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) Lifeblood Doctrine
The existence of government is a necessity, it cannot exist nor endure without the means to pay its expenses; and
for those means, the government has the right to compel all its citizens and property within its limits to contribute
in the form of taxes. It is the indispensable and inevitable price for civilized society; without taxes, the government
would be paralyzed for lack of the motive power to activate and operate it.
1. As to concept
Taxation refers to the power of imposing enforced proportional contribution from persons and property by the
sovereign to accumulate revenue in order to support its existence and carry out its legitimate objectives.
While in Eminent domain refers to the power of the state to tae private property for public use upon payment
of just compensation ascertained by law. It is sometimes called expropriation. To exercise the power of eminent
domain, the Constitution provides for the following conditions. First, the taking of property should be for public
use; second there must be a just compensation for the property, and the third, there must be observance of due
process in the taking.
While Police power is the power of the state make and implement laws in relation to persons or property to
promote public health, public morals, public safety and the general welfare of the people.
2. As to scope
Police Power is broader in application because it is general power to make and implement laws on taxation is
the power to raise money for the use and support of the government and eminent domain is merely the power to
take private property for public use upon payment of just compensation.
3. As to Authority
The power of eminent domain may be granted by the law to public service or public utility companies while the
power of taxation and police power are both to be exercised only by the government or its political subdivisions.
4. As to Purpose
In Taxation, the property is generally in the form of money which is taken for the support of the government
while in police power, the property is taken or destroyed to promote general welfare. On the other hand, in
Eminent Domain, the private property is taken for public use.
5. As to Necessity of Delegation
The exercise of the power of eminent domain and police power can be expressly delegated to the local
government units by the law making.
On the other hand, Congress cannot delegate the power of taxation.
6. As to Person Affected
In Eminent Domain, its power operates on the particular private property of an individual.
However, Taxation and Police Power operate on the community or class of individual.
7. As to Benefits
In Taxation, an individual receives a benefit in the form of protection afforded by the government.
For Eminent Domain, the benefit received by the individual concerned is the market value of the specific
property taken from him.
Through Police Power, an individual receives indirect benefits through a healthy economic standard of
society.
8. As to Amount of Imposition
Taxation has generally no limit on the amount of tax which may be imposed.
In Eminent Domain, there is no imposition because the owner of the private property taken is paid at its market
value.
The amount imposed under Police Power should only be sufficient to cover the cost of the regulation, issuance
of the license and the necessary expenses of police surveillance.
9. As to Importance
Taxation is an indispensable function of existence of the government. Without it, there shall be no revenue to
effect and permanently exercise the Eminent Domain and Police Power.
12. As to Limitation
Police power is limited by the demand for public interest and requirement of due process, Eminent Domain
is bounded by public purpose and just compensation.
Taxation is under constraints of the inherent limitations and constitutional restrictions.
b) Schedular Tax System – Different types of incomes are subject to different sets of graduated or flat income tax
rates. The applicable tax rate will depend on the classification of the taxable income and the basis could be gross
income.
c) Semi-Schedular or Semi-Global Tax System – The compensation income, business or professional income,
capital gain and passive income not subject to the final withholding income tax, and other income are added
together to arrive at the gross income, and after deducting the sum of allowable deductions from business or
professional income, capital gain and passive income and other income not subject to final tax, in the case of
corporations, as well as personal and additional exemptions, in the case of individual taxpayers, the taxable
income is subjected to one set of graduated tax rates or normal corporate income tax rate. With respect to the
incomes not subject to final withholding tax, the computation of income tax is “global”.
4.) Double Taxation
Double Taxation means an act of the sovereign by taxing twice for the same purpose in the same year upon the
same property or activity of the same person, when it should be taxed once, for the same purpose and with the
same kind of character of tax.
A. Strict sense
It is prohibited because it comprises imposition of the same tax on the same property for the same purpose
by the same state during the same taxing period.
