. If the adverse party is notified, he may abscond. Thus, in adversarial proceedings, in connection with procedural due process, the adverse party need not be notified all the time.

Equal Protection Clause

 

The first

led to the creation

of the

Subic Special Economic Zone (SSEZ). The latter set the limitations and boundaries of the application of the incentives (no taxes, local and national, shall be imposed within SSEZ. In lieu thereof, 3% of the Gross Income shall be remitted to the national gov’t) to those operating their businesses within the said area. Q: Who are the petitioners and what was their contention? A: The petitioners are Filipino businessmen who are operating their business outside the secured area. The petitioners contended that the law in question was violative of their right to equal protection of laws since they are also Filipino businessmen. H: The Supreme Court ruled that there was no violation since the classification was based on a substantial distinction.

As a rule, taxpayers of the same footing are treated alike, both as to privileges conferred and liabilities imposed. Difference in treatment is allowed only when based on substantial distinction. Difference in treatment not based on substantial distinction is frowned upon as “class legislation.” This is violated when taxpayers belonging to the same classification are treated differently form one another; and taxpayers belonging different classifications are treated alike.

Requirements of Reasonable Classification:

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

The element invoked here is element #1 that there must be substantial

of

taxpayers on whom the tax will be imposed. The Court observed that those foreign businessmen operating within the secured area have to give a larger capital to operate in the secured area (to spur economic growth and guarantee employment).

distinction

in

the

classification

ORMOC SUGAR CENTRAL vs. CIR Q: What did the municipality of Ormoc do? A: The City Council of Ormoc passed a Municipal Ordinance No.4 imposing upon any and all centrifugal sugar milled at the Ormoc Sugar Central a municipal tax on the net sale of the same to the United States and other foreign countries. Q: Did the owner accept this imposition? A: No. the tax due was paid under protest, then filed a complaint against the City of Ormoc. H: The Supreme Court said there was a violation of the equal protection clause. The element invoked here was element #3, that it must be applicable to both present and future circumstances. The Supreme Court said that one must go to the provision itself, in the case at bar, there was a violation of element #3 because the law was worded in such a way that it only applies to Ormoc Sugar Central alone and to the exclusion of all other sugar centrals to be established in the future. TAKE NOTE: People vs. Cayat

Freedom of Religion

It Involves 3 Things:

Non-impairment Clause

Q: What are the sources of obligation in the Civil Code? A: Law, Contracts, Quasi-Contracts, Delict, Quasi-Delict.

Q: What is the obligation contemplated in this limitation? A: Those obligations arising from contracts.

General Rule: The power to tax is pursuant to law, therefore, the obligation to pay taxes is imposed by law, thus the non-impairment clause does not apply.

You have to determine first the source of

obligation:

1. If the law merely provides for the

fulfillment of the obligation then the law is

not the source of the obligation.

2. When the law merely recognizes or

acknowledges the existence of an obligation created by an act which may constitute a contract, quasi-contract, delict, and quasi- delict, and its only purpose is to regulate such obligation, then the act itself is the source of the obligation, not the law. When the law establishes the obligation and also provides for its fulfillment, then the law itself is the source of the obligation

Q: So, in what instance does the non- impairment of contracts clause becomes a limitation to the power to tax? A: it is when the taxpayer enters into a compromise agreement with the government. In this instance, the obligation to pay the tax is now based on the contract between the taxpayer and the government pursuant to their compromise agreement.

1.

freedom to choose religion freedom to exercise one’s religion

Take

Note:

the

requirement

for

its

2.

application: the parties are the government and private individual.

3. prohibition upon the national government to establish a national religion

Q: Which one limits the power to tax? A: Prohibition upon the national government to establish a national religion because this will require a special appropriation of money coming from the national treasury which is funded by the taxes paid by the people.

Poll Tax

Q: What is a poll tax? A: It is a tax of a fixed amount on individuals residing within a particular territory, whether citizens or not, without regard to their property or to the occupation in which they may be engaged.

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

It is a tax imposed on persons without any qualifications. persons may be allowed to pay even if they are not qualified as to age or property ownership.

 

was reclassified and subsequently assessed for the payment of real property tax.

The contention of the respondent is that the hospital was no longer a

Example

of

Poll

Tax:

Community

Tax

charitable institution because it accepts pay-patients, it also operates a school for midwifery and nursing, and a dormitory. Since it is not exclusively used for charitable purposes it is not exempt from taxation. H: The Court ruled that petitioner is not liable for the payment of real estate taxes. It is a charitable institution, thus exempt from the payment of such tax. The hospital, schools and dormitory are all exempt fro taxation because they are incidental to the primary purpose of the hospital. NOTE: this arose during the 1935 Constitution. “Exempted by virtue of incidental purpose” was merely coined by the Supreme Court. Thus, it does not apply to other taxes except Real Estate Tax.

PROVINCE OF ABRA v. HERNANDO Q: What is involved in this case?

Certificate under Section 162 of the Local Government Code.

Q:

Why is it a limitation to the power to tax?

A: It is a limitation to the power to tax

because Congress is prohibited from passing

a

law penalizing with imprisonment a person

who does not pay poll tax. (funds for sending

a

person to jail is taken from the national

treasury which is funded by the taxes paid by the people)

Exemption from payment of Real Estate Tax

Q: What is the requirement for exemption from payment of real property tax under the 1935, 1973 and 1987 Constitution? A: Art. 6, Sec 22 (3), 1935 Constitution Cemeteries, churches and parsonages or convents appurtenant thereto, and all lands, buildings and improvements used EXCLUSIVELY for RELIGIOUS, CHARITABLE or EDUCATIONAL purposes shall be exempt for taxation. Art. 8, Sec. 17 (3), 1973 Constitution charitable institutions, churches, parsonages or convents appurtenant thereto, mosque, and non-profit cemeteries, and all lands, buildings, and improvements ACTUALLY, DIRECTLY, and EXCLUSIVELY used for RELIGIOUS and CHARITABLE purposes shall be exempt from taxation. Art. 6, Sec. 28 (3), 1987 Constitution charitable institutions, churches, and parsonages or convents appurtenant thereto, mosque, non-profit cemeteries, and all lands, buildings, and improvements ACTUALLY, DIRECTLY and EXCLUSIVELY used for RELIGIOUS, EDUCATIONAL and CHARITABLE purposes shall be exempt from taxation.

A

A religious institution was involved in this case, the Roman Catholic Bishop of Bangued, Inc. (bishop filed declaratory relief after assessed for payment of tax). The respondent judge granted the exemption from taxes of said church based only on the allegations of the complaint without conducting a hearing/trial. The assistant prosecutor filed a complaint contending that petitioner was deprived of its right to due process.

SC:

the

Court

ordered

that

the

case

be

remanded

to

the

lower

court

for

further

proceedings. The Court observed that the

cause

action

arose

under

the

1973

Constitution,

not

under

the

1935

Constitution

(note

the

difference).

