SYLLABUS IN TAXATION [ (REVISED BY 2016-2017) GENERAL PRINCIPLES & INCOME TAXATION (tor updating wih RA 10965 provisions) A. General Principies of Taxation 1. Concept Underlying Basis2 and Purpose Taxation, Taxes Defined Attributes or Characteristics of Taxes 1) Cebu Portland Cement v, CTA, L-29059, 15 Dec 1987, 156 SCRA 535 (Lifeblood of the Governmen:) ‘ 4)_-Mun. of Makati v. CA, et al, L-89898, 01 Oct 1990, 190 SCRA 206 (Exempt from execution) CIR. Algue, Inc etal, L-28896, 17 Feb 1988, 158 SCRA 9 (Lifeblood Theory; Rationale is Symolotic Raleionship; timeliness of assessment / collection; effect of warrant of distraint & levy; deductibility of promotional expense)3 igs Bank v. CA etal, 330 SCRA S07, 12 Apr 2000 (Mutual Observance of is for refund due to losses, how to prove entitlement) 4 2. Principles of a Sound Tax System Fiscal Adequacy ‘Theoretical justice Administrative Feasibility Will the non-obse:vance of these principles invalidate the tax law? No, unless other inherent and constitutional limitations are infringed. 3. Scope of axation No attribute of sovereignty is more pervading, unlimited, plenary, ‘comprehensive and supreme What isthe concept cf taration? I: cam be viewed in two ways, namely@a) asa power to tax and (b) asthe act ‘or process by which taxing power ic exercised What isthe theory or underiying besis of taxation? It is @ necessity without which no government could exist revenues collected are incended to finance government and its 100k) See Rev Reg No, 2-82, 29 Mar 1982 - taxation of sales of shares of stocks classified as capital assets See Rit 7~2003 ~ capital assets vs ordinary assets (Cash reward to informers 1096, max of 1M [see Sec 282, NIRC) Non-resident Citizen From withit Phil ~ same rules as to resident citizen Without Phil ~exempt Resident Alien ‘Same rules as to resident citizen, but only on income earned from within Phil Non-resident Alien Engaged in business (183 days) - same as resideat alien with respect to compensation, ‘business, other income and passive income, but not entitled to additional exemption, except: dividends from domestic corp - 20% (See 25(4)(2) Not engages! ~ 25% on gross income (but entitled to preferred rates for sale of shares of stocks and real property) Dividends from domestic corp ~ 25% Royalties, prizes & winnings ~ 25% Employed by OBU, RHQ/ ROHQ, MNC, petroleum service contractors / subcon (same treatment to Filipino of same rank & job ~ 15% based on gross income of non- residents, whether individual or corp from transactions with depositary banks under ecpanded! foreign currency deposit system - exempt from income tax, Sec 27 VGH Estates and Trusts (Sec 60 to 66, NIRC) CATEGORIES OF INCOME OF INDIVIDUAL TAXPAYERS Compensation Fringe Eenefits Income ‘rom Trade / Business Exercise of Profession Passive income Osher Dealings in P-operty COMPUTATION OF INCOME TAX DUE OF INDIVIDUAL WHO EARNS BUSINESS, COMPENSATION AND OTHER INCOME Gross Seles / Receipts Less: Séles Returns & Discounts Met Sales Less: Cost of Sales / Servi ‘Gross Income from business or exercise of profession Campersation income (purely compensation income is not entitled to business deductions) Other Income (other than taose subject to final tax)Total Gross Income Less: Itemized! Deductions or optional standard deduction Personal ard additional exemptions Taxable income Tax Due (Tax tabl 5% to 32%) Creditable W/Tax Tax still due / refund V'YPE OF GROSS INCOME OF INDIVIDUALS SUBJECT TO 5% TO 32% TAX Compensation Trade / Business Exercise of Profession Frizes / Winnings ~P 10K or less Capital enins on real property sold to government - 6% oF 5% to 32% Gther capital gains from dealings in phoperty [except those subject to 6% final tax on land and £9 or 19% final tax on shares of stocks and ¥ of 19 transaction