This kind of double taxation violates the constitutional provision of uniformity and equal protection, as well
as the principle that tax must not be excessive, unreasonable and inequitable. Therefore, such taxation should,
whenever and wherever possible, be avoided to prevent injustice or unfairness.
B. Broad Sense
It extends to all cases in which there is a burden of two or more pecuniary impositions. It is usually allowed
as long as there is no violation of the equal protection and uniformity clauses of the constitution.
The legislative consent to the transfer may be given either in the original act granting the exemption or in a
subsequent law.
1. It is generally revocable by the government unless the exemption is founded on a contract which is protected
from impairment, but the contract, such as, for example a valid cause of consideration. A legislative franchise in
the nature of contract. An exemption provided for in a franchise, however maybe repealed or amended pursuant
to the constitution.
Incidentally, a franchise is a particular right or privilege granted by law to a person or corporation, such as
the franchise for the operation of street railways, electric light, and power and telephone lines.
2. It implies a waiver on the part of the Government of its right to collect what otherwise would be due to it, and,
in this sense, is prejudicial thereto. Hence, it exist only by virtue of an express grant and must be strictly construed.
3. It is not necessarily discriminatory so long as the exemption has a reasonable foundation or rational basis.
Where, however, no valid distinction exist, the exemption may be challenged as violative of the equal protection
guarantee or the uniformity rule.
2. Implied
This occurs when tax is levied on certain classes of persons, properties, or transactions, without mentioning
other classes. Every tax statute, in a very real sense, makes exemptions since all those not mentioned are deemed
exempted. The omission may be either accidental or intentional.
3. Contractual
Contractual tax exemptions are those lawfully entered into the government in contracts under existing laws.
These exemptions must not be confused with the tax exemptions granted under franchises, which are not contracts
within the context of the non-impairment clause of the Constitution.
b. A tax credit Certificate issued in accordance with the pertinent provisions of the Tax Code, which shall remain
unutilized after five 5 years from the date of issuance, shall unless revalidated, be considered invalid, and shall
not be allowed as payment for internal revenue tax liabilities of the taxpayer and the amount covered y the
certificate shall revert to the general fund.
Debt
It is based on contract between parties;
It can be assigned to any third person as long as both parties permit it; nonpayment of the debt requires no
imprisonment and there is no criminal liability therefor, unless there is employment of deceit;
It is payable in terms of money and/or property;
Taxes on income and profits are imposed on all taxable income earned or received by a taxpayer,
whether as an individual, as a partnership, or as a corporation, during a particular period of time,
usually lasting one year.
Taxes on domestic goods and services are imposed on the use or sale of locally manufactured goods
as well as local services availed of within the domestic territory.
Taxes on international trade and transactions include import and customs duties, and other
international trade-related collections of the government.
Taxes on property are imposed on the ownership of wealth or immovable property levied at regular
intervals and on the transfer of real or personal property.
Other taxes primarily include collections from the motor vehicles tax, immigration tax and
forest charges.
Recently, the government came up with a comprehensive measure to overhaul the tax system to
bring in badly needed revenues for the government.
Called the Comprehensive Tax Reform Program (CTRP), the new tax measure has three principal
components, namely, a) income tax reform; b) excise tax reform; and, c) fiscal incentives reform.
The CTRP aims to widen the tax base, simplify the tax structure to minimize leakages, undeclared
revenues, overstated deductions and corruption to make the system more elastic and easier to
administer.
B) Definition
means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual
employee (except rank and file employees as defined herein) such as, but not limited to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market
rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee
in social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts
in excess of what the law allows
C) Taxable and non-taxable fringe benefits
Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a
collective bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner
Fringe Benefits Taxable such as, but not limited to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market rate
and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee in social and
athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts
in excess of what the law allows
There is, likewise, no limit to the amount that may be claimed. Itemized deduction may be availed by the following
taxpayers:
1. resident citizens;
2. non resident citizens;
3. resident aliens;
4. non-resident aliens engaged in trade or business in the Philippines;
5. partnerships and corporations; and
6. estates and trusts.