Tax

 

exemption

is

not

presumed.

It

must

be

HERRERA v. QC-BOARD OF ASSESSMENT (1935 Constitution) Q: What is involved in this case?

A:

institution, St.

Catherine’s

previously exempt from taxation until it

was

A

charitable

Hospital. The hospital

strictly construed against the taxpayer and

the

liberally

government.

construed

in

favor

of

ABRA VALLEY COLLEGE INC. v. AQUINO Q: What is involved in this case?

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

A: An educational institution is involved in this case. The ground floor of the school was leased to Northern Marketing Corp., a domestic corporation. The 2 nd floor thereof was used as the residence of the school director and his family. The Province of Abra now contends that since the school is not exclusively used for educational purposes, the school is now liable to pay real estate tax. H: The Court held that the school is PARTIALLY liable for real estate tax. 1. Residence exempt by virtue of incidental purpose; justified because it is necessary. 2. Commercial not exempt because it is not pursuant to the primary purpose; not for educational purposes.

Q: is the doctrine in the case of Herrera the same with this case? A: NO. in the Herrera case, the exemption was granted to all the real property (hospital, school and dorm). But in this case, the Supreme Court made a qualification. The Supreme Court said it depends.

1935

Constitution despite having been decided in

1988.

NOTE:

both

cases

arose

under

the

Q: At present, do we still apply the exemption from tax by virtue of the Doctrine of Incidental Purpose? A: Not anymore. The cause of action in said case arose under the 1935 Constitution and it does not apply to the provisions of the 1987 Constitution.

PHILIPPINE LUNG CENTER v. QUEZON CITY Q: What is involved in this case? A: A charitable institution, a hospital. It is provided in the charter of the Lung Center of the Philippines is a charitable institution. However, part of its building was leased to private individuals and the vacant portion of its lot was rented out to Elliptical Orchids. Respondent contends that since the hospital is not used actually, directly, an d exclusively for charitable purposes, it is liable to pay real estate taxes.

H: The Supreme Court held that the petitioner is liable to pay tax for those parts leased to private individuals for commercial purposes. For the part of the hospital used for charitable purposes (whether for pay or non-pay patients), petitioner is exempt from payment of real estate tax.

NOTE: petitioner contended that the profits derived from the lease of its premises were used for the operation of the hospital. The Court held that the use of the profits does not determine exemption, rather it is the use of the property that determines exemption. The case of Herrera does not apply because said case arose under the 1935 Constitution and the present case arose under the 1987 Constitution. The requirements for exemption are different. In the 1935 Constitution, the property must be EXCLUSIVELY used for religious, educational or charitable purposes. Under the 1987 Constitution, the property must be used ACTUALLY, DIRECTLY, and EXCLUSIVELY for religious, educational and charitable purposes.

Q: Was the doctrine laid down in Abra Valley affirmed in the Lung Center case? A: Yes. The Supreme Court unconsciously applied a doctrine laid down by the 1935 Constitution. The Supreme Court reiterated the ruling in the Abra Valley case which arose under the 1935 Constitution. The Supreme Court made a qualification, it held that it depends on whether or not the use is incidental to the primary purpose of the institution.

NOTE: at present, “exemption from tax by virtue of incidental purpose” is not applicable to all taxes including real estate tax.

COMM v. SC JOHNSON and SONS, INC. Important :

1. international double taxation

2. importance of international tax treaty

3. implication of most favored nation

clause Q: What is the corporation involved in this

A:

case? A domestic corporation (DC).

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

SC Johnson and Sons, Inc. entered into a license agreement with SC Johnson and Sons U.S.A (Non-Resident Foreign

Corp, NRFC) whereby the former was allowed to use the latter’s trademark and facilities to manufacture its products. In return, the DC will pay the NRFC royalties as well as payment of withholding tax. A case for refund of overpaid withholding tax was filed. Apparently, the

DC should have paid only 10% under the

most favored nation clause. H: The Supreme Court coined the term International Double Taxation or International Juridical Double Taxation. Q: What prompted the SC to coin such

term? A: Because a single income (tax royalties paid by a DC) was subjected to tax by two countries, the Philippines income tax and

the U.S. tax.

International Juridical Double Taxation applies only to countries where the tax liabilities of its nationals are imposed on

income derived from sources coming from within and without. Q: Is there an instance where

international double taxation does not apply? Yes. If it involves nationals of countries wherein the tax liability is imposed only from income derive from sources within and not including those derived from sources without. (Ex: Switzerland)

The controversy in

involves the income tax paid in the Philippines. After paying 25%, the US firm discovered that they are entitled to 10% under the most favored nation clause.

The question is: was the tax paid under similar circumstances with that of the RP- West Germany Treaty? The CTA and Court of Appeals ruled that it was paid under similar circumstances. The phrase referred to the royalties in payment of income tax. The Supreme Court ruled that the lower courts’ interpretation of the phrase was erroneous. Rather, the phrase applies to

the application of matching credit.

bar

A:

the

case at

Q: What is matching tax credit?

A: RP-Germany Treaty provides for that 20% of the tax paid in the Philippines shall be credited to their tax due to be paid in Germany. The 10% does not apply because there is no matching credit. Thus, there is no similarity in the circumstances.

EQUITABLE RECOUPMENT AND DOCTRINE OF SET-OFF

Equitable Recoupment

This doctrine provides that a claim for refund barred by prescription may be allowed to offset unsettled tax liabilities. This is not allowed in this jurisdiction, because of common law origin. If allowed, both the collecting agency and the taxpayer might be tempted to delay and neglect the pursuit of their respective claims within the period prescribed by law.

Equitable

Recoupment? A: When the claim for refund is barred by prescription, the same is allowed to be

credited to unsettled tax liabilities.

Q: What

is

the

doctrine

of

(Sir gives an illustration found in page 3 of magic notes)

Q: Is the rule absolute? Reason A: Yes, the rule is absolute. The rationale behind this is to prevent the taxpayer and government official from being negligent in the payment and collection of taxes. (furthermore, you have to be honest for this to work, hence, the government is preventing corruption) There is no exception at all otherwise, the BIR would be flooded with so many claims.

Set-off

Presupposes mutual obligation between the parties. In taxation, the concept of set- off arises where a taxpayer is liable to pay tax but the government, for one reason or another, is indebted to the said taxpayer.

Q: What do you mean by SET-OFF? A: This presupposes mutual obligations between the parties, and that they are mutual

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

creditors and debtors of each other. In

Q: What is being collected in this case?

taxation, the concept of taxation arises where

A:

Estate and inheritance taxes.

a taxpayer is liable to pay taxes but the

NOTE: we do not have inheritance taxes

government, for one reason or another, is INDEBTED to said taxpayer.

Q:

anymore because the same was abolished by Lolo Macoy. Who is the administratrix?

REPUBLIC v. MAMBULAO LUMBER CO.

out of contract or the same transaction

General Rule: no set-off is admissible against

A:

The surviving spouse.