tax on shares of stocks traded 2nd sold through the stock exchanges; see below Cepital gains otner chan from real property and shares of stocks are stil subject tothe rules on long term and short term investments, ie. 1 year or less and over 1 year holding period: loss carry ov2r and deduction rues of capital loss v. capital gains and ordinary income only. INCOME OF INDIVIDUALS SUBJECT TO FINAL TAX Fassive Income Prizes / winni Dividends. Royslties Interest Capital Gains from sale or exchange of shares of stock (outside of stock exchanges): Capical gains from sale of real property (held as capitsl asset) Compensation from ROHQ/RHQ, OBU, ete Informner's reward ‘5 >PLOK, except from PCSO, ete GENERAL PROFESSIONAL PARTNERSHIP (Sec 26) - Exempt from income tax as a corporation but its partners are taxable on their share whether distributed or not 79) Its exclusion is a classification clause not an exemption thus construed in favour of taxpayer, CIR. Ledesma, 31 SCRA 95, 30 Jan 1970 £0) Sison v. Ancheta and Tan v. Del Rosario, supra TAX BASE AND TAX RATES APPLICABLE TO CORP (Sec 27 ~ Heaning, of Corp 0° partnership Sharing not taxable ~ Paseual v. CIR, 166 SCRA 560 (1988) o-ownership is oct taxable, Ona v. CIR, 45 SCRA 74; Obillos v. CIR, 139 SCRA 436 (1985); rited Ona, Evangelista cases ‘Afisco Insurance v. CIR, GR No. L-112675, 25 Jan 1999; taxed as a corporation the pool of insurance companies Joint Emergency Operations Coll v. Batangas, 54 0G 6724 Power ef Attorney for operation of mining claims deemed partnership Philex Mining . CIR, |, NIRC) GR No, 148187, 16 Apr 2008, Kinds af Corporation Domestic (Sec 27)Profit-orienced (3286); effective July 1,2005 ~ 35% effective January 1, 2009 - 30% pet PA9337 Proprietary educational and non-profit hospital - 1096 of taxable income, except passive {ncome; contrast with atax exempt non-stock and non-profit educational institution; See ‘art. XIV, See 8(3) of the Constitution; Central Mindanao State Universtiy v. Dept of ‘Agrarian Reform 215 SCRA 86 (1992); and Abra Valley College, Inc. v. Aquino, 162 SCRA 106 (1988) Government Corps - S85, GSIS, PHIC, PCSO & PAGCOR (Pageor now taxable under RA 337) Foreign (See 23) Resident ~ engaged in business Non-resident Others whose activities or ventures considered as corporation for income tax purposes “AXATION OF DIFFERENT TYPES OF INCOME OF DOMESTIC CORP - SUBJECT TO TAX ON INCOME ARNED FROM ALL SOURCES (WITHIN & WITHOUT THE PHILS); see NV Reederif Amsterdam v. CIR GR No, 46029, 23 june 1988 ‘On taxable income (other than passive income) ~ 34%, 33% or 32% starting 2000, 35%; clfective January 1, 2009 ~ 30% per RA 9337 ‘On Passive Income Royalty ~ 20% Interest / Yield from bank deposits, deposit substitutes, Trust Fund and similar arrangement ~ 20% [CIR v. Solidbank, GR No, 148191, 25 Nov 2003 - GRT v. 2W7 = no double taxation; accrued v. constructive} Interest Income (expanded foreign currency) - 75% Interest Income of depositary banks from deposits in foreign currency & loans to residents ~ 10% Interest income from non-residents, whether individual or corp exempt Interest (5 years or more maturity) ~ exempt: if pre terminated <3- 20%, <4 ~ 12%, <5 5% Interest passed on by parent company to its subsidiaries on reimbursement basis re taxable to parent company. The real lender is che banks. [CTA Case No. 7036, 10 Jan 2008] Dividends from domestic corp and taxable partnership ~ exempt from regular income tax (See Sec 73, NIC] Dividends from foreign corp subject to regular income tax Capita’ gains from sale of real property located in the Phil ~ 6% Where sale of land was made between PEZA-registered enterprises subject to 5% preferential tax ” in Meu of all other taxes", the same is not subject to 6% CGT, VAI or DST [DA 025-2008, 22 Jan 2008] Sale of “eal property held for investment by a holding company and not engaged in real estate business is subject to 6% CCT & DST but exempt from VAT [DA 011- 2008, 15 Jan 2008] Buyers af real property who are not engaged in trade or business are required to ‘w:lhhold the creditable tax from the purchase price. If seller already remitted the tax, thez2 is no more obligation to pay the tax or the penalty, (DA 02-2008, ‘08 Jan 2008) Sale ci stocks 07 domestic corp Listed and thru stock exchange - exempt from income tax, but subject to business tax at % of 1% of gross (Sec 127)1P9 of a taxpayer granted with legislative air transport franchise is not subject to IPO tax because of ipso facto provision in its franchise that levels ‘tie playing field with competition. The competition franchise provides that it shall pay 2% franchise tax or basic corp income tax whichever is lower, “in lieu of other taxes’. The issuance of shares of stocks is likewise not subject to DST. (DA 05-2008, 9 Jan 2008} Wot listed or iflisted, not trade thru stock exchange ~ 5%, 10% (100K, >100k) Sew RR 7-2003 Capital assets v. Ordinary Assets /M% MCIT BASED ON GROSS INCOME (see Rev Reg 9-98, 25 Aug 1998) Eeginnirg immed.avely on the 4* taxable year from start of operations; compare tax based on 30% ind 29% of Gross income whichever is higher. Carry Forward of Excess MCIT vs regular tax for 3 immestiately succeeding years Relies due to prulonged labor disptes, force majeure, and other legit buss reverses Gross Income seans Gross Sales less sale returns, discounts & allowances & Cost of Goods Sold (CGS). C5 include all expenses to produce the goods to bring them to their present location & use. For tracing or merchandising, CIF & duties; for manufacturing, cost of goods manafactured and sold, cost of producing finished goods; for seller of services, Gross Receipts less sales returns, discounts, allowances & cost of services, facilites, salaries, benefits, equipa.ent, rent supplies; for banks, include interest expense. £1) CREBS Ine v. Ese Secretary, etal - GR NO, 160756, 09 March 2010 (Validity of imposition of (MCT and otter “elated issues) 5% OF GROSS INCOME |S: AN OPTION TO CORPORATION Tax effor: ratio = 22% of GNP Income tax collect] = 40% total revenues VAT = 4% of GNP Consolic ated Publ c Sector Financial Positir 9% of GNP RESIDENT FOREIGN CORFORATION 20% effe-tive Jam. ry 1, 2009 ~ same as domestic corp, except that taxable income should come from Phil scur-vs {nernational Carrer ~2 % of Gross Phil Billings (GPB) ‘Air Carrier continuous and uninterrupted Might originating from Phil regardless of place of issue and payment, exchange with other airlines; but in transhipment. ony the leg from vail Shipping ~ ori slocument (2) CAR’ Toky> Saipping Co. GR No, L-66252, 25 May 1995 [Claim for refund of tax on GPE fom hare or vessel Clif refund construed stuitcssint juris nding of fact by CTA tha vessel ft with ut suger laden; 15 vears lapsed without refund though at one point lawyer of BIR said i was approved: Ki goose thot lay che golden eg} (0% -Otishore banicng units - income from foreign transactions with local and resident banks, Inching fron ‘oreign leans with residents 5% Branch profits remittances based on total profits applied or earmarked for remittance ‘without decue: on oftax component paid via withholding system lexcept sctivitiesrejistered with PEZA 13): of ince» rent, dividends, salaries, omuneraticn, capital gains, royalty, et if not effectively onvcte with tv conduct of ts trade oF Business inthe Phils [see CIR v. Marubeni, 177 SCRA 500 0% - REQ. AH, IAQ - Sec 22 DD & EE, NIC, or definitions 20% -oninterest: royaltes 1 interest income from expanded foreign currency denominated units in a depositary cating fom Phil up to final destination; regardless of sale or payment of