However, a non-resident alien not engaged in trade or business in the Philippines may not claim the itemized
deduction.
However, the following taxpayers may not avail of the optional standard deduction:
1. Non-resident aliens, regardless whether or not they are engaged in trade or business in the Philippines; and
2. Partnerships and Corporations
• Aliens
a. Resident Aliens – An alien actually present in the Philippines who is not a mere transient or sojourner is a
resident of the Philippines for income tax purposes.
b. Non-resident Alien – Further classified into engaged or not engaged in trade or business in the Philippines.
➢ Engaged in Trade or Business - If his aggregate stay in the Philippines is more than 180 days during any
calendar year, he shall be deemed a non-resident alien doing business in the Philippines, Sec. 22 (G) of the 1997
Tax Code notwithstanding.
➢ Not Engaged in Trade or Business - - If his aggregate stay in the Philippines does not exceed 180 days during
any calendar year, he shall be deemed a non-resident alien not doing business in the Philippines.
• Special Class of Individual Employees
a. Minimum Wage Earner - (A) Requirement of Withholding. - Every employer making payment of wages shall
deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That no
withholding of a tax shall be required where the total compensation income of an individual does not exceed the
statutory minimum wage, or five thousand pesos (P5,000.00) per month, whichever is higher. (Sec. 79, NIRC)
b) Corporations
• Domestic Corporation – When applied to corporation means created or organized in the Philippines or under its
laws. (Sec. 22 [C])
• Foreign Corporations
a. Resident Foreign Corporation – is one engaged in Trade or business in the Philippines.
b. Non-Resident Foreign Corporation – is a foreign corporation not engaged in Trade or Business in the
Philippines.
c) Partnerships – Except for a general professional partnership and an unincorporated joint venture or consortium
engaged in construction or energy related projects, which in reality are also partnerships, the Tax Code considers
any other type of partnership as a corporation subject to income tax.
d) General Professional Partnership – A partnership formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engaging in any trade or business.
e) Estates and Trusts – Taxable estates and trusts are taxed in the same manner and on the same basis as in the
case of an individual, except that the amount of income for the year which is to be distributed currently by the
fiduciary to the beneficiaries, and the mount of the income collected by a guardian of an infant which is to be held
or distributed as the court may direct, shall be allowed as deduction in computing taxable income of the estate or
trust, but the amount so allowed as deduction shall included in computing the taxable income of the beneficiaries,
whether distributed to them or not.
f) Co-ownership – There is co-ownership when the undivided ownership of an undivided thing or right belongs
to different persons. For tax purposes, the individual co-owners report their share of the income from the property
owned in common by them in their individual tax returns of the year, and the co-ownership is not considered as
a separate taxable entity.
Tax credit refers to the taxpayer’s right to deduct from the income tax due the amount of tax he has paid to a
foreign country subject to limitations.
Income derived from any public utility or from the exercise of any essential governmental function accruing to
the Government or to any political subdivision thereof shall be excluded from the computation of Gross Income.
Proceeds of life insurance policies paid to the heirs/beneficiaries upon the death of the insured:
• If such amounts are held by the insurer under an agreement to pay interest, the interest payments shall be
included in the Gross Income;
• Insured must die to avail of total exemption. If he survives, there/s only partial exemption to the extent that the
proceeds constitute return of capital (total amount of premiums paid)
Amount Received by Insured as Return of Premium under life insurance, endowment, or annuity contracts,
received either during the term or at the maturity of the terms or upon surrender of the contract.
Amount Received by Insured as Return of Premium under life insurance, endowment, or annuity contracts,
received either during the term or at the maturity of the terms or upon surrender of the contract.