Q: What is the liability of Mambulao? A: They are liable to pay forest charges (under the old tax code). NOTE: under our present tax code, the NIRC, we do not have forest charges as the same was abolished by President Aquino. Q: What did the lumber company do? A: The lumber company claimed that since the government did not use the reforestation charges it paid for reforestation of the denuded land covered by its license, the amount paid should be reimbursed to them or at least compensated or applied to their liability to pay forest charges. H: The Court ruled that the reforestation charges paid is in the nature of taxes. The principle of compensation does not apply in this case because the parties are not mutually creditors and debtors of

Q: What did the surviving spouse do? A: The surviving spouse suggested that the compensation to which the decedent was entitled to as an employee of the Bureau of Lands be set-off from the estate and inheritance taxes imposed upon the estate of the deceased. H: Both the claim of the government for estate and inheritance taxes and the claim of the (intestate) for the services rendered have already become overdue hence demandable as well as fully liquidated, compensation therefore takes place by operation of law, in accordance with Art. 1279 and 1290 of the Civil Code and both debts are extinguished to the concurrent amount. Compelling Reason: Congress has enacted RA 2700, allocating a certain sum of money to the estate of the deceased.

each other. A claim for taxes is not a debt, demand, contract or judgment as is allowed to be set-off under the statute of set-off which is construed uniformly, in

FRANCIA v. IAC Q: This happened in what city?

the light of public policy, to exclude the

A:

Pasay City

remedy in connection or any indebtedness of the State or any municipality to one who is liable for taxes. Neither are they a proper subject for recoupment since they do not arise

sued on.

demands for taxes levied in general or local governmental purposes.

Q: What is the tax being collected? Who is collecting the same? A: Payment for real estate taxes for the property of Francia. It appears that petitioner was delinquent in the payment of his real estate tax liability. The same is

being collected by the Treasurer of Pasay. Q: What is the suggestion of petitioner? A: Suggested that the just compensation for the payment of his expropriated property be set-off from his unpaid real estate taxes. (the other part of his

Reason:

Taxes

are

not

in

the

nature

of

property was sold at a public auction)

contracts or debts between the taxpayer and the government, but arises out of a duty to, and are positive acts of the government to the making and enforcing of which, the consent of the individual is not required. Taxes cannot be the subject matter of compensation.

H: The factual milieu of the case does not justify legal compensation. The Court has consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A taxpayer cannot refuse to pay a tax on the ground

DOMINGO v. GARLITOS

 

that the government owes him an amount.

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

Internal Revenue taxes cannot be the subject of compensation because the government and the taxpayer are not mutually creditors and debtors of each other, and a claim for taxes is not a debt, demand, contract or judgment as is allowed to be compensated or set-off. Furthermore, the payment of just compensation was already deposited with PNB Pasay, and the taxes were collected by a local government, the property was expropriated by the national government. (diff parties, not mutual creditors and debtors of each other.)

from its pending claim for a VAT Input credit/refund. The Court did not allow set-off. Taxes cannot be the subject of compensation for the simple reason that the government and taxpayer are not mutual creditors and debtors of each other. Taxes are not debts. Furthermore, in the instant case, the claim for VAT refund is still pending. The collection of a tax cannot await the results of a lawsuit against the government.

DOUBLE TAXATION

 

Double taxation is allowed because there

CALTEX PHIL v. COA Q: What is being collected? A: Caltex’s contribution to the Oil Price

is no prohibition in the Constitution or statute.

Stabilization Fund (OPSF).

Obnoxious

double

taxation

is

the

COA sent a letter to Caltex asking the

synonym of double taxation.

 

latter to settle its unremitted collection stating that until the same is paid, its

Elements of Double Taxation:

claim for reimbursement from the OPSF

1)

Levied by the same taxing authority

will be held in abeyance.

2)

For the same subject matter

Q: Why is Caltex entitled to reimbursement?

3)

For the same taxing period and

 

A: Because of the fluctuation of the oil

4)

For the same purpose

prices in the Middle East and Europe. Caltex wanted to off-set its unremitted collection from its reimbursements. H: The Court did not allow the set-off, and reiterated its ruling in the case of

There is no double taxation if the tax is levied by the LGU and another by the national government. The two (2) are different taxing authorities.

Mambulao and Francia. Furthermore, RA 6952 expressly prohibits set-off from the collection of contributions to the OPSF. The Court likewise stated that Caltex merely acted as agent of the government in collecting contributions for the OPSF

LGUs are expressly prohibited by the provisions of RA 7160 or the LGC of 1991 from levying tax upon: (1) the National Government; (2) its agencies and instrumentalities; (3) LGUs (sec.113(o)).

because such is being shouldered by the consumers when they purchase petroleum products of oil companies, such as Caltex. Taxation is no longer envisioned as a measure merely to raise revenues to

The National Government, pursuant to the provisions of RA 8424 of the Tax Reform Act of 1997, can levy tax upon GOCCs, agencies and instrumentalities (Section 27 c)), although income received by the Government form:

support the existence of the government.

1)

any public utility or

Taxes may be levied for regulatory purposes such as to provide means for the rehabilitation and stabilization of a

2) the exercise of any essential governmental function is exempt from tax.

threatened industry which is vested with public interest, a concern which is within the police power of the State to address.

KINDS OF INCOME TAXPAYERS

 

PHILEX MINING CORP v. COMM The petitioner is liable for the payment of excise taxes, which it wanted to be set-off

Q: Generally, how many kinds of income taxpayers are there? A: Under section 22A of NIRC, there are three (3), namely:

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

1. individual;

2. corporate;

3. estate and trust.

I. INDIVIDUAL TAXPAYER

Q: How many kinds of individual taxpayers are there?

A:

There are seven (7). Namely:

1. Resident Citizen (§23A and 24A);

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

3. OCW and Seaman (§23C and 24A);

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

5. Nonresident Alien Engaged in Trade or Business (§22G, 23D and 25A)

6. Nonresident Alien NOT Engaged in Trade or Business (§22G, 23D and

25B)

7. Aliens Engaged in Multinational Companies, Offshore Banking Units, Petroleum Service Contractors (§25C,D and E)

Resident Citizen (RC)

Q: How many types of RC?

A:

There are two (2), namely:

1. RC residing in the Philippines; and

2. Filipino living abroad with no intention to reside permanently therein.

Q: If you are abroad, and you have the intention to permanently reside therein, can you still be considered a RC? A: Yes. If such intention to permanently reside therein was not manifested to the Commissioner and the fact of your physical presence therein, you may still be considered a RC.

OCW and Seamen

OCW was used and not OFW in the CTRP, because the classification shall cover only those Filipino citizens working abroad with a contract. TNTs are not covered.

A Filipino seaman is deemed to be an OCW for purposes of taxation if he receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade.