• Damages will be exempt only if they arise together with personal injury; however, if damages only amount to
return of capital, it is exempt (Ex. Damages from car accident exempt only if claim includes compensation for
personal injury. If no personal injury, damages for car wreckage will only be exempt to the extent of the amount
of the actual damage.)
Income Exempt under Treaty shall be exempt to the extent required by any treaty.
Prizes and awards in recognition of religious, charitable, scientific, educational, artistic, literary or civic
achievement
1. Made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic
achievement.
2. The recipient was selected without any action on his part to enter the contest or proceeding.
3. The recipient is not required to render substantial future services as a condition to receiving the prize or award.
c) Gains form the sale of bonds, debentures or other certificates of indebtedness with a maturity of more than 5
years;
Q: In 2006, Sally, a fruit market operator received an assessment for customs duties for her imported
market equipment in the amount of P75,000. Believing that the amount is excessive, she paid the same
under protest. Because of the assurances from her retained CPA that she stands a good chance of being
able to secure a refund of P50,000 she did not deduct the same anymore from her income tax return.
She deducted only the P25,000 which she believed was due from her. She received the refund amount
ing to P50,000 in 2008. What should have been the proper tax treatment of the payment of P75,000 in 2006?
A: Sally should have deducted the total P75,000 customs duties in 2006. When she received the refund
of P50,000 in 2008, she should have included the amount as part of her income. Under the tax benefit
rule, taxes allowed as deductions, when refunded or credited shall be included as part of gross income
in the year of receipt to the extent of the income tax benefit of said deduction.
15.) Passive Income
Passive income refers to income derived from any activity on which the taxpayer has no active
participation or involvement.
Under this provision, there are two passive incomes mentioned: (1) Bank interest; and (2) royalties.
With respect to bank interest, to be considered passive, it must be derived from sources within the Philippines. It
will be considered derived from sources within the Philippines if the bank from which the interest is earned is
located in the Philippines.
Unlike the final income tax of individuals, a domestic corporation is not exempt from final income tax for long-
term deposits.
As regards royalties, the lower rate of ten percent (10%) which is applicable to individual taxpayers, does not
apply to domestic corporations, all royalties derived by domestic corporation from sources within the Philippines
are subject to a final income tax rate of twenty percent (20%)
(b) Capital gains from the sale of shares of stock not traded in the Stock exchange
The rules on individuals are also applicable to domestic corporations. The capital gains from the sale of shares of
stock not traded in the stock exchange shall be subject to final income tax provided the elements are present: (1)
the shares are shares in a domestic corporation; (2) classified as capital assets; and (3) the shares are not listed
and traded in the local stock exchange.
(c) Income derived under the expanded foreign currency deposit system
The rules on domestic corporations are applicable to resident foreign corporations. The only difference is that
under Section 28 (A) (7)(b), the income earner is a resident foreign corporation depository bank under the
expanded foreign currency deposit system.
Under this provision, the resident foreign corporation is a stockholder of a domestic corporation. The income
received by the former from the latter in the form of dividends shall be exempt from income tax.
(e) Capital gains realized from the sale, exchange, or disposition of lands and/or buildings.
A final income tax of six percent (6%) based on the gross selling price or fair market value, whichever is higher,
shall be imposed on capital gains presumed to have been realized from the sale, exchange or other disposition of
real property located in the Philippines, classified as capital asset. (Section 24 (D) (1). Based on the foregoing,
the following elements must be present for final income tax to apply: (1) the property sold is real property; (2)
located in the Philippines; and (3) classified as a capital asset.
Capital gains presumed to have been realized from the sale or disposition of the principal residence by natural
persons shall be exempt from final income tax, provided, the following elements are present; (1) the property sold
or otherwise disposed of is the principal residence of the taxpayer; (2) the proceeds of which is fully utilized in
acquiring or constructing a new principal residence; (3) the acquisition or construction of the new residence is
within eighteen (18) months from the date of sale or disposition; (4) the historical cost or adjusted basis of the
real property sold or disposed shall be carried over to the new principal residence built or acquired; (5)the taxpayer
should inform the BIR of his intention to avail of the exemption within 30 days from the sale or disposition; and
(6) the tax exemption can only be availed of once every ten years.