Consequently, if he is not a member of the complement or even if he is but the vessel where he works is not exclusively engaged in international trade, said seaman is not deemed to be an OCW. He is either a RC or a NRC depending on where he stays most of the time during the taxable year. If he stays in the Philippines most of the time during the taxable year, he is considered a RC, otherwise, a NCR.

If you are a seaman in the US Navy, you are not the one being referred to.

The importance of ascertaining whether or not a seaman is a RC or a NRC, is that if he is a RCm he is taxable on ALL income derived from all sources within and without. If he is a NRC, he is taxable only on income derived form sources within the Philippines.

Q: What is the significance of using OCW? A: It only covers Filipinos who works abroad with a contract. It does not cover TNTs.

Q: What is the status of a TNT? A: Since they are not covered by this classification, they are considered RC because they work abroad without a contract and they have not manifested their intention to permanently reside abroad. (distinguish from an immigrant)

Requirements for a seaman to be considered an OCW:

1. must be a member of the compliment of a vessel;

2. the vessel must be exclusively engaged in international trade or commerce.

Resident Alien (RA)

An individual whose residence is within the Philippines and who is not a citizen thereof.

Intention to reside permanently in the Philippines is not a requirement on the part of the alien.

The requirement under RR#2 is that he is actually present in the Philippines, neither a sojourner, a traveler, not a tourist.

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

Whether

he’s

a

transient

or

not

is

Q: How many kinds?

determined by his intent as to the nature and length of his stay.

A:

Only one.

 

The reason

why the NRANETB are

Q: Is the intention to permanently reside in the Philippines necessary? A: No, so long as he is not a sojourner, tourist or a traveler.

Non-Resident Alien Engaged in Trade or Business (NRAETB)

included in any income tax law is because they may be deriving income form sources within the Philippines. They are subject to tax based on their GROSS INCOME received form all sources within the Philippines.

Aliens Employed by Regional or Area

A foreigner not residing in the Philippines but who is engaged in trade or business here.

 

Headquarters

&

Regional

Operating

Headquarters

 

of

Multinational

 

Companies/

Aliens

Employed

by

RR 2-98 has expanded the coverage of the term, “engaged in trade or business” to include the exercise of a profession. Furthermore, by the express provision of the law, a NRA who is neither a businessman nor a professional but who come to and stays in the Philippines for an aggregate period of more than 180 days during any calendar year is deemed to a NRAETB in the Philippines.

 

Offshore

Banking

Units

(Aliens

Employed by MOP)

 

Status: either a RA or NRA depending on

their stay here in the Philippines.

 

Their

status may

either

be

RA

or

NRA

because

Section

25

C

and

D

does

not

distinguish.

 

Q: How many types?

Liable

to

pay

15% from Gross

Income

A:

There are three (3) types, namely:

1. NRA engaged in trade or business

(25a1);

received from their employer

Income earned from all OTHER sources

2. NRA who practices a profession (Revenue Regulation 2-98);

shall be subject to the pertinent income tax, as the case may be.

3. foreigner who comes and stays in the Philippines for an aggregate period of MORE THAN 180 days during any calendar year.

Aliens Employed in Multinational and Offshore Banking Units

 

Q:

How are they classified?

Q: What is the status of a Chinese who stays

A:

If they derived income from other sources

here for 200 days in 2001? A: NRAETB

aside from their employer, you may classify them either as RA, NRAETB, or NRANETB.

Q: Suppose he stayed here for 100 days in 2000 and another 100 days in 2001? A: He is not a NRAETB. To be considered as

Q: What is the income tax applicable to said

Aliens Employed in Petroleum Service Contractors and Subcontractors

such, he must stay for an aggregate period of more than 180 days during a calendar year.

taxpayer?

Status: ALWAYS NRA. If they derive

income from other sources, such income shall be subject to the pertinent income tax, as the case may be.

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

Income derived or coming from their

derived form sources within the Philippines.

employer shall be subject to a tax of 15% of the gross.

Non-Resident

Alien

Not

Engaged

in

Trade or Business

II. CORPORATE TAXPAYER

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

1. Domestic Corporation (DC) created or organized under Philippine laws.

2. Resident Foreign Corporation (RFC) corporation created under foreign law, and engaged in trade or business.

3. Nonresident Foreign Corporation (NRFC) created under foreign law, and NOT engaged in trade or business.

Q: What are deemed corporations under the NIRC? A: The term corporation shall include partnerships, no matter how created or organized, joint stock companies, joint accounts, associations, or insurance

companies, but DOES NOT includes general professional partnerships and a joint venture or consortium formed of the purpose of undertaking construction projects or operations pursuant to or engaging in petroleum, coal, geothermal or consortium agreement under a service contract with the Government.

1. Partnerships and others no matter how created

2. Joint Stock Companies

3. Joint Accounts

4. Associations

5. Insurance Companies

CIR v. COURT OF APPEALS The phrase no “matter how created or organized” was interpreted. Even if the partnership was pursuant to law or not, whether nonstick, nonprofit, it is still deemed a corporation. Reason: because of the possibility of

earning

Philippines.

the

profits

form

sources

within

profession, no part of the income of which in derived from any trade or business. (what if a partner has other businesses not related to the GPP? > read section 26 quoted hereunder)

Two (2) Kinds of GPP formed for:

1) Exercise of a profession not a corporation; exempt from Corporate Income Tax (CIT) 2) Exercise of a profession and engaged in trade or business a corporation; subject to CIT

TAN v. DEL ROSARIO

a

corporation exception: GPP exception to the exception: if the GPP derives income from other sources, it is considered a corporation, thus liable to pay corporate income tax.

general

rule:

a

partnership

is

Rule:

1. if the income is derived from other

sources and such income is subject to NET INCOME TAX, it is not exempt and it is considered a corporation.

2. if the income is derived from other

sources and such income is subject to FINAL INCOME TAX, it is still EXEMPT and it is not deemed a corporation. ( separate return for

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

» This is pursuant to the fact that FIT will

not reflect in the ITR of the GPP since the withholding agent is liable for the payment of the FIT.

Q: What is the importance of knowing whether the corporation is exempt or not? A: To determine their tax liability. This is important to determine the tax liability of the individual partners of the GPP.

Q: Are partnerships always considered

Exception: General Professional Partnerships

Section 26 (1 st paragraph) provides: “a

corporations? Is there no exception? A: General Rule: a partnership is a corporation.

(GPP)

GPP as such shall not be subject to the Net Income Tax…” however, “…persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and individual capacities.” In short, each partner will be paying NIT,

Q: What is a GPP?

and the distributive shares they will be receiving from the net income of the GPP will

A:

It is a partnership formed by persons for

be included in the gross income of the

the

sole

purpose of exercising their

partner.

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

Q: If the GPP is deemed a corporation, will the partners have to pay for the income tax? A: No. as far as the share of the GPP is concerned, it is considered a taxable dividend which is subject to FIT.

Q: Is a joint venture a corporation?

A:

Generally, yes, it is a corporation.

2)

3) 10% income tax on corporations with properly accumulated earnings.

4) MCIT (Minimum Corporate Income Tax) of 2% of the Gross Income 5) Optional Corporate Income Tax of 15% of the Gross Income

FIT Final Income Tax

A NRFC is liable for payment of the ff:

 

1)

GIT- Gross Income Tax

Q: Corporation X and Corporation Y joined together. How many corporations do we

Q: When is a joint venture not considered a

Domestic Corporation

2)

FIT Final Income Tax

have?

III.

TRUST AND ESTATE

A: Three, namely Corporation X, Y, and X+Y. the joint venture has a separate and distinct personality from the two corporations.

corporation? A: It is not deemed a corporation when it is formed for the purpose of undertaking a (“construction?) project or engaging in petroleum, gas, and other energy operations pursuant to “?” or consortium agreement

Q: How many for each? A: Seven (7) kinds for each because the trust or estate will be determined by the status of the trustor, grantor, or creator, or of the decedent.

The status of the estate is determined by the status of the decedent at the time of his death; so an estate, as an income taxpayer can be a citizen or an alien.

under a service contract with the government.

When a person who owns property dies, the following taxes are payable under the provision of income tax law:

Is

one

created

or

organized

in

the

1) Income Tax for Individuals to cover the period beginning January to

Philippines or under its laws.

 

the time of death. 2) Estate Income Tax if the property is

Taxable

on

all

income

derived

from

transferred to the heirs.

sources within or without the Philippines.

3) If no partition is made, Individual or

Resident Foreign Corporation

 

Corporate Income Tax, depending on whether there is or there is no

Foreign corporations engaged in trade or business in the Philippines.

settlement of the estate. If there is, depending on whether the settlement is judicial or extrajudicial.

Taxable for income derived within the Philippines.

Non-Resident Foreign Corporation

Foreign

corporations

not

engaged

in

trade or business in the Philippines.

Taxable for income derived within the Philippines.

Both

DC

and

RFC

are

liable

for

the

payment of the following:

1)

NIT Net Income Tax

Judicial Settlement

the

settlement, the estate through the executor, administrator, or heirs is liable for the payment of ESTATE INCOME TAX (Sex, 60 (3)). 2) If upon the termination of the judicial settlement, when the decision of the court shall have become final and executory, the heirs still do not divide the property, the following possibilities may arise:

1)

During

the

pendency

of

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

a) If the heirs contribute to the estate money, property or industry with the intention to divide the profits between and among themselves, an UNREGISTERED PARTNERSHIP is created and the estate becomes liable for payment of CIT (Evangelista vs. Collector (102 Phil 140)) b) If the heirs without contributing money, property or industry to improve the estate, simply divide the fruits thereof between and among themselves, a CO- OWNERSHIP is created and Individual Income Tax (IIC) is imposed on the income derived by each of the heirs, payable in their separate and individual capacity (Pascual vs. COMM (165 scra 560) and Obillos vs. COMM (139 SCRA

436))

Extrajudicial Settlement and if NO Settlement

Some possibilities may arise. The income tax liability depends on whether or not the unregistered partnership or co-ownership is created.

Trust

Trusts can be created by will, by contract or by agreement. The status of a trust depends upon the status of the grantor or trustor or creator of the trust. Hence, a trust can also be a citizen or an alien.

1. Net Income Tax (NIT);

2. Gross Income Tax (GIT);

3. Final Income Tax (FIT);

4. Minimum Corporate Income Tax of 2% of the Gross Income (MCIT)

5. Income Tax on Improperly Accumulated Earnings subject to 10% of the Taxable Income;

6. Optional Corporate Income Tax of 15% on the Gross Income

I. NET INCOME TAX

Q: what is the formula? A: Gross Income Deductions and Personal Exemptions = Taxable Income

Taxable Income x Tax

Income

Rate

=

Net

Taxable Net Income Tax Credit = Taxable Net Income Due

Net

Income

deductions and

Formula:

means

Gross

GI - deductions Net Income x Tax Rate Income Tax Due

Income less

Q: What is the rate?

A:

Individual: 32% Corporation: 35%

NOTE:

personal exemptions and tax credit.

the

formula

allows

for

deduction,

Q: Where the trust earns income and such income is not passive, who among the parties

Q: What are the other terms for NIT?

mentioned is liable for payment of income

A:

NIRC:

tax thereon?

a.

taxable income

 

A: The TRUST itself, through the trustee or

b.

gross income (wlang kasunod)

fiduciary but only if the trust is irrevocable.

only

income

tax

from

improperly

If it is revocable, or for the benefit of the

accumulated earnings does not use this term.

grantor, the liability for the payment of income tax devolves upon the trustor himself in his capacity as individual taxpayer.

1. CFA: “to be included in the gross income”

KINDS OF INCOME TAX

Q: How many kinds of income tax?

A:

There are Six (6), namely:

2. Revenue Regulations and Statutes:

a. ordinary way of paying income tax;

b. normal way of paying income tax .

Characteristics:

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

Q: Who are not liable to pay NIT?

 

Q: Is this subject to withholding tax? A: Yes, it is subject to withholding tax

A:

1.

NRANETB (liable for GIT);

because the persons liable are foreigners.

2.

NRFC (GIT also);

 

This rule is ABSOLUTE

3.

With certain modifications, AEMOP, if they derive income from other sources;

NOTE: there are two (2) ways of paying taxes depending on which side of the bench you are.

Q:

Is

the

taxable

net

income

subject

to

withholding tax?

A:

says so.

It is subject to withholding tax if the law

III. FINAL INCOME TAX (FIT)

Q: What is the formula?

A:

(Each Income) x (Particular Rate)

Q:

What if the law is silent?

 

Unlike in the gross income tax where you

A:

If the

law is

silent, it

is not subject

to

add all the income from all the sources and

withholding tax.

 

multiply the sum thereof by the rate of 25% or 35%, as the case may be, in final income

Q:

What is another term for withholding tax?

 

tax, you cannot join all the income in one

A:

It

is also known as the creditable

group because each income has a particular

withholding tax system under the income tax law.

rate.

Q: Do we have to determine if there is an actual gain or loss? A: Yes because the formula for deductions, etc.

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

A:

Yes, you will be held liable.

II. GROSS INCOME TAX (GIT)

Q: What is the formula?

A:

Gross Income x Rate

Q: How many taxpayers pay by way of the gross? A: There are two (2) individual - NRANETB corporation - NRFC

Q: What is the rate?

A:

35% as the case may be.

NOTE: like GIT, the formula does not allow deductions, personal exemptions, and tax credit.

Characteristics:

Q:

A: All taxpayers are liable to pay FIT provided the requisites for its application are present.

Who are liable to pay FIT?

Q: Do you still have to pay NIT?

A:

pay NIT or else there will be double taxation.

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

NOTE:

the

formula

does

not

allow

any

NOTE: as time passed by, the number of FIT increased.

deduction,

personal

exemptions

and

tax

credit.

before 1979 proceeds from the sale of

Characteristics:

 

real property not exempt, it is subject to NIT or GIT, as the case may be. after 1979 capital gains tax. Proceeds

NRANETB and NRFC, though not engaged

from the sale of real property is exempt.

in trade or business, are liable to pay by way of the gross for any income derived in the Philippines. While not engaged in trade or business, there is a possibility that they may earn income in the Philippines.

Q: If you fail to pay, will you be liable? A: No. the withholding agent is liable to pay FIT.

Case of Juday, Richard and Regine

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

For one to be liable for the payment

NIT, the income must be derived on the basis of an employer employee relationship.

of

Employer Employee Relationship (3 Cs):

1. contract;

2. control;

3. compensation;

However, in the case of celebrities, there

is no employer employee relationship, they are merely receiving royalties. Royalties are subject to final withholding tax, thus the agent is liable to pay. (so, distinguish nature of income, whether royalty or compensation)

RULE:

1. for NIT, whether or not subject to Creditable Withholding Tax (CWT), the taxpayer is always liable if he fails to pay.

2. for GIT and FIT, absolute liability to pay is upon the withholding agent.

Reason:

claiming too many deductions.

to

discourage

corporations

from

V. OPTIONAL CORPORATE INCOME TAX

Q: Under what section is this found? A: Section 27A 4 th paragraph and Section 28 A(1) 4 th paragraph.

Q: Is this applicable now?

A:

No. this is not yet implemented.

Q: To what kind of taxpayer does this apply?

A:

To DC and RFC.

Q: What

imposed

taxpayers?

A:

the six (6) kinds of income taxes.

kind

upon

of

taxes

the

1 st

are

applicable

five

or

individual

Only two (2) kinds are applicable out of

1. NIT;

2. FIT;

Q:

AEMOP?

A:

What

kind of income

tax

will apply to

Generally, only one kind, 15% FIT with

Q: Why is it that the rate of withholding is

respect

to

income

derived from their

always lower, and why is it that the rate of

employer.

GIT and FIT is always equal? A:

Income from other sources:

1. NIT allows deductions;

2. GIT and FIT do not allow deductions.

Q: Do you have to determine whether there is an actual loss or gain? A: No need to determine because the formula does not allow deductions. Gain is presumed. No liability for final withholding tax except for the sale of shares of stock. (?)

1. Determine the status of the AEMOP;

a. NIT

b. FIT

2. NRANETB

a. GIT

b. FIT

Q: What kind of income tax applies to DC?

A:

six (6)

Only four (4) kinds will apply out of the

IV.

MINIMUM CORPORATE INCOME TAX

1. NIT

(MCIT)

2. FIT

Q: What is the formula?

3. MCIT

4. Improperly Accumulated Earnings

A:

Gross Income x 2%

 

Q: May

all

of

these

be

applied

Q: Who pays this tax?

 

simultaneously?

 

A:

DC and RFC only.

A:

No.

only the

NIT, FIT

and

Improperly

 

Accumulated Earnings

be

applied

Q: May it be applied simultaneous with NIT?

simultaneously. NIT

and

MCIT

cannot

be

A: No. there must be a computation of the NIT first then apply which ever is higher. The MCIT is paid in lieu of the NIT.

applied simultaneously. Only one will apply, whichever is higher between the two.

Q: What kind of tax will apply to NRFC?

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

A:

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

Q: What is the determining factor in order to know if the income is from within?

apply:

1.

GIT

A:

2.

FIT

1. location if the bank is from within the

2. residence of the obligor (whether an

Q: What is the significance of knowing the classification of these taxpayers? A:

1. to determine the kind of income tax applicable to them;

Philippines (pursuant to a Revenue Reg.)

individual or a corp.) contract of loan with respect to the interest earned thereon.

2. to determine their tax liability.

Q: Under

Section

23,

who

are

liable

for

For example the borrower is a NRAETB, he borrowed money from a RA. The interest

income within and income without?

earned by the loan will be considered as an

A:

Only

income without. RA is not liable to pay tax

1. RC

since RA is liable only for income within,

2. DC

therefore exempt from paying the tax.

The rest of the taxpayers will be liable for

NATIONAL DEVELOPMENT CO. v. CIR

to

the contract was entered into and was

withhold anything. NDC said that since

collect income tax on interest received by

income coming from sources within.

 

F: The National Development Company (NDC) entered into a contract with several

Income from sources without, no liability,

Japanese shipbuilding companies for the

therefore exempt.

 

construction of 12 ocean-going vessels.

NOTE: The income taxpayer is not a RC or a

The contract was made and executed in Tokyo.

DC.

Determine

if

the

income

came

from

The payments were initially in cash

sources

within

or

without

to

know

the

and irrevocable letters of credit.

taxpayer’s liability.

 

Subsequently, four promissory notes were signed by NDC guaranteed by the

If the facts are specific, do not qualify

Government.

your answer. Answers must be responsive to the question.

Later on, since no tax was withheld from the interest on the amount due, the

Q: Is section 42 relevant to all the taxpayers?

BIR was collecting the amount from NDC. The NDC contended that the income

A:

NO. SECTION 42 IS NOT MATERIAL TO

was not derived from sources within the

ALL taxpayers, particularly the RC and DC because these two are liable for both income within and without.

Philippines, and thus they are not liable

executed in Japan, it is an income

Section 42 is applicable only to taxpayers

without.

who are liable for income within, the rest of the taxpayers are otherwise exempt.

H: The government’s right to levy and

Q: Section 42(A)(1) provides for how many kinds of interests? A: It establishes two (2) kinds of interests, namely:

1. interest derived from sources within the Philippines.

2. interest on bonds, notes or other interest bearing obligations of residents, corporate or otherwise.

a foreign corporation not engaged in

trade or business within the Philippines is not planted upon the condition that the activity or labor and the sale from which the income flowed had its situs in the Philippines. Nothing in the law (Section 42(1)) speaks of the act or activity of nonresident corporations in the Philippines, or place where the contract is signed. The residence of the obligor who pays the interest rather than the physical

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

 

location of the securities, bonds or notes or the place of payment is the determining factor of the source of the income. Accordingly, if the obligor is a resident of the Philippines, the interest paid by him can have no other source than within the Philippines.

Q: Filipino Executive, assigned to Hong Kong, receiving two salaries, one from the Philippines, the other from HK. The performance of the job was in HK. Is he liable for both salaries? A: No, he is not liable for the two incomes. His status is an OCW (note facts: working in HK under contract). The compensation he received is not subject to tax pursuant to Section 42(c). Compensation for labor or personal services performed in the Philippines is considered an income within. When it comes to services, it is the place where the same is rendered which is controlling. In the case at bar, the services were rendered abroad, thus it is an income derived from sources without, irrespective of the place of payment.

Q: Suppose a DC hired a NRFC to advertise its products abroad. What is the liability of the NRFC? Will there be a withholding tax imposed? A: The income is derived from sources without since the services in this case were

Q: Suppose a NRFC, an Indonesian firm,

becomes a stockholder of two corporations, a

DC

and a RFC, and both corporations

declared dividends, what is the liability of the Indonesian firm if the same received the

dividends?

 

A:

 

1. Dividends received from DC: the Indonesian firm is liable to pay taxes. NRFC, under the law, is liable if the income is derived from sources within. (Sec 42a)

2. Dividends received from RFC: the Indonesian firm’s liability will depend on amount of gross income from sources within the Philippines.

The

NRFC will be liable to pay income tax if

performed abroad. As such, the NRFC is not liable and therefore exempt from the payment of tax. If the NRFC is not subject to NIT, then it is not also subject to withholding tax.

Q: What is the controlling factor? A: The controlling factor is the place where

the following requisites are present:

 
 

1. at least 50% is income from sources within;

2. the 1 st requisite is for the three (3) preceding taxable years from the time of declaration of the dividends.

In

the

absence

of

any

or both

requisites, the income will be considered from sources without, thus exempting the Indonesian firm from payment of income tax.

Q: Same scenario, but this time the shares of stock of the two corporations were being disposed off. What is the tax liability of the Indonesian firm? A:

1. sale of shares of stock of DC: the Indonesian firm will be liable for the payment of taxes because the income is from sources within.

2. sale of shares of stock of RFC: the liability will depend on where the shares of stock were sold. (mejo Malabo sa notes, please be guided accordingly)

the services were performed and not where the compensation therefore was received.

RENTALS AND ROYALTIES income from sources within Q: Granted by who? A: NRFC

Q: Suppose you are the franchise holder, how much is the withholding? A: 35% (GIT)

Q: if the franchise is granted by RFC, how much is the withholding? A: 10% (NIT) and in some cases 15%

Section 42(4) MEMORIZE FOR RECIT (CEKSTTM)

a.

right of, or the right to use copyright, patents, etc

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

b. industrial, commercial, scientific equipment

c. supply of knowledge

d. supply of services by nonresident

e. supply of technical assistance

f. supply of technical advice

g. right to use: motion picture films, etc.

Section 39

Q: What is capital asset? A: Capital asset is an asset held by a taxpayer which is not an ordinary asset.

The following are ordinary assets:

1. stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory

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

of

the taxpayer if on hand at the close

property?

of

the taxable year;

A: Gains, profits, and income from the sale

2. property held by the taxpayer

of real property located within the Philippines considered income within.

primarily for sale to customers in the ordinary course of trade or business;

Q: What about the sale of personal property, what is the rule? A: Determine first if the property is produced or merely purchased.

1. it the property is manufactured in the Philippines and sold abroad, or vice- versa, it is an income partly within and partly without. 2. if the property is purchased, considered derived entirely from the sources within the country where it is sold.

EXCEPTION:

corporation, it is an income within wherever it is sold.

domestic

of

shares

stock

of

COMMISSIONER v. IAC Q: What is the issue here? A: They cannot determine if the business expense was incurred in the Philippines.

Q: if you are the BIR, and the taxpayer is not sure, will you disallow the deduction?

A:

Formula: GI from within GI from without

No. determine it pro rata.

Example: 100,000

3. property used in trade or business of

a character which is subject to the

allowance for depreciation provided in subsection 1.

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

All other property not mentioned in the foregoing are considered capital assets.

Q: What is a capital gain? What is a capital loss? A: Capital gains are gains incurred or received from transactions involving property which are capital assets. Capital losses are losses incurred from transactions involving capital assets.

Q: What is ordinary gain? Ordinary loss? A: Ordinary gains are those received from transactions involving ordinary assets. Capital losses are losses incurred in transactions involving ordinary assets.

a

distinction?

A: It is relevant because Section 39B,C, and D apply to capital assets only.

Q: What

is

the

relevance

of

making

1. time when property was held (39B)

to

(holding

period

applies

only

1,000,000

individuals);

= 10%

2. limitations on capital losses (39C);

the ratable share in the

deduction. If the deduction being asked is 100,000 not all of it will be allowed. Only 10,000 or 10% of 100,000 will be allowed as deduction.

Hence, 10% is

CAPITAL GAINS AND LOSSES

3. Net Capital Carry-Over (39D)

I. CAPITAL ASSETS

Q: What is the holding period?

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

A: If capital asset is sold or exchanged by an individual taxpayer, only a certain percentage of the gain is subject to income tax. It is the length of time or the duration of the period by which the taxpayer held the asset.

Q: What is the requirement? A:

1. the taxpayer must be an individual. Section 39B states “in case of a taxpayer, other than a corporation

2. property is capital in nature.

Q: What is the term?

A:

for not more than 12 months; (short term) 50% if the capital asset has been held for more than 12 months. (long term)

100% if the capital asset has been held

NOTE: the holding period applies to both gains and losses.

Q: Do you include capital gains in your ITR?

A:

General rule: yes, include in ITR.

EXCEPT:

1. gains in sales of shares of stock not traded in stock exchange(section 24);

2. capital gains from sale of real property(section 24).

Q: When will the holding period not apply? A:

1. property is an ordinary asset

2. taxpayer is a corporation

3. sale of real property considered as ordinary asset

II. LIMITATION ON CAPITAL LOSSES

synonymous to 34D & loss capital rule this applies to individual and corporate taxpayer Q: What is the loss limitation rule? A: Pursuant to Section 39 C, losses from sales or exchange of capital assets may be deducted only from capital gains, but losses from the sale or exchange of ordinary assets may be deducted from capital or ordinary gains. (applies to individual and corporation)

Q: In connection with 34 D, Losses in Allowable Deduction, what is the rationale behind this rule?

A: If it is otherwise, it will run counter with the rule that the loss should always be connected with the trade or business, capital losses are losses not connected to the trade or business, thus it is not deductible

Q: what is your remedy? A: 39 D, net capital loss carry-over

Q: What is the rationale in allowing ordinary loss to be deducted from either the capital gains or ordinary gains? A: It is already included in ITR, the gross income less deductions hence it already carries with it the deduction

TAKE NOTE: Normally if the loss is an ordinary loss there is no carry over. Except: a. 34D3 b. if the loss is more than GI

III. NET CAPITAL LOSS CARRY-OVER

Q: What are the requirements? A:

1. taxpayer is an individual;

2. paid in the immediately succeeding year;

3. applies only to short term capital gain;

4. capital loss should not exceed net income in the year that it was incurred.

Q: How does net capital loss carry-over differ from net operating loss carry-over under Section 34 D (3)? A: Under the net capital loss carry-over rule, the capital loss can be carried over in the immediate succeeding year. In net operating loss carry-over rule, capital loss can be carried over to the next three (3) succeeding calendar year following the year when the loss was incurred.

NOTE:

over, if the loss is greater than the gains.

only

15%

of the loss

will be carried

In net operating loss carry-over there is an exception to the 3 year carry-over period. In case of mines other than oil and gas wells, the period is up to 5 years.

Q: What is a short sale?

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

A: Sale of property by which the taxpayer

CALAZANS v. CIR

A:

NIT

cannot come into the possession of the property. EX: shares

Q: What is taxable income? A: (memorize section 31) it is the pertinent items of gross income specified in the NIRC,

Q: What do you mean by the phrase “other

F:

The taxpayer inherited the property

less the deductions and/or personal and

I:

fro her father and at the tie of the inheritance it was considered a capital asset. In order to liquidate the inheritance, the taxpayer decided to develop the land to facilitate the sale of the lots. Was the property converted to

additional exemptions, if any, authorized for such types of income by the NIRC or other laws. It refers to NIT because it allows deductions.

than B, C, and D”?

H:

ordinary asset? The conversion from capital asset to ordinary asset is allowed because Section 39 is silent.

A: It means that if the elements of passive income are present, the taxpayer has to pay FIT.

Q: Who

are

the

taxpayers

mentioned

in

Q: Are you allowed to convert ordinary asset

section 24?

to capital asset?

A:

A: General rule: it is not allowed. Read

1. RC

Revenue Regulation 7-2003

2. NRC

The case at bar still applies despite of the

3. OCW

issuance of said Revenue Regulation.

4. RA

Q: What is the conversion prohibited in the Revenue Regulation?

Additionally, under Section 25, NRAETB

A:

Conversion of real estate property.

Q: What is the rationale?

A:

the real estate is capital asset. If it is an ordinary asset, it will be subject to income tax of 32% for individual taxpayer, and 35% if the taxpayer is a corporation.

Section 24 D final income tax of 6% if

Q: What are the properties involve in the RR

7-2003?

Q: What is the tax liability of NRAETB? A: Section 25(1) NRAETB is subject to income tax in the same manner as those individuals mentioned in Section 24.

Q: What about Domestic Corporations? A:

1. Sec. 27 A,B, and C

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

A: 1. those property for sale by the realtors

Q: What

about

Resident

Foreign

2. real property use in trade or business

Corporations?

 

not necessary realtors

A:

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

Tax

Q: That is the conversion allowed by the Revenue Regulation? Is there an instance when an ordinary asset may be converted to capital asset? A: Yes, provided that the property is an asset other the real property, and it has been idle for two (2) years.

SECTION 24 TAX ON INDIVIDUALS

Q: What is the tax mentioned in section 24?

Q: What about Non Resident foreign Corporation and Non Resident Alien not engaged in Trade or Business? A: Not Subject to Net Income Tax but they are liable for Gross Income tax.

Q: Do legally married husband and wife need to file separately or jointly?

A:

1. Pure compensation income- separate 2. Not Pure compensation income- joint

It depends if:

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

 

Q:

Does it apply to all individuals?

Passive Income

A:

No! It does not apply to 10 NRFC and NRA

Interest, Royalties, prizes and Other winnings

and NRAETB because they are liable to GIT.

Interest

NOTE: if the depositary is a Non resident it is exempt

Q: Bank Interest, what is the requirement?

A:

because the income must be derived from sources w/in.

must be located in the Phils.

The bank

Q: Do you include this in your ITR?

A:

The bank is the one liable for the payment of this.

No! because it is subject already to FIT.

NOTE: Liability for NIT, GIT, and MCIT will depend on the elements present.

Q: Who are liable for bank interest? A:

1. RC }

2. NRC} Sec. 24 B1

3. RA

}

Resident citizen is liable to pay tax for bank interest earned abroad (NIT)

Q: If the money earns interest in abroad who is liable? A: RC and DC only by NIT, the rest are exempt. No FIT abroad because we do not have withholding agent abroad.

Q: MCIT applies to DC and RFC in relation to bank interest? A: If the bank interest is derived abroad, RFC is exempt but DC is liable. Impose NIT if it is higher than the MCIT, otherwise apply MCIT if its higher than the NIT

4. NRAETB

Prizes

5. NRANETB Sec. 25 (25%)

6. AEMOP

Requirements:

7. DC

8. RFC

9. NRFC

1. Prizes must be derived from sources w/in the Phils.

2. it must be more than P 10,000

Q: What is the rate of interest?

Q:

Who are liable? (FIT)

A:

FIT of 20%

A:

Q: Is there a lower rate?

A:

7 ½ % if under EFCDS

1. RC

2. NRC

3.

4. RA

OCW

Q: What

if the depositor

is non resident

5. NRAETB

alien?

6. AEMOP (RC, NRAETB)

A:

-W/in FIT - W/out- exempt

Not Liable

1. NRANETB- liable for GIT at 25 %

2. AEMPOP (NRANETB- GIT)

Q: What is the rule on pre- termination?

3. DC- NIT 27 D is silent

A: If it is pre terminated before 5 th year a FIT

4. RFC NIT law is silent 28A7a

shall be imposed on the entire income and

5. NRFC subject to GIT

shall be deducted and withheld by the depositary bank from the proceeds of the

Q: When can we apply NIT in Prizes?

long term deposit based on the remaining

A:

1.

When the taxpayer is RC, RFC and DC

maturity thereof

2.

For DC and RC it must be derived

a. 4 yrs to less than 5 yrs 5%

from income abroad RFC it must be

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

derived from income w/in

c. Less than 3 yrs- 20%

3.

amount is more than P10,000

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

NOTE: If the prize is derived from sources w/in but it is below P 10,000 it is not subject to tax. If derived from sources abroad, most of them are exempt except for RC and DC who are liable w/in and w/out.

Q; Is it possible for RC and DC to pay MCIT?

A:

Yes if MCIT is higher than NIT.

Winnings

Q: Do we apply the P10, 000 req.?

A:

prizes.

gambling.

No,

we

It

do not

must

apply it only

not

pertain

applies to

illegal

to

Thus, the only requirement is it must be

derived from income w/in.

Q: You are a writer for Snoop Dogg are you liable for FIT? What if for April Boy? A: Liable for NIT if Income abroad like a writer for Snoop. While FIT if for April Boy.

Q:

A:

Who are liable (FIT)?

1.

2.

3. OCW

4. RA

5.

6. AEMOP (RC, NRAETB)

RC

NRC

NRAETB

Not Liable?

1. NRANETB

2. AEMOP

3. DC

Q:

Who are liable? (FIT)

4. RFC

A:

5. NRFC

1. RC

2. NRC

3. OCW

4. RA

5. NRAETB

6. AEMOP (RA, NRAETB)

Not liable to FIT?

1 NRANETB- GIT

2 AEMOP (NRANETB- GIT)

3 DC- law is silent NIT

4 RFC- law is silent

5 NRFC- GIT

Q: When does NIT apply to winnings? A:

1. If Taxpayer is DC or RC