Any excess of the MCIT over the net income tax shall be carried forward and credited against the net income tax
for the three (3) immediately succeeding taxable years.
The Secretary of Finance is authorized to suspend the imposition of the minimum corporate income tax of 2% on
any corporation which suffers losses on account of:
1. prolonged labor dispute
2. force majeure
3. legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the
necessary rules and regulation that shall define the terms and conditions under which he may suspend the
imposition of the minimum corporate income tax in a meritorious case
The following domestic corporations are exempt from the imposition of the MCIT:
1. Proprietary educational institutions;
2. Non-profit hospitals;
3. Depository banks under the expanded foreign currency deposit system (foreign Currency Deposit Units); and
4. Domestic corporation enjoying special tax privileges under the Bases Conversion Development Act and
Republic Acts 7916 and 7227 otherwise known as the PEZA law.
The following resident foreign corporations are likewise exempt from the imposition of the MCIT:
1. International air and shipping carriers;
2. Offshore Banking Units (OBU’s);
3. Regional operating headquarters of resident foreign corporations; and
4. Resident foreign corporations enjoying special tax privileges under the Bases Conversion Development Act
and Republic Acts 7916 and 7227 otherwise known as the PEZA law.
(e) Applicability of the MCIT where a corporation is governed both under the regular tax system and a special
income tax system.
17.) Improperly Accumulated Earnings Tax
IAET is a surtax imposed on corporations formed or availed for the purpose of avoiding the income tax with
respect to its shareholders or the shareholders of another corporation, by permitting earnings and profits to
accumulate instead of being divided or distributed.
General Rule: 10% of the improperly accumulated taxable income of domestic and closely-held corporations
Exceptions:
(a) Publicly-held corporations;
(b) Banks and other non-bank financial intermediaries; and
(c) Insurance companies.
(A) Labor, agricultural or horticultural organization not organized principally for profit;
(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital
stock organized and operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a
fraternal organization operating under the lodge system, or a mutual aid association or a non-stock corporation
organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the
members of such society, order, or association, or non-stock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong
to or inure to the benefit of any member, organizer, officer or any specific person;
(F) Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net
income of which inures to the benefit of any private stockholder or individual;
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social
welfare;
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like organization of a purely local character, the income of which consists solely of
assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of
marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling
expenses on the basis of the quantity of produce finished by them;
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing
organizations 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, shall be subject to tax imposed under this Code.
Yes, corporations and taxable partnerships are required to file the following income tax returns:
a) 1st, 2nd and 3rd quarter returns – the return shall be filed and the tax paid within 60 days from the close of
the first three quarters; and
b) Final Adjustment Return – the return shall be filed and the tax paid on or before the fifteenth (15th) day of
the fourth (4th) month following the close of the taxable year.
Whats is the manner of reporting income and expenses in the corporate income tax returns?
The quarterly returns of the taxable year shall report the quarterly income and expenses on a cumulative basis,
that is, the income and expenses of the first (1st) quarter are forwarded or added to the income and expenses of
the second (2nd) quarter, and the income and expenses of the first (1st) and second (2nd) quarters are also forwarded
or added to the income and expenses of the third (3rd) quarter.
The final adjustment return shall report the income and expenses for the entire taxable year.
Any income tax actually paid in the prior quarter/s may be claimed as a tax credit in the quarterly and annual
returns.
When the corporation adopts the calendar year as its taxable year, the returns must be filed and the tax paid as
follows:
The deadline will vary if the corporation adopts the fiscal year as its taxable year. To illustrate, if the corporation
adopts a fiscal year beginning July 1 and ending June 30 (12 month accounting period), the returns must be filed
and the tax paid as follows: