TAXATION 1 - ARANAS 1 EH 306, A.Y.

’19-‘20
are the taxes being collected from the
TAXATION 1 taxpayers.
(e.g., VAT)
GENERAL PRINCIPLES OF TAXATION
Power of Taxation – the process of imposing or
levying the VAT
When it comes to the study of taxation we
have to differentiate power of taxation from Importance of Knowing What Power Is Being
taxes: Exercised by the Government

Power of Taxation The inherent powers of the state has its own
and specific limitations. Therefore, it is
It is the inherent power of the state. important to distinguish whether the power
exercised is taxation, eminent domain, or
This is the power by which the sovereign police power.
raises revenue to defray the necessary
expenses of the government from among The applicable limitation depends on the type
those who in some measure are privileged to of power exercised.
enjoy its benefits and must bear its burden.
There are common limitations which we call as
Simply put, REVENUE RAISING. Indirect Limitations provided under the
Constitution.
PURPOSE: To fuel the necessary activities of
the government in order for it to perform its Taxes
governmental function.
The enforced proportional contributions
from persons and property levied by the law-
making body of the State by virtue of its
Atty: The power to tax is the power to destroy. sovereignty for the support of the government
Is it the case? The answer is YES, but it is two- and its public needs. (Memorize!)
fold. Although it is the power to destroy, there
are also limitations put in place in order to ENFORCED – it is not voluntary. You are
control such power. required or mandated to pay or to contribute.
Manifestations of the Power to Tax Being a The requirement to pay comes in only if you
Power to Destroy belong to that classification or if you are
included in the coverage.
Excise taxes or taxes on these so called non-
essential commodities. If the government Can you refuse to pay just because the
wants to discourage that particular activity, by beneficiary of this tax are the infrastructures in
all means, the government CAN simply Manila, for example? I am from Cebu and I
exercise its power of taxation. Either impose don’t benefit from it.
tax or increase the tax that is currently being
collected from that particular activity or No. So long as you belong to a classification
taxpayer. which is being subjected to tax, you are liable
to pay tax, regardless of where it (taxes) will
Paseo Realty and Development Corp. v. CA go – even if it goes to the pockets of corrupt
officials. It is an enforced or mandatory
SC: Taxation is a destructive power which contribution.
interferes with the personal and property rights
of the people, and takes from them a portion of PROPORTIONAL – the more that you have,
their property for the support of the the more tax that you should be paying. It is
government. based on the person’s ability to pay.
Because it takes property, it is covered under Is proportional the same as progressive?
the limitation provided by the Constitution that Because in political law, there is a requirement
“There should be no undue taking of private that Congress must evolve a progressive
property.” system of taxation.
Prime Distinction between Taxation and Tax S: Yes, because proportional means the more
that you have, the more that you should pay. It
The power being exercised is the power of is also progressive because the more income
taxation. The output, once the power is that a person earns, for example, the more tax
exercised, or once the process is completed, that he should also pay.
TAXATION 1 - ARANAS 2 EH 306, A.Y. ’19-‘20
Atty: So are you saying that a progressive tax S: A state is sovereign if it is free from external
is a proportional tax? control. Meaning, it can administer or rule its
own territory.
S: Yes.
Atty: Is a local government unit like a province,
Atty: Let’s change it. Is a proportional tax a city, or municipality a state? Philippine set-up
progressive tax?
S: No.
S: Not always.
Atty: It’s not a state who can impose tax.
Atty: Basically, it is the same as progressive Because?
because progressive is technically defined:
S: Only the state or the national government
PROGRESSIVE - As the tax base increases, has the power to tax, however, they can
the tax rate will also increase. delegate it.
So essentially, if the tax base will increase, Atty: When it comes to these LGUs, do they
and the tax rate will increase, your tax liability have the inherent power to tax?
will also increase. So the more that you have,
the more that you are also paying. Is it not the S: No.
same as proportional?
Atty. They do not. They have the power to
S: In progressive, as the tax base increases, impose or levy taxes but such power is not
the tax rate also increases. In proportional, if inherent; only delegated. How is it delegated?
the tax base increases, the tax liability also
increases. I think they are the same. S: It delegated by provision of law under the
LGC.
Atty: If it is progressive, you look at the tax
base and the tax rate but if it is proportional, PUBLIC NEEDS/PUBLIC PURPOSE – it is for
you only look at the tax base and tax liability. the general welfare. it is not necessary that a
majority of the people will benefit so long as it
Tax base – it is where the tax rate and can be considered as for public use.
percentage tax will be multiplied
TN: In so far as the Tax Code is concerned,
Tax rate – the percentage of the tax; one that there is no definition as to what is meant by
is dictated by law public purpose because that is one of the
functions of the power of taxation: IT MUST
E.g. of progressive tax: Income tax. The more ADHERE TO THE EVER-DYNAMIC
that you earn, the more you will pay. CONCEPT OF PUBLIC PURPOSE.
E.g. of proportional tax: VAT. Even if your tax Before, socialized housing is not considered
base and tax liability will increase, the tax rate as a public need, but now it is more than a
is fixed (at 12% for VAT) need already which is why the government is
VAT is not progressive because the tax rate is giving tax incentives using its power of taxation
fixed, but it is proportional because the more vis-à-vis police power to encourage these
VAT-able purchases you have, the tax liability types of projects.
increases. Senior citizens, PWDs: before, they are not
TN: What is mandated therefore is not considered as public concerns, but eventually
necessarily a progressive tax, but a they became public concerns.
proportional tax based on the taxpayer’s ability May the legislative body enact laws to raise
to pay. revenue despite the absence of a
How about the Constitutional mandate to have Constitutional provision?
progressive tax? It is NOT mandatory; merely S: Yes, because the power of taxation is an
D I R E C T O R Y. W h a t i s m a n d a t e d i s inherent power of the state. What is only
proportionality. required is that a state must exist for the power
LEVIED BY THE STATE – It only means that a of taxation to exist.
State must exist. Remember the elements of May the Sangguniang Panlalawigan of Cebu
the state. enact a law imposing a tax not provided under
Atty: When is a state considered sovereign the LGC or other laws?
again?
TAXATION 1 - ARANAS 3 EH 306, A.Y. ’19-‘20
S: No, because the power of the Sanggunian show; there is a public display. You don’t do
is limited by what is provided under the LGC. It any other activity. But for resorts and tourist
can only impose or levy the tax delegated to it. spots, although the tourists will be visually
engaged, but there is no show. They are
Atty: If the LGU says you can collect this type essentially different
of tax, the LGU still needs to pass an
ordinance in order to impose or levy that kind In essence, the SC is saying that they are
of tax in its locality or in its jurisdiction. So, in a different in nature. And because the province
sense, it is like a mini-state but its power is of Benguet is mandated only to collect
limited. If it is not provided under the LGC, amusement tax on these types of
then the LGU cannot collect that kind of tax. establishments, it follows that you cannot
collect amusement tax from resorts and tourist
Pelizloy Realty Corp. v. Province of spots as they are not expressly covered under
Benguet the enumeration.
SC: The power to tax is an attribute of TN: Taxes are different from fees and charges
sovereignty and such is inherent in the state. such as entrance fees. Hence, LGUs can
However, such is not the case with provinces, collect such fees as they are only for purposes
cities, municipalities, and barangays – they are of maintenance. It is different from the nature
not sovereign; they are mere territorial and of tax.
political subdivisions of the Republic of the
Philippines. They are also called as Municipal
Corporations. And because they are mere BASIS OF THE POWER OF TAXATION &
political subdivisions, they are dependent on THEORIES OF TAXATION
what is delegated to them.
Primary Basis of the Power of Taxation
In this case, this involves the imposition of
amusement tax on resorts within the province LIFEBLOOD THEORY
of Benguet. Now, this amusement tax is
collected by the national government for It’s just a theory; just a principle, so what we
specific types of amusements. LGUs are also are looking at here are its different
empowered to collect amusement tax so long manifestations.
as that particular activity is not being subjected Atty: What is this lifeblood theory all about?
to amusement tax by the national government.
S: Lifeblood theory states that the state is
In the LGC, it is expressly stated there that the necessary and therefore it must be unhindered
LGU can collect an amusement tax on in its collection of taxes.
“cinemas, concert halls, exhibitions, and
similar establishments.” Wala nakabutang nga Lifeblood Theory: the collection of taxes must
resort. Here comes now the province of not be hindered, or remain unhindered, for it to
Benguet imposing a 10% amusement tax for finance the operations of the government.
the mountain resorts. Pelizloy, the owner of the
resort, now questioned the legality of the Manifestations of the Lifeblood Theory
ordinance. Pelizloy’s contention is that it is not 1. No injunction in the collection of taxes
within the local taxing power of Benguet. as a general rule.
However, the province claimed that the
amusement tax imposed is already provided For taxation purposes, there can be no
under the LGC falling under “similar injunction. But that is just the general rule.
establishments”
EXC: If injunction is issued by the Court of Tax
Pelizloy countered that resorts are not the Appeals
same with cinemas or concert halls to which
the SC agreed. When it comes to tax assessments, to
questions as to the propriety of the imposition
SC: Apply the principle of ejusdem generis – it or the assessment of the computation… – not
should be restricted on the foregoing on the constitutionality or legality of a law
enumeration. In interpreting this so called imposing a tax, because if such is the case,
“similar establishments,” you go back the you go to the regular courts, the RTC,
previously enumerated items: cinemas, eventually to the SC. But when it has
concert halls, etc. When you say cinemas, something to do with your tax computation,
concert halls, and exhibitions, what happens proper assessment, the proper court to
here is that the audience is visually engaged address that question is the CTA. You do not
because these establishments are staging a go to the RTC.
TAXATION 1 - ARANAS 4 EH 306, A.Y. ’19-‘20
Therefore, if you are questioning before the Manila Memorial Park v Sec. of DSWD and
CTA that BIR’s computation alleging that it was DOE
improper, kung kulektahan ko niya, illegal
collection. Can you issue injunction? Where it gave the government exercises the
police power the state in line with the proper of
Ans: Yes, the CTA can do that but there must taxation.
be an appeal before the CTA. So before it
went to the CTA, it must have been first Which goes to show that the power of the
resolved administratively by the BIR. government to tax is unlimited and plenary.

Q: When will the CTA issue an injunction? So here, the SC, together with the
concurrence of Justice Leonen, said that
Ans: Generally, under three conditions: (1) if taxation said that taxation is an inherent
there is an appellate action before the CTA, powers of the state, anchors on its social
and ancillary to that appeal is a prayer for contract WHICH OBLIGES IT to promote
injunction; (2) if to its opinion collection of the public interest and common good
tax will harm the tax payer or the government;
and (3) if the tax payer is able to post a bond
which is equivalent to the amount twice the tax LEGISLATIVE POWER TO TAX
liability.
SCOPE: Not only to determine the rate of the
2. No off-setting. tax but the method of collection as well. In
Let’s say for example, the government takes short, walay makabuot sa Congress kung
your property by the power of eminent domain. ganahan sya ipa claim na as tax credit or tax
So you have a collectible from the government deduction because that is well-within its
for just compensation. unlimited and plenary powers.

Pwede ba ka muingon, government, dili nako 1. Inherent Prerogative of the sovereignty

bayaran ang income tax, dili nasad nako Which among the three inherent powers is the
kuhaon ang compensation sa property nga strongest?
imo gikuha. Can we do that?
The power to tax allows Congress to
The answer is NO. That is not allowed determine matters as whether tax rates would
However, there is an exceptional case, the old be applied to gross or net, and that discounts
case of Garlitos (Domingo v. Garlitos). Taxes may be allowed by deduction from gross or the
may be off-set under two conditions: tax credit.

If the amount of taxes is already due and While the power to tax is considered as the
demandable, and the amount is already strongest of all government powers, with taxes
liquidated- meaning to say there is no more as the lifeblood of the government, this power
question as the final amount of the tax that can has its limits. Because when it comes to its
be…(inaudible) being unlimited, it’s being plenary, of course it
is the strongest among the three.
(But don’t rely on this. It’s just an exception.
We stick to the general rule.) Kung eminent domain, covers only private
property. Kung police power, ma exercise
3. Imposition even in the absence of within the territorial bounds. But power of
constitutional grant taxation, essentially, covers anything and
everything even outside the territorial
Because again, it is an inherent power of the boundaries of the Philippines so long as you
state. are classified as a resident citizen or a
4. State can select the object and subject domestic corporation.
of taxation 2. Legislative in character
TN: What cannot be issued an injunction is the Primary basis is that he Congress, the HOR to
collection phase (duha mana: assessment be specific, is the one who must start the
phase and collection phase). passage of a tax law
Basis: Taxes are a grant of the people who
are taxed, and the grant must be made by the
immediate representatives (HOR) of the
people. And where the people had laid the
TAXATION 1 - ARANAS 5 EH 306, A.Y. ’19-‘20
power where it must remain and be exercised the power to change is delegated to the
(Cooley). President and not maintained by the
legislature?
Mao na kung naay ganahan mu pass ug tax
law, or mu amend ug tax law, it must Ans: (inaudible)
commence from the HOR. It can never
commence before the Senate. Kung nag Atty: Basically, in the interest of time. You are
sugod sa Senate, can it be a ground to nullify correct in saying it’s too administrative for the
that particular revenue bill or law? legislature to do. Kung muingon manggud ka
naay pasulod nga kargamento sa Philippines,
Ans: Yes, because that is part of the if it is the legislature who will change the tariff
Constitutional limitations to the power of rate, pila na kabuok Congressman? So they
taxation. still need to have a quorum? Kay di ra man na
nimo mainsert right there and then sa agenda.
GR: The power to tax is exclusively vested in Whereas if you will just let one person to do
the legislature, and it cannot be delegated as a the action, upon advice of the tariff
whole. commission, mas paspas ang pag address.
EXC: Because under Tariff and Customs, you will
a. Local taxes by the LGUs learn there that the purpose of imposing tariff
b. Flexible tariff clause and customs duties is not only for revenue
c. Administrative regulations raising. Another purpose is protection of the
local industry – this is what we call as the
Taxation with LGUS? Protective Tariff.

It does not necessarily contravene the nature We also have the so-called Bargaining Tariff.
of legislation because, the legislature This is where the President comes in. When
expressly delegated the power to collect local we say protective, like bulk of shipments of
tax to the LGU. That is pursuant to a ukay-ukay are coming in, and the tariff rate is
Constitutional provision which provides that just normal, then it could harm our local
local governments shall be given local fiscal industry.
autonomy, and it must be allowed to raise its Bargaining, basically, kontra nata sa US for
own funds. Pursuant to that, we have the LGC example, our products coming into US are
of 1991. being imposed very high tariff rates. Pwede
What does the Flexible Tariff Clause under bata mubawi ngari sa Pilipinas? Like we will
the Constitution tells us?
 also impose higher tariff rates until such time
that they will lower down the tariff and customs
duties.
Ans: (inaudible)
Ans: Yes
Atty; So there is a provision wherein the
President is empowered to adjust the tariff Atty: Can the President, upon the advice of the
rates on importations. Is this not a violation of NEDA and tariff commission, do that?
the rule that the power to tax rests exclusively Ans: Yes, because it’s impractical to call all
with the legislature? congressmen and decide on the floor whether
Ans: (inaudible) to increase or decrease these rates.

Atty: No, because it is expressly provided by

law, by the Constitution. What do you think is Administrative Regulations
the reason why the President is given the
power to adjust? This is more focused on assessment and
collection. Who is in-charge when it comes to
Kaning tariff rates, basically are still taxes that admin regulation?
have to be paid if you bring in goods from
abroad or if you bring goods out of the Ans: It’s the Department of Finance through
Philippines. Pero usually, kung export the Bureau of Internal Revenue. But take note,
manggud, exempted na from taxes because when we talk about administrative regulation,
gina-encourage man ta to export, because revenue issuances should be within the
when you export you are being paid in dollars mandate of the tax law.
and our reserve is in dollars. So usually, dako
ug tariff or tax kung import. Why do you think
TAXATION 1 - ARANAS 6 EH 306, A.Y. ’19-‘20
In essence, as to the detail of the imposition of Kung muingon kag Necessity theory, unsa
the tax, it can be determined administratively dapat ang word nga naa sa definition? The
because it’s too technical already. word Necessity.
So kung muingon ka Benefits-Received
Theory?
Case of GMA increasing the VAT rate from
10% to 12% Ans: (inaudible)
The SC said there was a valid delegation from Atty: So it’s still related to the Lifeblood Theory.
Congress because substantive and procedural But the point there is, in so far as the
due process were observed. government is considered, there is a necessity
to serve the people and there is a necessity to
Basically, gi layout na didto ni Congress what protect the people. And for the government to
the conditions are before the President can serve and protect the people, there is a
exercise his powers to increase the rate from necessity to collect the tax under the Necessity
10% to 12%. Theory.
Sa Necessity Theory manggud, this raises
So, Lifeblood Theory again, taxes are the more nga naay need dapat. Lifeblood Theory
lifeblood of the government and it should be does not necessarily care about need so long
collected without a necessary hindrance. as the government can raise revenue.
Taxes will be paid for a civilized society. So Because, it is essential also in passing tax
without taxes, the government will be laws, you have to look at two things:
paralyzed. Atty: Kung magpass ug tax law, does the
Common Tip: If in tax exams it asks, is this legislator need to justify that it will be used for
particular activity or item taxable? Kung dili na this particular public purpose? The answer is
gyud k aka-answer kung taxable or dili, might NO because we follow Lifeblood Theory.
as well answer as TAXABLE. And you will be Meaning to say if the legislator says we will
asked why- DUE TO LIFEBLOOD THEORY. collect excise tax on sweetened beverages,
Pero pinaka-last na na nga option on the kinahangln ba ni i-justify nga these proceeds
taxability or non-taxability of a particular item. will go to the cancer patients or diabetic
patients, etc.? The answer is NO. Because
But in this case CIR v. Metro Star Superama after all, it is a tax. It will just go to the general
Inc.: funds.
The SC said that it is a requirement in all In short, when you say Necessity Theory, it’s
democratic regimes that it must be just a generic necessity that we are talking
exercised…(inaudible…and in accordance about- the generic necessity to serve and the
with the prescribed procedure. If it is not, then generic necessity to protect. Not necessarily
the taxpayer can complain, and the court will specific necessity nga muingon ka mag collect
come to his support. tag tax kay nibuto ang Taal Volcano or mag
collect tag tax kay ubos ang collection ni BIR
What happened in this case? You read that this year. It cannot be the case. So side-by-
case of Metro Star Superama. side and Lifeblood and Necessity Theory.
But this case involves more on the remedy of Atty: Benefits-Protection Theory?
the taxpayer, questioning the legality of the tax
(inaudible). Ans: (inaudible)
Atty: That’s why it is also termed sometimes as
the Benefits-Received Theory because of the
N E C E S S I T Y T H E O RY v. B E N E F I T S - Doctrine Symbiotic Relationship.
RECEIVED THEORY
So under this theory, every person who able
Then other than the Lifeblood Theory we have must contribute a share to the government,
the Necessity Theory and the Benefits- and the government is expected to respond in
Received Theory. What’s the difference the form of tangible and intangible benefits
between the two? intended to improve the lives of the people and
When you say Lifeblood Theory, what is your enhance their moral and material values.
keyword there? Essential for the
government.
TAXATION 1 - ARANAS 7 EH 306, A.Y. ’19-‘20
When we talk of intangible, very basic: to variations in public expenditures. What do
infrastructures, schools, hospitals. When we we mean by that?
say intangible, what do we mean by this?
When we talk of government, basic scenario
Services? Well, it could be intangible. But just because niingon ko diba the tax goes to the
the general feeling of belonging to a state or general fund, how will the government take out
society (inaudible). But the point is, at least, that funding for its specific project? What
we are a civilized society. process or procedure will the government do in
order to take out funds from the general fund?
Now, next point is, can you question or can
you go to the SC and question nga wala kay Ans: (inaudible)
nadawat nga anything from the government?
And as such, you will not pay the tax. The Atty: Okay. Sa start palang, Congress will have
answer is NO. So long as you are able to pay the appropriation for the whole year. It means
and so long as you belong to that coverage. therefore that the fund must be sufficient for
Because as what I have said, it’s not the whole year to meet the budgeted needs,
necessary for the government to pinpoint the which is why, appropriation palang daan, sige
specific purpose or specific need for the na na silag debate because they have their
imposition of that specific tax. Because after own biases. But si BIR, galabad na ang ulo
all, the tax collected by the government goes because at that point, BIR already has a target
to the general fund of the government. It’s up kung pila dapat ang ma-collect niya for the
to the government on how to spend the fund entire year sufficient to finance the needs of
collected from the taxpayers. the government because it has already been
appropriated.
So as lawyers, what should we first remember
under these theories? Nga pwede gamiton If muingon si BIR kani lang gyud ang ma-
when it comes to…it’s common. Like ganiha, collect based on previous year, unya kani ang
we attended the hearing at the Cebu City Hall gi proclaim ninyo because you want to do the
on the imposition of local business tax…and Build, Build, Build Project, what will the
they are now trying to grant amnesty tax, and government do now?
they are now trying to impose amusement tax. During the time of PNoy, it’s very easy to pass
So this, you will be asked to comment on the the appropriation because there’s not much of
legality or validity of the bill. infrastructure project. So kung pila imong
But my point is, if you will check on how good budget this year, it will be replicated the
a particular tax proposal is, the first thing that following year. So kung ako si BIR, kung pila
you have to check is whether that bill will ako collection this year, wa ko problem the
promote a sound tax system. And when we following year. But here comes a new
talk of sound tax system, you have these administration wanting to do new projects
simple three principles which I hope you would which means new funding.
memorize by heart because this is a favorite in Ans: (inaudible)
the Bar exam. There are generally 3 but some
authors expanded it to 4. Atty: So that’s when legislation or imposition of
new taxes will come in. So asa man ang Fiscal
BASIC PRINCIPLES OF A SOUND TAX SYSTEM Adequacy ngadto? The point now, in Fiscal
Adequacy, if there are planned governmental
expenditure, the usual collection or the usual
Basic Principles of a Sound Tax System taxes imposed must be able to meet that
particular expenditure of the government,
1. Fiscal Adequacy which is why in the current performance or
2. Theoretical Justice or Equity collection, if it’s not anymore sufficient to
3. Administrative Feasibility finance new project of the government, there is
4. Economic Efficiency – which is more or less now a need to pass new tax laws or new
still related to Fiscal Adequacy legislation. And because of that, the Build,
Build, Build that I have mentioned, the TRAIN
So when we say Fiscal Adequacy, it simply Law came into effect. So what happened
means that a particular tax system must be under the TRAIN Law?
sufficient to meet governmental expenditures, Ans: (inaudible)
revenue should be elastic or capable of
expanding or contracting annually in response Atty: It’s very tricky to pass a tax law because
our political system is based on popular vote.
TAXATION 1 - ARANAS 8 EH 306, A.Y. ’19-‘20
So if that particular law is tagged on that being required here? A progressive tax or a
particular politician, and it caused even a proportional tax?
minimal increase in the price of commodities, I
tell you that would be the end of the political Ans: Proportional tax
career of that politician. Are you familiar with Atty: Is a progressive tax a proportional tax?
Ralph Recto? He was the main proponent of
the E-VAT law, the Expanded Value Added Tax Ans:
Law, and increasing the VAT from 10 to 12. So
when it caused an increase in the rice of Atty: True or false nalang. Are progressive
commodities, pag sunod nga election, number taxes proportional?
1 siya ha sa previous, the next election wan a Ans: True
kasulod.
Atty: Are proportional taxes progressive taxes?
So now, the government, in trying to pass the
TRAIN Law…because the law passed in late Ans: Not necessarily.
2017 but the Build, Build, Build Program of the
government started in late 2016. To address Atty: So again. Progressive taxes are
the issue in meeting the expenditures of the proportional- that is true because when the tax
government, Fiscal Adequacy, wala man to base increases, the tax rate increases and tax
naka budget ang infrastructures. Ang liability also increases so it’s proportional.
napressure was the BIR which is why year But not all proportional taxes are progressive
2017 was the year when the BIR had to because there are taxes nga nisaka lang ang
exceed its target just to address the plan Build, tax base, the tax rate remained the same, and
Build, Build Program. And prior to the passage the tax liability also increased. That is
of that law, what the BIR did was it went after proportional but that is not progressive. So
the evaders. Good thing, the case of Mighty what is required is based on taxpayer’s ability
Corporation happened where the BIR found to pay. So essentially what is required for a
out that the former tampered the excise tax for sound tax systems is that it must be a
the cigarettes. So the government earned 40 proportional tax. It can be a progressive tax
billion from that. So they were able to raise but it need not be progressive. It has to be
that much in 2017. Then come 2018, that’s proportional.
when the TRAIN Law also took effect.
This is required under section 28, article 6 of
So what happened under the TRAIN Law, the the 1987 Constitution, this principle that we
income tax rate was reduced which benefited must follow Theoretical Justice or Equity.
the income earner, but excise taxes were
introduced. Atty: If a particular tax law violates Theoretical
Justice or Equity, will it make that law
TRAIN Law was sponsored by Angara, but unconstitutional? Pwede ba ka muadtog SC
doing round of interviews is not Angara but the and ask the SC to nullify the law for being
Department of Finance, because after all they violative of the principle? The answer is YES,
are the proponent. unlike if Fiscal Adequacy because it is not
expressly required under the Constitution.

Atty: Now, what if in a particular tax law, it is Atty: Is equity the same as equality? What do
not fiscally adequate? Will it make that law you think is the difference between the two?
unconstitutional? Ans: For equality, I think you are given equal
Ans: It will not. shares orobligations, for example, but equity,
there are certain circumstances that must be
Atty: It will not because what is the remedy if put into account in order to determine …
inadequate? (inaudible)
Ans: Legislation Atty: Which is basically (inaudible). But when it
comes to equality, I don’t care in your ability to
Atty: The remedy is to just pass another tax pay, basta equal, bayad mong tanan. Kung
law. Point is, you cannot go to the SC say that naa tay contribution nga 500, bahalag
this tax law is unconstitutional because it is allowance pa na nimo, bayada jud ka. But
fiscally inadequate. It cannot be the case. equity is different. Pila may allowance nimo,
Second principle is Theoretical Justice or 10% of that mao imo contribution.
Equity which is based on taxpayer’s ability to
pay. Progressive or proportional? What is
TAXATION 1 - ARANAS 9 EH 306, A.Y. ’19-‘20
TN: What is required is equity, not necessarily mana nila? Point is, kung I-combine nila, ma
equality. large taxpayer sila. If non-large, they will
belong to different RDOs. Siguro di ka
Next, we go to Administrative Feasibility. manotice ni BIR at first, pero eventually you
S: Under the Administrative Feasibility, it will be noticed you kay naa man tay gitawag
ensures that the tax is convenient, just, and nga Taxpayer’s Verification by the BIR. If you
effective. get a clearance from the BIR, you need
Taxpayer’s Verification.
Atty: Okay. Two things, basically –
Point is, admin feasibility that’s why we have
On the part of the taxpayer, you say that it is large and non-large taxpayers.
administratively feasible if it is simple and easy
to follow. Atty: If a tax law violates the principle of admin
feasibility, will it make the law unconstitutional?
On the part of the government, it is Or invalid?
administratively feasible if it closes up
loopholes of corruption, if there are measures Ans: No. it’s only defective but it is not invalid
in place to prevent corruption, and to deter but it is not unconstitutional. Because what’s
unscrupulous officials from committing fraud. your remedy man? If it is not administratively
feasible, the remedy is to pass a new revenue
In layman’s term, when we talk of admin regulation or the BIR will pass a revenue
feasibility, it simply requires nga ang cost of memorandum circular, clarifying that particular
implementation should be lower than the treatment for this particular situation. Or pass
benefit that you will get from it. Can you give TRAIN Law because one of the purpose of the
me an example where the government applies TRAIN Law is to simplify the complicated tax
this principle of admin feasibility in taxation? system.
Ans: I think in classification of taxpayers. The fourth one is Economic Efficiency. As what
I have mentioned, it’s more or less still related
Atty: Correct. How are taxpayers classified? to Fiscal Adequacy.
Ans: Those who are earning a 100,000 a year, Nature of taxation. The legislature, basically,
those who are low-income earners, and those has the power to determine what the purpose
who are (inaudible) of the tax is, what are the subjects or the
Atty: So basically we have the classification of objects of taxation, amount or rate of the tax,
large taxpayers and non-large taxpayers. That the type of tax to be collected, the manner by
is for admin feasibility because if you are which the tax will be imposed, situs of taxation
classified as large taxpayer, especial ka sa – when we talk of situs of taxation, that is the
mata ni BIR. When it comes to compliance, place of taxation – the grant of tax exemption
you will be heavily monitored. You will be or condonation, and the provision of admin
required to have computerized accounting and judicial remedies to be availed of by the
system, you will be required to submit this taxpayer and the government.
documents, and you will belong to the large Take note of the grant of tax exemption, when
taxpayers division of the BIR wherein there will it comes to the taxing proper of the
be a specific revenue audit (inaudible) nga government, ang rule is kung kinsay maka
nakatutok sa kompanya nimo. impose ana nga type of tax, siya sad ang
Ug non-large ka, anhi lang ka sa Regional maka grant ug tax exemption. So if it is an
District Office nga gubot kaayo ig sulod nimo, income tax imposed by the national
mangutana lang ka kasab an ka. But when it government, para ma exempt ka, it should also
comes to audit or assessment, priority sad ka be the national government who will pass a
because admin feasibility. In short, dili man law granting the exemption, not the local
practical i-audit ni BIR tanang taxpayer. It’s government nor the BIR. If it is the local
costly. government imposing a local business tax, it
will also be the local government who will pass
That’s why they have to classify who is large an ordinance exempting you from the payment
and who is non-large. So kung non-large ka, of that local business tax, not the Congress,
expensive? Mao na ang mindset sa mga except if the legislature will abolish the power
karaang insik. Ang buhaton nila daghan sila of the LGU to collect the local business tax. So
negosyo pero nakaregister separately sa mu follow, I abolish pud niya ang right or
asawa, sa anak, but at the end of the day, they power to grant tax exmption.
go back to one house. Nganong gibuak buak
TAXATION 1 - ARANAS 10 EH 306, A.Y. ’19-‘20
S: With regard to the authority granted to the
President in relation to the tariff rates, is there i.e. When you buy at the wet market, it has no
a need for a law to be passed? tax, no additional VAT because these
commodities are essential commodities.
Atty: It’s more of a Constitutional provision, But if it is non-essential like alcoholic
basically. And then it’s also in the Customs beverage, sweetened beverages, or cosmetic
Modernization and Tariff Act (CMTA). Diba surgery,VAT and excise tax may now be added
provisions in our Constitution, usually naa bacause it is not essential causing an increase
manang self-enforcing? Magkinahanglan ug on its price.
Special Law. The provisions on LGU is not
self-enforcing, which is why we have the LGC. 4. Representation - the power of taxation is
For the Flexible Tariff Clause, we also have the basically used in a democratic society. This is
CMTA. where the direct representatives of the people
Q: What's the difference again between a or the members of the house decide what are
proportional tax and a progressive tax? the taxes to be imposed

A:In a proportional tax, as the tax base SECONDARY PURPOSE: Non-Revenue

increases, the tax liability will also increase, Raising
regardless of any change in the tax rate.
In a progressive tax, as the tax base A. Regulation - this is a secondary objective
increases, the tax rate will also increase. of imposing tax
● In Manila Memorial Park case, one way
Q: What is the nature of the power of of resolving the issue of that case to
taxation? determine the power exercised was the
A: primary purpose of the law whether the
1. It is inherent in Sovereignty of the State primary purpose to raise revenue or the
2. It is legislative in Character - primarily it is primary purpose to honor and give
the legislature who impose or levy the tax benefit to the senior citizen wherein no
although there are exceptions revenue is raised
● The SC said that strictly this is not
power of taxation but police power
PURPOSE OF TAXATION exercised side by side with the power
of taxation.

The 4 R's of Taxation In connection with the non-revenue raising

purpose, we have to remember these two
1. Revenue Raising (PRIMARY PURPOSE) - dicta:
very basic because the purpose is to collect
the money 1. Holmes Dictum - The power to tax is not
● In other books it need not be primary the power to destroy so long as this court sits.
but it should be the substantial reason
for the imposition of the exercise of this 2. Marshall Dictum - The power to tax is the
power. power to destroy.
● If secondary or no revenue raising at
all, then it may not be taxation but it Atty: Who is Marshall?
may be more on police power. S: SC justice in the US.
Atty: What is his last name?
2. Redistribution - redistribution of wealth S: Marshall?
because when it comes to taxation, we follow Atty: Law (AHAHAHA)
the rule that the more that you have, the more Atty: So why are we listening to Marshall and
that you should be paying. Holmes? This is a serious question.
So the amount that you pay to the govt S: These dicta were contradicting. So the
basically will be used by the govt for its reconciliation is that the power to tax is given a
functions to benefit the less fortunate. wide lateral or a wide reach imposing such
power to promote the general welfare but it is
3. Repricing - this is where the power of subject to limitations.
taxation is used in order to increase or Atty: If it is exercised beyond its limitations
decrease the price of a certain commodity or then that is where the taxpayer can go to court
activity that is being encouraged or and the court will invalidate that law.
discouraged by the government.
TAXATION 1 - ARANAS 11 EH 306, A.Y. ’19-‘20
If we combine both it is true that the power to not increase. If ever maalkansi sila, didto
tax is the power to destroy and because of that bawion or i-ask ang refund sa OPSF.
it must be exercised cautiously in line with the As a result, the price of oil in the market is
limitations set in the constitution, in the tax stable.
code and the regulation. CALTEX argued that it is not a valid imposition
This is a favorite question in the BAR. of tax because it is a regulation of the oil price
and not revenue raising. It also argued that it is
not for public purpose because it will only
LICENSE V. TAX benefit the oil industry and not the general
welfare of the public.
PAL v. EDU - The SC clarified the power of Held: Taxation is no longer envisioned as a
taxation. SC said it is possible for an exaction measure merely to raise revenue to support
to be called a tax and regulation. the existence of the government. Although dili
License fees and charges are a source of siya and main, pero substantial and real nga
revenue as well as a means of regulation. The makaraise gihapon ug revenue, pwede
fees may be properly regarded as taxes even gihapon sya maconsider as taxes.
though they also serve as a means of Taxes may ve levied with a regulatory purpose
regulation. and provide means for the rehabilitation and
If the purpose is primarily revenue or if the stabilization of a threatened industry which is
revenue is at least one of the real and affected with punlic interest.
substantial purposes, then the exaction is
properly called a tax. The SC in this case did not go into the
definition of public purpose but determined if
We usually apply this lang class if it is not clear there is public interest. Definitely we have an
kung unsa ang purpose sa exaction or interest in the oil industry because it has
collection. We also use this interpretation effects in the prices of commodities.
especially if it is not clear in the problem asa SC said there can be no doubt that the oil
muadto ang funds. industry is greatly imbued with public interest
If it is an exercise of power of taxation, the as it vitally affects the general welfare.
funds collected should go to the general funds Therefore the imposition of additional minimal
of the government, it should not be used for a tax on the oil industry players is a valid
special project. imposition of tax and exercise of power of
taxation.
GR: Tax collected should go to a the general SC further said that even if it goes to the
fund. special fund, once the purpose of the
What if it goes to a special fund? establishment of the fund ceases, it will be
This is where public purpose examination reverted to the general fund of the
comes in. If it was used for public purpose. government.
There are cases that even if the tax went to a
special fund, SC still upheld it as a valid So again the government can collect taxes for
imposition of tax because the purpose of the a special or particular fund but it has to ensure
collection is of public interest. that that particular project is imbued with public
A case illustrating this is CALTEX v. COA: interest.
CALTEX v. COA (G.R. 92585) Lutz v. Araneta
Facts: This involves the establishment of the The purpose of the funding is to rehabilitate
Oil Price Stabilization Fund (OPSF) during the the sugar industry because gamay nalang ang
time of Pres. Ramos because there were harvest nila.
erratic changes in the oil price in the world
market. The SC essentially said that although it will not
During that time, there were some problems in benefit majority of the Filipinos but the sugar
the middle east so oil price was not stable. So industry is imbued with public interest.
to stabilize the oil price the government The primary purpose is to stabilize the oil
established OPSF wherein those business industry but one of the real and substantial
engaged into the importation or distribution of purpose is to raise revenue therefore it is still
oil and diesel products are assessed of tagged as power of taxation rather than strictly
additional tax which will go to the OPSF. police power of the state.
Purpose of OPSF - if muspike ug ayo ang oil
price, the local dealers, distributors and
suppliers will not follow the oil price and will
TAXATION 1 - ARANAS 12 EH 306, A.Y. ’19-‘20
Actually mao na ang reason of the impending Common example is business tax, kung ako si
rationalization of tax incentives of PEZA LGU ang maimpose ra nako nga tax is
companies. PEZA companies have this business tax, di ko pwede muimpose sa uban.
incentive that ang bayaran nila nga tax is only But in so far as the imposition of business tax,
5% and the government now under the SITIRA LGUs power is plenary. Meaning, it is the LGU
BILL is proposing to shorten the period to 5 that determines what businesses to subject to
years, max of 5 years so the PEZA companies business tax.
are questioning it as it violates their So that is on the side of the LGU, Plenary.
registration agreement, Basta musulod sa classification, pwede
the contract that they've signed with the isubmit ni LGU to tax. It is more basic and
director general of PEZA which is basically a apparent if national government is the one
govt agency. In the agreement there was no imposing it.
limit until when they will enjoy the 5% instead
of 30%. In the case of Tio v. Videogram Regulatory
Board:
The power of taxation is subordinate to the
non-impairment of contracts, especially if the Facts: This is the early days of regulating the
contract is with consideration. VHS. Because of piracy of movies back then,
nakaabot ba mo sa video city? Exciting tong
Issue: In granting the incentive to PEZA, what sa video city sauna muabang ka nya di na
power is exercised by the government? nimo iuli. Common nas mga lalaki sauna adto
sa R-18 na section. HAHAHA.
PEZA - it is power of taxation therefore you
should not impair the contract Anyhow, during that time they established the
DOF - it is police power because the Videogram Regulatory Board. A certain
government did not raise any revenue out of percentage of the sales of movie producers
the incentive will be collected by the government to
establish the board, to do the raid, to finance
So let's wait and see because that will be everything.
exciting.
Tio petitioned before the court and questioned
SCOPE OF TAXATION the exercise of the power of taxation. Ngano
daw sila ang masubject to tax, ngano daw sila
ang musuffer.
(Memorize: use Mnemonic CUPS)
SC said it is beyond serious question that a tax
1. Unlimited ceases to be valid merely because it regulates,
2. Comprehensive it discourage or even definitely deters the
3. Plenary activity being taxed.
4. Supreme
Same with issue of public purpose nga dili ni
BAR Q: Describe the scope of taxation. for public purpose because it will only benefit
the movie producers, issue that it is for
Pepsi Cola v. Municipality of Tanauan regulation and not revenue raising was raised.
SC declared that the plenary nature of the
taxing power delegated to the LGU would not But SC said that the power to impose taxes is
suffice to invalidate the law as confiscatory one so unlimited in force and so searching in
and oppressive. extent, that the courts scarcely venture to
In delegating the authority, the state is not declare that it is subject to any restrictions
limited as to the exact measure of that which is whatever, except such as rest in the discretion
exercised by itself. of the authority which exercises it. So the tax
Municipalities may be permitted to tax which was validly imposed.
for reasons of public policy the state does not
deem wise to tax for general purposes.
What do we mean by that? Diba as what we ASPECTS/PHASES OF TAXATION
discussed, delegated lang and power ni LGUs
to tax.
So kung muimpose sya ug tax, it must be
pertaining to the one delagated to it. ASPECTS/PHASES OF TAXATION
1. Levy or Imposition - pursuant to tax law
TAXATION 1 - ARANAS 13 EH 306, A.Y. ’19-‘20
2. Administration - in the executive
department 1. Internal Revenue Taxes
(under National Internal Revenue Code, our
A. Assessment primary basis)
There are two general classes of assessment: -Income tax, Transfer Tax (Donor's and Estate
Tax), Percentage Tax (Value Added Tax (VAT)
1. Self-Assessment (default) - primary or Other Percentage Tax (OPT)), Excise
responsibility of the taxpayer. It is the tax(Specified under NIRC), documentary
taxpayer who determines initially how stamp tax (Specified under NIRC)
much is his tax liability and pays his For Income Tax in Tax 1 we will be covering
computed tax to the government. the individual.

2. D e f i c i e n c y a n d D e l i n q u e n c y 2. Local Municipal Taxes

Assessment - undertaken by the BIR/ -under LGC: Local Business Tax and Real
BOC in counter-checking whether the Property Tax
voluntary computation or self-
assessment of the taxpayer is correct 3. Tariff and Customs Duties
so if there is a finding na incorrect or -under CMTA or Customs Modernization and
kulang that's when these government Tariff Act
agencies will issue deficiency
assessment 4. Taxes and Tax Incentives under Special
Laws
-Those under Special Economic Zone Act or
B. Collection - responsible are BIR/BIR/ SEZ Law as well as the BOI
Provincial/City/Municipal Treasurer

C. Payment - responsibility of the taxpayer ESSENTIAL CHARACTERISTICS OF TAXES

Tip: Just in case you will be asked what are 1. ENFORCED CONTRIBUTION - Meaning it
the different aspects or phases of taxation, you is mandatory. There can be no excuse in
can either answer 2 (The 1. imposition and 2. payment simply because you did not feel the
administration) or 4 (1. Imposition, and the government. After all the power of taxation is
Administration can be further be broken down tangible or intangible.
into 2. Assessment, 3. Collection and 4.
Payment) 2. GENERALLY PAYABLE IN MONEY - When
we say "generally" that gives you an idea that
it admits of exceptions. Here we are basically
TAXATION V. POLICE POWER & EMINENT referring to the legal tender.
DOMAIN The BIR will not accept payment in dollar, euro
or yen no matter how big the amount of the
conversion rate is. So you really need to
convert it first to PHP and pay it to BIR.
Q: How is taxation distinguished from Police Q: Can you pay in kind or gold? NO as a rule.
Power and Eminent Domain? Q: So what are the EXCEPTIONS?
Note: Please refer to sandeesuan notes table
because the student just recited what is in the A. Tax Credit Certificate (TCCs) - pwede
table applyan ni nimo sa BIR and you will use that
certificate for a certain limited period of time to
Atty: Sa Taxation kay mao man ang subject pay your tax liability.
nato, mao ni ang most powerful among the
three powers. B. Tax Credit Options or Carry Over Options
under tax code which you can use to settle
TAXES - enforced proportional contributions your tax liability wherein there is no inflow of
from persons and properties levied by the law cash to the government
making body of the State by virtue of its
sovereignty for the support of government and 3. PROPORTIONATE IN CHARACTER
for all public needs. We've mastered already the distinction
between a proportionate tax from a
KINDS OF TAXES progressive tax. What is mandatorily required
is it is proportional in character.
TAXATION 1 - ARANAS 14 EH 306, A.Y. ’19-‘20
4. LEVIED ON PERSON, PROPERTY OR 5. Must not fringe the inherent and
THE EXERCISE OF A RIGHT OR PRIVILEGE Constitutional Limitations of the power of
taxation
5. LEVIED BY THE STATE
TN: Ug tan awon nimo class sayon ra kaayo i-
6. LEVIED BY THE LAWMAKING BODY OF memorize but sa number 5 palang daan, 20 na
THE STATE ni. Inherent limitations 5, Constitutional
Limitations naay direct and indirect and you
7. LEVIED FOR PUBLIC PURPOSE/S need to memorize that too to know if the tax is
valid.
REQUISITES OF A VALID TAX Atty: Unsa man to? Kadungog mo or ako ra'y
kadungog? Murag lain man gud. (*Naay moan
(Please do memorize this! It's a favorite item sounds sa gwas dunggan pas recording
in the bar) HAHAHA)
Suggested Mnemonics: PUJAN virus or PUJ-
DL CLASSIFICATION OF TAXES
P- Public Purpose , U- Uniform, J- Jurisdiction,
A- Assessment, N-Not infringe on the inherent 1. As to subject matter or object
and constitutional limitations
A. Personal, Poll or Capitation - tax based
Magamit nimo ning PUJAN to resolve a on the place, you cannot be imprisoned for
situation if that transaction is subject to tax or non-payment of poll-tax
not subject to tax. And if the tax imposed is a
valid tax. For you to say that it is balik, you go B. Property - tax based on the thing
back to the requisites of a valid tax:
C. Excise - tax based on the privilege you get,
1. It is for Public Purpose This can be Income Tax, VAT, Percentage Tax
Case of Lutz - so long as public interest is but there are specific taxes such as Sintax
involved then you can say that it is for public which has a different chapter in NIRC.
purpose

2. Uniform - so long as the person, property or WHO BEARS BURDEN OF TAXES

activity belong to the same classification the
same rate of tax is applied kay ginaclassify
man na. 1. DIRECT TAX
Taxpayer is directly and primarily liable (kinsay
Giunsa pagclassify? Based on the tax type gideductan) who cannot shift the tax to another
(i.e. Income tax - so long as you earn income,
you're subject to income tax, VAT - business 2. INDIRECT TAX
tax, so long as you have business and you The persona of the statutory taxpayer (ikaw
meet certain criteria then you are subject to ang nakaassign na taxpayer under the law,
VAT, but if that is just an isolated transaction ikaw ang mandated to remit the tax to the
then you are not subject to VAT) govt) is separated from the taxpayer who
bears the burden.
3. Within the Jurisdiction of the taxing Although you are the statutory taxpayer, it
authority - not only physical but also the nexus does not mean that you will be the one who
or the bond between the taxing authority and will bear the burden of the tax. In indirect tax,
the taxed person or property the burden of paying the tax can be shifted to
the customer.
4. In consonance with the Due Process Unsaon? I-add sa price and that is the issue
Clause - substantive due process and here because if you will shift the tax burden to
procedural due process - there must be a law the customer it means that the selling price will
granting a right and the methods of granting it increase. Whereas if you shoulder that your
must be followed Selling Price is lower by 12% kung VAT ang
Failure to follow these processes will mean gihisgutan.
that it violates the Due Process Clause TN: this is usually applicable to Business
Taxes, it does not apply to personal taxes or
direct tax
TAXATION 1 - ARANAS 15 EH 306, A.Y. ’19-‘20
Atty: I think nagsalida na siya. Noh? Kay imposition of that particular tax na gihonor sa
murag X-rated man ang salida niya. (*Kay SC even if ang niquestion kay si customer na
niintensify ang sounds HAHAHA) dili statutory taxpayer.

Atty: Kung empleyado ka, naa kay sweldo, Example:

pero ngano man imong employer ang muremit Case of World Health (2018) - imposition of
sa BIR an imong income tax? Working ba ka business tax. There is this contractor nga
ma'am? nakigkontrata niya ang WHO which is exempt
S: No sir. from whatever taxes. The BIR insists that
Atty: Pero imong papa working siguro noh? dapat masubject ug business tax si contractor
Kung in-ana will you consider Income Tax as ni WHO.
direct tax or indirect?
S: Still direct tax because sila man ang WHO assailed it saying if BIR will collect that
gideductan sa tax. So essentially si employee tax from their contractor, ultimately, their
ang statutory taxpayer, sya ang gideductan sa contractor will pass it to them in contravention
sweldo so sya ang nibear sa burden. against international treatises.
Rationale why it is the employer that remits: The BIR questioned the personality of WHO
The Principle of Sound Tax System because it is not a statutory taxpayer, the law
Imagina tanang workers sa Pilipinas magfile gives BIR the right to collect tax from
sa ITR nila tagsa2, dili maaccommodate sa contractors engaged in that type of business.
BIR that is why we have the withholding agent
and that's where the employer comes in. SC said since it is an indirect tax, it can
So si employer mura rana sya ug gisugo ug essentially be shifted to the client who is
palit ug suka sa iyang mama. It does not have exempted from taxation so the client can
the burden, although malatiguhan sya ug di question the imposition of tax.
sya mutuman sa gisugo. HAHAHA. Here WHO won.
Mao na ang withholding agent, ikaw na gani
gisugo, ikaw pay mapenalty ug di ka mutuman. TN: Para musud ang in ani na scenario sa
exception, the client must have a legal basis
WHY IS IT IMPORTANT TO DISTINGUISH nga exempted siya from the tax and therefore
DIRECT AND INDIRECT TAX? dili ishift ang burden kang taxpayer.

-Important in cases of claims for refund

because kinsa diay ang makaclaim for refund? CLASSIFICATION OF TAXES AS TO THE
In direct tax there is no problem because the DETERMINATION OF AMOUNT
statutory taxpayer is at the same time is the
one who bears the burden.
But problem comes in in an indirect tax kay 1. SPECIFIC
lahi man ang personality ni Statutory Taxpayer -you already know how much is the applicable
ug ni Taxpayer who actually bears the burden. tax, the rate is already specified. Problema
nalang nimo ug asa ka nga classification
I.e. Jollibee nagmanual, ang gicount nimo 100, masulod kay nakaspecify na ang rate no need
12% VAT ang ibayad unta nimo nga VAT P12 of appraisal
but gibayad nimo P120 instead P112. Muadto i.e. excise tax, docs tax
ba ka sa BIR and muclaim sa sobra sa
gibayad nimo nga P8? 2. AD VALOREM
In so far as the customer who bears the -there is a need to assess or appraise the
burden, BIR does not know about it. Wala syay property to determine the applicable tax
personality. because it is usually based on the Fair Market
Value of the property
GR: When it comes to indirect taxes it is i.e. shares of shares of stock, share of real
essential that si statutory taxpayer ang property, customs duties and tariff rates -
muclaim sa refund even if he did not bear the before the BIR can compute how much is the
burden. applicable gains tax there is a necessity of
appraisal
XPN: Jurisprudence wherein the SC honored
refunds being made directly by the one who is
supposed to bear the burden CLASSIFICATION OF TAXES AS TO PURPOSE
Not necessarily refunds lang but there are
even questions on the Constitutionality on the
TAXATION 1 - ARANAS 16 EH 306, A.Y. ’19-‘20
1. GENERAL, FISCAL OR REVENUE - to
raise revenue Tax Base ↑ x Tax Rate = Tax Liability ↑

2. SPECIFIC OR REGULATORY - for special 2. PROGRESSIVE

purposes, mga special fund or regulatory fund
for those imbued with public interest Tax Base ↑ x Tax Rate ↑ = Tax Liability ↑

→ This is why Progressive Tax is a

CLASSIFICATION OF TAXES AS TO SCOPE OR Proportional Tax kay increase man sila tanan.
AUTHORITY But not all Proportional Taxes are Progressive.

3. REGRESSIVE
1. NATIONAL TAX
Recent Case: Mandanas which came out in Tax Base ↑ x Tax Rate ↓ = Tax Liability ↓
the BAR exam last year
Q: Is regressive tax allowed?
Facts: It involves several governors and the A: Yes. Example is VAT
PNOY Administration Q: Is a regressive tax a proportional tax?
A: NO.
Main Issue: Allocation of Internal Revenue
Allotment (IRA) of the LGU (share of the LGU In Regressive, tax rate decreases as the tax
sa national money) base or traffic increases. So if your tax rate will
decrease, it follows then that the tax liability
The main question is on the base of the will decrease.
computation of the IRA because there is this
certain percentage that the LGU will get if you Answer the question first, is a regressive tax a
multiply to a certain base proportional tax a proportional tax?
Ang gigamit sa PNOY administration as base No. Because for it to be Proportional, as the
is the National Internal Revenue Tax (NIRT) base increase, the liability should also
proceeds meaning ang taxes na gicollect nila increase.
Mandanas et al said that it is unconstitutional Q: Let’s go to VAT. You’re saying VAT is a
because the constitution says that the IRA regressive tax, therefore its like saying that
must be based on national taxes which is VAT is not a proportional TAX. So nganong
different from NIRT naa paman tay VAT karon?
If based on National Tax, it is composed of
NIRC taxes + CMTA + Customs Duties/Tariff. It It is regressive in effect.
is based on the collection of BIR and the BOC
Atty: Is VAT a regressive tax? YES OR NO.
If based on NIRT, it is based on the collection A: Yes. It is regressive but it is not a regressive
of the BIR only. tax.
Atty: Taronga na imong statement, di jud ka
SC sided with the LGU. makauyab ana. lol. Again, is VAT a regressive
tax?
If you will be asked what is the difference A: No. It is a proportional tax.
between a National Tax v. National Internal
Revenue Tax, cite the case of Mandanas Okay, it all started with the case of Tolentino
which says that National Tax are composed v. Secretary of Finance
basically of NIRT plus customs duties, tariff
rates collected by the BOC. Whereas in NIRT, Facts:
are taxes under NIRC. This was the early days of the imposition back
then of the 10% VAT. So it was questioned by
2. MUNICIPAL OR LOCAL TAX - taxes under the petitioners and one of the grounds that
local origin they raised is VAT should be invalidated
because it is a regressive tax. The petitioners
CLASSIFICATION OF TAXES AS TO
did not argue on the technical meaning of VAT
GRADUATION OF RATE
but the argument was that the effect of the
10% VAT can be felt more if the consumer
have less in life.
1. PROPORTIONAL
TAXATION 1 - ARANAS 17 EH 306, A.Y. ’19-‘20

Example: If I have 100 and you get 12% from Kung lantawon lang nato ang interrelationship
it, the P12 is material already for my P100, ni tax base and tax rate, we basically describe
samot na if P10 ra ako kwarta nya kwaan pa it as either progressive, regressive or
nimo ug P1.20, I will really feel the effect. BUT digressive.
if I am a millionaire or billionaire, 12% is And for tax base and tax liability, didto na
immaterial. So the more that I have in life, the musulod ang proportionality. Ug musaka ang
lesser will I feel the VAT. The lesser that I have duha together, proportionate. And this is what
in life, the more will I feel the effect of VAT. is mandatorily required.

The SC in resolving the case said VAT is

REGRESSIVE IN EFFECT but it is not a TAX DISTINGUISHED FROM OTHER
regressive tax in a technical sense. Although it IMPOSITIONS
has a regressive effect, you cannot invalidate it
based on that ground. Why? Because what is Tax v. Special Assessment
mandatorily required by the Constitution is not
a progressive tax, what is required is a Special Assessment - enforced proportional
proportional tax and VAT is proportional. contribution from owners of land for special
benefits resulting from public improvements
The statement that the Congress must evolve -Not a tax because there is no uniformity when
a progressive system of taxation is merely it comes to all owners of land. Only those
directory. SC said that If you look at our tax owners of the land who will benefit from a
system, there are so many tax types which project funded by the LGU will be imposed or
have fixed tax rate and we’ve been levied.
implementing these sales taxes even before -This is different from a Real property tax
the implementation of the VAT so why because latter is really a tax on real property
invalidate it now? Okay, so ang girequire is regardless on the benefit that you get from it.
proportional lang. If we go by the technicality,
VAT is proportional. But the effect, similar with Republic v. Bacolod - In essence, i-enforce
other indirect taxes with fixed tax is regressive lang ni LGU if the improvement is already
and we don’t look at the effect because there and that increases the value of the land.
relative man na. Ang SC will decide based on That is one way for the government to recover
fact not based on your feeling that the lesser the costs funding it, it is not to finance the
that you have you feel more burdened. SC project kay nahuman naman. Usually up to
further said that in the VAT system, there are 60% ang pwede irecover ni LGU
mechanisms in which you can avoid the 12%
VAT. There are provisions on VAT zero rating, Example: Farm to Market roads in provinces
VAT exemption. So if you say that you have
less in life and it will have a regressive effect to Tax v. Debt
you, all that you need to do is to ensure that Refer to the table comparing both in
your transaction belongs to the zero rated Sandeesuan transcript
transaction or the VAT exempt transaction.
Mura ra gud na’g inom ka ug Starbucks, kaon Tax v. Subsidy
ka ug jollibee dayon mureklamo ka sa VAT, ug Subsidy - a sum of money granted by the
katkat ka problema na na nimo! HAHAHA Ug government or a public body to assist an
pobre ka, magpinobre ka pero ug magdinato industry or business so that the price of a
ka, ayaw ug reklamo sa VAT. commodity or service may remain low or
competitive.
If we go by technicalities, when you say
Regressive tax, it is not proportional, therefore Although tax may be used to assist a certain
when you look at the tax code, there is no industry, its primary purpose is raising
such thing na ang tax rate muubos ug musaka revenue.
ang tax base because that is in itself invalid
and unconstitutional. In the Philippines, subsidies is not common, in
4. DIGRESSIVE - starts with progressive then other countries, they really have a budget for
eventually the rate becomes constant/stagnant that. Here, what is common is the grant of tax
I.e. Individual Income Tax exemptions, deductions and incentives to
minimize the tax liability of businesses.
Q: Is Digressive Tax allowed?
A: Yes because it is proportional.
TAXATION 1 - ARANAS 18 EH 306, A.Y. ’19-‘20
Revenue - inflow of taxes 2. Non-delegation of the legislative power
Internal Revenue - inflow of National Internal to tax
Revenue Taxes. These are your Income tax,
donor’s tax, VAT under the NIRC. 3. Exemption from taxation of government
entities (not limited to agencies political
We also have Tariff and Customs Duties subdivisions, but also instrumentalities
under CMTA which is specifically defined to the government such as corporate
under special law entities that do not qualify as private
corporation that handle a public
License Fee is regulatory imposition in the function)
exercise of police power therefore it is not
considered as a tax. 4. International Comity

5. Territorial Jurisdiction
Let’s be clear aron dili ta maglibog sa local
tax. PUBLIC PURPOSE:
The local government, city or municipality • For the support of the government and
collects: the recognized objects and public
1. Local Business Tax - TAXATION POWER welfare
2. Mayor’s Permit Fee - POLICE POWER
3. Other Regulatory Fees - POLICE POWER o Pascual v. Secretary of Public works:
I.e. Garbage, Sanitation, Fire When should public purpose exist?

What we are referring to in the License Fee is ▪ The apparition of funds for the
the Mayor’s Permit Fee in the exercise of construction of a “feeder road”
Police Power of the State. connecting one national highway
from one National highway to
If you don’t pay the license fee, pwede another, BUT it passes through a
ipaclose imong establishment, police power subdivision
man ni. Whereas kung nonpayment of Local
Business Tax, it does not mean nga pasirad-an ▪ One politician against another
ka. Ang consequence is interest and
▪ SC: Public purpose must be
surcharge.
present at the passage of the law
(time the funds are appropriated)
Toll Fee - amount charged for the cost and
maintenance of property used ▪ If a tax law doesn’t benefit the
p u b l i c d i r e c t l y, i t i s n o t
Compromise Penalty - amount collected in automatically void SO LONG as
lieu of criminal prosecution in cases of tax they only INCIDENTALLY benefit
violations. private persons
Every tax violation under the NIRC is a o Lutz v. Araneta: Protection of the
criminal violation.Bisag malate lang ka ug file sugar industry which is imbued with
class, it is a criminal violation. But it is not the public interest
mandate of BIR. So instead mag-gasto2 pa si
BIR ug hire ug prosecutor, magfile sa corte, ▪ Funds gained from taxes trickle
etc. pabayron nalang ka ug Compromise down to the stabilization of prices
Penalty. Usually pinakagamay karon 1k not
exceeding 15k or 50k depending on the o Lozada v. COMELEC: tax payers
violation. suit for the conduct of a special
election

INHERENT LIMITATIONS OF TAXATION ▪ SC: The petitioners cannot

question the wisdom for the
➔INHERENT LIMITATIONS: do not have to conduct of special election.
be provided under the constitution or the by
laws o Planters v. Fertiphil: The SC
invalidated a law that in essence
1. Public Purpose benefitted private individuals directly
TAXATION 1 - ARANAS 19 EH 306, A.Y. ’19-‘20
• Although private individuals benefit from a • Embassies are an extension of another
tax law, it is not invalid PROVIDED the state’s jurisdiction and is thus exempt
benefit is only incidental and the from being taxed
ULTIMATE PURPOSE must be for general
welfare/ public • Banks financed or RE-financed by a
foreign government are also exempt
• TEST: is not the one who receives the
money, but the character of the purpose to • Double Taxation Agreement: Not
which it is expended subjecting a person to tax who is taxed
in another country
o AND not the immediate result, but
rather the ultimate result of the o Ex. United Nation’s own charter
expenditure and World Health Organization
= Philippines is a signatory
• Tax for a special purpose is still valid which exempts them from
power of taxation – Art. 6 of the taxation
Constitution
NON-DELEGATION OF THE LEGISLATIVE
o Once the purpose has been achieved, it POWER TO TAX
will be placed in the General Fund
• Tax law must provide a substantive
• The power of taxation gives both direct and procedure for when to exercise such
indirect benefits to the public taxing power and its scope
• There is no hard and fast rule in defining o Ex. Arroyo changing tax percentage
public purpose: consideration is taken into from 10➔12% VAT
the increasing social challenges of the
times and it is determined at the enactment ▪ BIR defended this
of the tax law and not the time of its because all requisites
implementation were met

o Ex. Social Funds may be made in cases Exemptions:

of emergencies
1. Delegation to the President
• TAXPAYER’s SUIT: Questions the legality
of funds derived from taxation and its • Flexible Tariff Clause: Exercised by the
disbursement BUT the SC has the in the interest of national economy,
discretion to address it depending on the general welfare and/or national security
cause of action AND after the recommendation of the
NEDA
o Disbursement of donations and
contributions ➔ cannot be questioned in • Cannot be freely imposed by the
a taxpayer’s suit because it questions president
the intention of the donor (ex. Yolanda =
a)To increase, reduce or
may use the ombudsman to question
remove existing
the disbursement of donations)
protective rates of
o Used to prevent illegal disbursement import duty, provided
that the increase should
INTERNATIONAL COMITY: under the not be higher than 100%
constitution, the Philippines adapts generally ad valorem
accepted principles of international law ➔
respect the sovereignty of states and therefore b)To e s t a b l i s h i m p o r t
cannot impose taxes upon them quota or to ban imports
of any commodity
• Resident of a foreign state that earns
income from the Philippines? c)To impose additional
duty on all imports not
o Yes. May be taxed because the exceeding 10% ad
resident has a separate valorem
personality from the state itself.
2. Delegation to the LGUs
TAXATION 1 - ARANAS 20 EH 306, A.Y. ’19-‘20
• LGU will merely implement and electricity, so even if the government
cannot go beyond the scope owns 60%, they still pay taxes)
within the LGC
▪ Charter creating the entity will express
3. Delegation to Administrative Units: the tax exemption
Admin Regulations
▪ Ex. UP is an instrumentality created by
E X E M P T I O N F R O M TA X AT I O N O F a charter w/ a board of trustees that
GOVERNMENT ENTITIES: has no shares of stock (acts like a
corporation)
SC: “If you tax a government entity, it is
like transferring money from one pocket to ▪ Exception does not automatically mean
another pocket” exemption from income tax, but usually
real property taxation
• As long as you are a government entity
= agency/ department (part of the o If they lease or rent, it is no
government framework), political longer part of the charter as it
subdivision (cities, provinces, receives income that may be
municipality, barangay) are exempt taxed
from tax
▪ Government Entities Exempt from Tax
o UNLESS they are performing
proprietary functions 1. GSIS

• GOCC ( Government owned and 2. SSS

controlled corporations)
3. PHIC
o NDA v. Cebu City:
4. PCCSO
▪ “The Republic, like any individual, may
form a corporation with personality and 5. PAGCOR: As of its 2016 case,
existence distinct from its own. The by way of its charter it is only
separate personality allows a GOCC to exempt from operations tax;
hold and possess properties in its own proceeds from leasing may
name and, thus permit greater subject the corporation to
independence and flexibility in its income tax. Is exempt from
operations. It may, therefore, be states regular income tax because it
that tax exemption of property owned by already pays franchise tax.
the Republic of the Philippines “refers to
TERRITORIAL JURISDICTION/ SITUS
properties owned by the Government
and its agencies which do not have • Persons or property must be within the
separate and distinct personalities jurisdiction of the taxing power.
(unincorporated entities).”
• Resident citizen who works abroad
• Corporations created as an attached may still be subjected to income tax
agency to the government where it is
a corporate entity that has no • Business tax follows the physical
shares of stocks and does not jurisdiction, or those within the
issue dividends rather than a Philippines; but if a consumable is
share of its earnings is remitted to brought into the Philippines it may be
the National Treasury and the Gov. subject to tax
Agency appoints its Trustees
o Manufactured in the Philippines
▪ The legislature make create a ➔ exported (not subject to tax)
corporate entity (pursuant to a special BUT the net income may be
charter), and is not registered under subject to income tax (PEZA
the SEC of the Philippines ➔ becomes appealing because it
instrumentalities of the government becomes exempt from income
tax)
▪ If it goes through the SEC ➔ separate/
private corporate entity EVEN IF they
provide a public service (water/
TAXATION 1 - ARANAS 21 EH 306, A.Y. ’19-‘20
Congressmen will vote ➔ Committee of
DIRECT CONSTITUTIONAL LIMITATIONS OF Ways and Means of the Senate ➔
TAXATION Reading ➔ reconciliation of the House
and Senate versions ➔ President
➔ DIRECT CONSTITUTIONAL
LIMITATIONS: Only applies to the exercise of CONCURRENCE OF A MAJORITY OF ALL
the power of taxation (Indirect applies to the 3 THE MEMBERS OF CONGRESS FOR THE
inherent powers of the state) PASSAGE OF A LAW GRANTING TAX
EXEMPTION
1. Revenue bill must originate exclusively
in the House but the Senate may
• Law GRANTING any tax exemption —
propose with amendments — law Absolute majority (Substantive due
making process process)

2. Concurrence of a majority of ALL the

• Law WITHDRAWING any tax
members of Congress for the passage exemption — Relative Majority (tax
of a law granting tax exemption exemptions under the NIRC and not
the Constitution ➔ must go through
3. Rule of Uniformity or Equity in Taxation Constitutional Amendment ➔ Ex. Non-
stock, non-profit educational
4. Progressive System Taxation institutions)

5. Exemption of religious, charitable and o NOTE: Tax exemption, amnesties,

educational entities, non-profit refunds are considered in the nature of
cemeteries, and churches from tax exemptions. A grant thereof, needs
property taxation approval of the absolute majority of the
congress.
6. Exemption of non-stock, non-profit
educational institutions from taxation • Absolute majority — not majority on
quorum, but must be based on 50 + 1.
7. Non-imprisonment for non-payment of So if there are 200 members but only
a poll tax 101 are present all the 101 must agree
for it to be passed.
R E V E N U E B I L L M U S T O R I G I N AT E
EXCLUSIVELY IN THE HOUSE BUT THE • Relative majority — majority base on
S E N AT E M AY P R O P O S E W I T H quorum. So if 101 are present, need
AMENDMENTS — LAW MAKING PROCESS only 52 votes.
• Tolentino v. Secretary of Finance RULE OF UNIFORMITY OR EQUITY IN
TAXATION
o Bill initiated in the House of
Representatives but the final law was • Uniformity: uniform in application; those
the version coming from the Senate. who belong to the same class with
substantial distinction; differentiation is
o “To insist that a revenue and not only allowed as long as it is not arbitrary
the bill which initiated the legislative
process culminating in the enactment • Equity: based on one’s ability to pay
of the law must substantially be the
same as the House bill would be to o Equality: all pay the same
deny the Senate’s power not only to amount regardless of standing
“concur with amendments” but also
to “propose amendments.” It would PROGRESSIVE SYSTEM TAXATION
be to violate the co-equality of
legislative power of the two houses
• Progressive: It is not contrary to
of Congress and in face make the Uniformity and Equity
House superior to the Senate.” • Though, what is required is
• Process: Department of Finance ➔ proportional tax
Contacts a Congressman (or several) o “Tolentino case on VAT being
to sponsor a revenue bill ➔ Goes to the regressive: The argument is it
Committee of Ways and Means to be is regressive in terms of effect.
scrutinized ➔ Read to the Floor and The lesser I have, the more
TAXATION 1 - ARANAS 22 EH 306, A.Y. ’19-‘20
burdensome. SC said no more or non-paying are
point ang regressive effect kay exempt from real
may provisions sa law which property taxes. Those
mitigate the regressive effect. portions of its real
Provisions such as zero-rated property that are leased
transactions, exempted to private entities are not
transactions, ang vat exempt exempt from real
lang usually marine and property taxes as these
agricultural at original state.” are not actually, directly
and exclusively used for
EXEMPTION OF RELIGIOUS, CHARITABLE charitable purposes.”
AND EDUCATIONAL ENTITIES, NON-
PROFIT CEMETERIES, AND CHURCHES
FROM PROPERTY TAXATION (may still be
subject to income, business and donor • Previously in the old constitution (no longer
taxation) ➔ CONSTITUTIONAL EXEMPTION used): if a portion of the property is
principally used a religious purpose and
Art. 6, Sec. 28 [3] “(3) Charitable institutions, the other for commercial = the entire
churches and personages or convents property is thus exempt (Herrera v.
appurtenant thereto, mosques, non-profit Quezon City Board of Assessment
cemeteries, and all lands, buildings, and Appeals)
i m p r o v e m e n t s , a c t u a l l y, d i r e c t l y, a n d
exclusively used for religious, charitable, or • Abra Valley College Inc., v. Aquino:
educational purposes shall be exempt from taxability of a school where the first floor is
taxation.” commercial, the top is residence of the
officers, and another is the school
• Condition under the NIRC: If these
institutions earn income by the disposition o SC: The commercial portion
of the property or activities, regardless of is no longer exempt from tax
its disposition, they may be subject to
income tax • CIR v. St. Luke's Medical Center
(SLMC): accepts both paying and non-
• Current Jurisprudence: paying patients and a question of income
tax was placed (though they are exempt
• Philippine Lung Center v. from real property tax)
Quezon City
o Earning of income for profit
▪ Charitable institution ➔ may be subjected to tax
that accepts non-paying
patients BUT also has (Ex. presented as
commercial businesses proceeds for income
(flower shop) = taxable BUT
proceeds for
▪ “Under the 1973 and research on the
1987 Constitutions and community = not
Rep. Act No. 7160 in taxable)
order to be entitled to
the exemption, the
petitioner is burdened to
prove, by clear and • C i t y A s s e s s o r o f C e b u C i t y v.
unequivocal proof, that Association of Benevola de Cebu Inc.
(a) it is a charitable o City assessor of Cebu assessed the
institution; and (b) its
building with a market value of Php
real properties are
28,060,520 and on assessed value of
ACTUALLY, DIRECTLY
Php 9,821,180 at the assessment level
a n d E X C L U S I V E LY
of 35% and not 10% which is currently
used for charitable
imposed on private respondent herein.
purposes. Accordingly,
Petitioner claimed that the building is
only those portions of
used as commercial clinic/spaces for
the hospital used for
renting out to physicians and thus
patients whether paying
classified as commercial. Benevola de
TAXATION 1 - ARANAS 23 EH 306, A.Y. ’19-‘20
Cebu contended that the building is o CIR v. De La Salle University
used actually, directly and exclusively
part of hospital and should have an ▪ To avail of the exemption, the
assessment level of 10%. taxpayer must factually prove that
it used actually, directly and
▪ SC: “We hold that the new building is exclusively for educational
an integral part of the hospital and purposes the revenues or income
should not be assessed as commercial. sought to be exempted. In
Being a tertiary hospital, it is concrete terms, the lease of a
mandated to fully departmentalized portion of a school building for
and be equipped with the service commercial purposes, removes
capabilities needed to support such asset from the property tax
certified medical specialist and other exemption granted under the
licensed physicians. The fact that Constitution. There is no
they are holding office is a separate exemption because the asset is
building does not take away the not used actually, directly and
essence and nature of their services exclusively for educational
vis-a-vis the overall operation of the purposes. The commercial use of
hospital and to its patients.” the property is also not incidental
to and reasonably necessary for
EXEMPTION OF NON-STOCK, NON-PROFIT the accomplishment of the main
EDUCATIONAL INSTITUTIONS FROM purpose of a university, which is
TAXATION (In cases of charitable institutions to educate its students. However, if
there is no distinction whether it is proprietary the university actually, directly and
or non-stock, non-profit = allows for exemption exclusively uses for educational
to real property tax) purposes the revenues earned from
the lease of its school building, such
Art. 14, Sec. 4 [3,4] (3) All revenues and revenues shall be exempt from taxes
assets of non-stock, non-profit educational and duties. The tax exemption no
institutions used actually, directly, and longer hinges on the use of the
exclusively for educational purposes shall be asset from which the revenues
exempt from taxes and duties were earned, but on the actual,
direct and exclusive use of the
BUT its real properties are ACTUALLY,
revenues for educational
DIRECTLY and EXCLUSIVELY used for
purposes. The crucial point of
educational purposes
inquiry then is on the use of the
• Revenue — related/unrelated activity assets or on the use of the revenues

o Defence that the proprietary activity • Where educational institution is private and
(leasing a building) was done, BUT the non-profit but a stock corporation (such as
proceeds collected from the activity are UC and UV), it is subject to income tax but
for an educational purpose ➔ exempt a preferential rate of 10% rather than 30%.
from tax This also applies to hospitals because
these establishments are welcome and
• Assets — referring to exemption from real desired by the government.
property tax
• Requisite for the application of the 10%
o Atty A. Ex. Lex Circle is an association preferential rate: ‘
that collects money from students and
proceeds to buy a condo and the 1. It must be private
money collected from the rent is for the
2. It has permit to operate from the DECS, or
students ➔ May still be taxable
CHED, or DepEd, or TESDA
BUT
3. It is non-profit;
o If USC (non-stock, non-profit) allows
4. Its gross income from unrelated trade or
food stands to rent the area, the
business must not exceed 50% of its total
defence that the proceeds are used for
gross income from all sources. Otherwise,
educational purposes (show financial
if it will exceed the 50%, it will be subject to
statement for teachers) ➔ Exempt from
the 30% corporate income tax rate
Tax
TAXATION 1 - ARANAS 24 EH 306, A.Y. ’19-‘20
▪ YMCA: is not a educational institution ➔ Substantive due process requires that tax
Exemptions do not extend statute must be within the constitutional
authority of the Congress to pass and it must
o There is leasing and does not be reasonable, fair and just. Meaning to say,
have any curriculum based ang question diha if power of taxation na siya,
programs that can be allowed was it validly passed by Congress? If it is a tax
by CHED or TESDA exemption, for example, was it passed with the
vote of absolute majority? Or if it is a revenue
NON-IMPRISONMENT FOR NON-PAYMENT bill or tax bill, the initiation should be in the
OF A POLL TAX House and not Senate, otherwise it will be a
violation of substantive due process.
L e t ’s h a v e a q u i c k r e c a p f o r d i r e c t
constitutional limitations, these are the Procedural due process, this is where the
limitations that strictly applies to the power of requirement of notice and hearing comes in-
taxation. Of those discussed ang mga which requires that the procedures set under
pinakafamous gyud are(1) the revenue bill the law and regulations must duly be followed.
must originate exclusively from the House of This must be followed not only by the
Representatives but the Senate may propose Congress but also by BIR when it comes to the
or concur with amendments, (2) the exemption implementing tax laws. If the laws state that
of religious, charitable and educational entities that the prior to the collection, there has to be
from property taxation, (3) the exemption of a valid assessment- then this must be
non-stock, non-profit educational institutions followed. In remedies under Tax II, we will
from taxations of its revenue as well as its discuss the procedure on how the BIR make
assets actually, directly and exclusively used its collections and what are the rules and steps
for educational purposes. that need to be followed by the BIR for there to
be a valid collection. Primary is that there must
be valid assessment. Mao gyud na ang
pinaka-una. For there to be valid assessment,
INDIRECT CONSTITUTIONAL LIMITATIONS OF several steps are to be borne in mind. If nay
TAXATION usa ka step nga mamiss out then that is
already a technical violation. In so far as the
Now, we move on to indirect constitutional BIR is concerned, it is violation of procedural
limitations. For this kind of limitation, this due process.
applies not only to the power of taxation but Take note that this due process provision
also to the other inherent powers. We have: under the Consti, this is all-encompassing in
(1) Due process of law; so far as taxation is concerned.

(2) Equal protection of the law;

(3) Non-impairment of the There are five (5) instances of violation of
obligations of contract; due process:

(4) Non-infringement of First, when the law is in violation of the

religious freedom; inherent limitations of taxation. This is because
the due process clause violation involves
(5) No appropriation for violations of the inherent constitutional
religious purposes; limitations of taxation- (1) public purpose, (3)
non-delegation of the legislative power to tax,
(6) Non-infringement of the (4) international comity; and (5) Territorial
freedom of the press; and jurisdiction- these need not be expressly
(7) Power of the President to provided in the Consti or in the Tax Code. If
veto any particular items in a revenue the inherent limitations are violated then it
or tariff bill. is deemed a violation of the due process
clause. Kung moexercise ka sa power of
First, on the due process of the law, its primary taxation dapat moadhere ka sa inherent
basis is the constitutional provision found in limitations. If you violated the inherent
Sec. 1, Art. III which states that, “No person limitations then in essence, it is also a violation
shall be deprived of life, liberty, or property of the substantive due process. Meaning, the
without due process of law.” This is composed tax law was passed beyond the powers
of the substantive due process as well as granted to the Congress. Remember, in power
the procedural due process. of taxation there is no just compensation.
TAXATION 1 - ARANAS 25 EH 306, A.Y. ’19-‘20
Second, if the tax amounts to a 5. Due process clause may be correctly
confiscation of property. Kanus-a man ka invoked only when there is a clear
maka-ingon nga ang tax kay confiscation of contravention of inherent or constitutional
property? If the BIR did not follow the limitations in the exercise of taxing power.
procedure laid down under the law. Before
collection of the BIR, there has to be a valid In number 3, it presupposes of adverse
assessment. If gidiretso ra na ug garnish rulings. Or a ruling contested by a party.
imong bank account sa BIR with no Example, if it is a mere revenue ruling and you
explanation whatsoever then this is already are just asking the opinion of the Bureau, then
confiscation. This is violative of the procedural there is no need for a hearing. But it would be
due process clause under the Constitution. different case if we present an issue to the BIR
wherein it could affect another party. In such
Third, if the subject confiscation is case, before the admin body gives an
outside the jurisdiction of the taxing authority, interpretative ruling, due process on hearing
kani related gihapon sa inherent limitation on must be conducted. Although in BIR, there’s
jurisdictional requirement. not much adverse rulings unlike in the DFA
wherein naay moreklamo against a party and
Fourth, if the law was applied there’s an issue that’s need to be resolved and
retroactively imposing an unjust and so a hearing must be conducted. In BIR, it’s
oppressive taxes. more of asking for BIR’s opinion. In that case,
Fifth, if the law is imposed for a hearing is not necessary because if iquestion
purpose other than public purpose. nimo ang opinion ni BIR you have other
remedies like you can go to the Sec. of
Based on the cases, I will summarize nalang Finance or you can go to the Supreme Court.
kay it’s in the list of cases assigned to you I’m The case illustrative of this is the case of
sure sad nabasahan na ni ninyo kay sa Consti Chamber of Real Estate and Builders’
I man ni. But in relation to taxation, you have Associations’, Inc. v. Romulo et. al., it is here
these principles. where the Supreme Court emphasized that
when the due process is invoked, considering
1. The validity of a statute may be contested that it is not a fixed rule but a broad
only by one who sustained direct injury in standard, there is a need for proof of such
consequence of its performance. persuasive character. In this case, the
If you can recall, this is also the petitioners were questioning the validity of the
principle relied to in the case of Lozada imposition for Minimum Corporate Income Tax
when they tried to question the (MSIT) in the Creditable Withholding Tax
appropriation funds for a special (CWT). Let’s focus on the argument that says
election. the MSIT should not be imposed or withhold
the tax.
2. There must be proof of arbitrariness,
otherwise, apply the presumption of *calls a student
constitutionality. Q: So what are the arguments raised
This is also applied in the case of by the petitioners?
Manila Memorial Park and its A: The petitioners argued that the
subsequent cases and also in the MCIT violative of the due process clause
Chamber of Real Estate case. because it levies income tax even though
3. Due process requires hearing before there are no realized gains. They claimed that
adoption of legislative rules by it was highly oppressive, arbitrary and
administrative bodies of interpretative confiscatory.
rulings. Q: How about the creditable
4. C o m p l i a n c e o f s t r i c t p r o c e d u r a l withholding tax?
requirements must be followed to avoid a A: …
collision course between the state’s power
to tax and the individual’s recognized *calls another student
rights.
Q: What are the reasons why dili sila
Basically, this is more on procedural musugot nga magwithhold ug tax?
due process.
A: …
TAXATION 1 - ARANAS 26 EH 306, A.Y. ’19-‘20
Q: Diba they were saying that the of MCIT. Gicopy lang sad ni nila sa US
CWT is violative of the equal protection wherein the MCIT will be multiplied to the
process clause, did they raise that also? gross income. So for the regular corporate
income tax (RCIT) or the Normal Corporate
*calls another student Income Tax (NCIT) is multiplied here (he’s
A: … writing in the board huhu). Ang buhaton lang
nimo even if positive ni (pointing to the board),
*calls another student at least inegative or izero lang nimo and you
try to look for other operating expenses (pls
A: Their contention was CWT was only refer lang sa formula sa notes). These costs of
imposed on real estate enterprises. sale are usually your direct expenses which
Q: Yes! Why did not include other the traceable expenses which is also related to
businesses? your sales. The indirect comes in here (points
to board), mao to ang buhaton sa mga
A: Because the construction business karaang mga negosyante sauna kay ila nalang
is a class of itself and the Supreme Court said iapil ang expenses sa family members,
that they may be differentiated from allowance sa mga anak nya tuition- apil tanan
manufacturing companies and also in regular isud sa operating expenses. Ngano man?
manufacturing business, they produce more Because it was not very strict before. Basta
than in construction business. naa lang kay ikapresent nga resibo, okay na.
Moingon man ang uban nga, ‘Akong iaudit
lang gud’ kung tawn-an lang pero kung dili aw
It is here where the SC used substantial isud sa libro sa kompanya.
distinction in ruling that the construction I handled a case before of one family business
business is a class of its own and so long as where all the household expenses were
the requirement to withhold is uniformly included in the expenses of the company,
applied then the same is valid. The because that is what they are used to. So if
construction business is different from retail overstated, its negative but really, because the
and different from manufacturers. direct expenses is gamay, the income is
The Minimum Corporate Income Tax (MCIT) positive that is why they can continue to
and the concept of Withholding Tax, these operate. So they impose MCIT wherein the
were introduced in the 1997 Tax Code. MCIT will be multiplied to gross income.
Meaning, prior to 1997, naanad ang mga This now becomes an “or” meaning to say, a
negosyante nga ang bayaran lang nila regular corporation may be subject to MCIT or RCIT. If
or normal corporate income tax, no concept of your MCIT is higher than your RCIT, then the
withholding. The DOF, during those times of company will have to pay for the MCIT. That is
need, noticed that there were businesses why, in the case, Chamber of Real Estates
existing for 10 years or 20 years and challenged this. It said that, “MCIT is
consistently reporting loss- bottom figure, oppressive and arbitrary and that it is taxing
instead of net income ang gireport net loss. unrealized income”.
But what- these businesses are existing for 10 Example, nagmanufacture ko ig pentelpen nya
or 20 years; they were supposed to be growing nag cost kay Php10.00, I am going to sell it at
but why are they reporting loss? Basically, that Php 20.00. Of course if you are the
was tax avoidance which was legal at that businessman you will make sure that you will
time. Ngano man? Kay wala pa may concept have a gross income. Mao ni niigon sad si
sa Corporate Income Tax. What accountants Chamber nga oppressive ang MCIT kay wala
did in these companies is blow the operating niya giconsider ang other operating
expenses- overdeclared. Remember class, expenses nga apil man unta na nga mga
there are expenses nga pwede nimo ideduct expenses sa negosyo. But the thing is, if you
for taxation purposes which do not necessarily look at the intent of the legislators, the
involve cash outflow (?). For taxation, there is imposition of the MCIT is more of a
that we call depreciation. For accountants, deterrent which is to discourage reporting
they call it deductible expense. So what they bloating or overdeclaring expenses. Ngano
were doing before is simply overstate some of man? Kay kung gamay ang RCIT nimo,
these non-cash expenses. Ang nahitabo the mobayad man gihapon ka sa MCIT, whichever
operating expenses increased resulting into is higher.
the net flow but really the gross income is
positive. So the DOF has to find a way and In the case, what did the Supreme Court say?
one of the ways they used is the imposition Well, it said that there was no proof presented.
TAXATION 1 - ARANAS 27 EH 306, A.Y. ’19-‘20
The defense of the Secretary is the provision Q: Atty., so your previous MCIT
of the law. This is because the law provides excess of Php 40k can no longer be carried
that MCIT can only be imposed after the over?
development stage of the said business,
minimum of 4 years. So during the 4-year A: Yes, because the condition is the
period, wa kay problema even if your report a MCIT can only be carried over against your
loss because that is considered as the RCIT.
development stage of the business. But after Let’s change the example in 2022. In 2022,
that, MCIT can already be applied. So that was your MCIT is Php20k and your RCIT is
their first defense in saying that MCIT is not Php40k, so you pay RCIT. Last year, you still
arbitrary or oppressive because you are given had an excess of Php 40k, you can carry over
a chance to earn income for 4 years. Second it to 2020 to make your tax payable zero. In
is that there’s really a choice between the essence, you still made use of your MCIT
MCIT and the RCIT. So if you don’t want to be excess because you reported a higher RCIT in
subjected to MCIT, just make sure that RCIT is the succeeding years- 2021 and 2022. The
higher than your MCIT. And third, the point here is that MCIT is not arbitrary or
difference between the MCIT and the RCIT or oppressive because the MCIT is more of like
the excess can actually be carried over. There an advance payment of you regular tax
is a carry-over provision. For example, in payable in the future basta magreport lang ka
2020, your MCIT is Php 200k and your RCIT is ug higher RCIT. It’s like the government
Php100k, so there is a difference of Php100k. saying, “Karon nga year nag-overstate ka sa
This Php100k difference can be carried over in imong expenses, you lied, we will collect MCIT
the 3 succeeding years. Meaning to say, if in from you (coz MCIT is only multiplied to your
the following years what is payable (the gross income, no consideration to your
higher) is the RCIT, you can deduct the MCIT expenses which you btw, overstated), and if
difference from your RCIT in order to arrive at you want to recover the excess MCIT, make
your tax payable. Kasabut mo sa punto? Wala sure in the following year you report what is
daw haha. real. And you report a higher RCIT so that you
Again, for example, in 2020 your MCIT is Php can take advantage of the excess MCIT carry-
200k and your RCIT is Php 100k, based on the over. Otherwise, if you keep on bloating the
law, you will pay the higher amount. Let us just operating expenses resulting to no or lower
say that your first year of operation was in RCIT, then you will be paying MCIT, not
2015, so basically you are now covered by the advantageous on the part of the taxpayer.
MCIT- now is 2020. In 2020, you will pay Php Q: What if Atty. sa 2021 bigger ang
200k which is the MCIT. But take note that you MCIT, ang excess macarry-over pa sa 2022.
have an excess of Php 100k. Kining Php100,
000 pwede pa ni nimo macarry-over? The A: Yes.
answer is yes, you can carry it over for the 3
consecutive years. The only condition here is Let’s say in 2022, your MCIT is Php50k and
that in the next years, your RCIT is higher than your RCIT is Php30 k. Naturally, you pay the
your MCIT. If the carry over provision expires MCIT because you pay whichever is higher.
in 3 consecutive years, then it will be in 2023. Can you deduct the remaining Php40k excess
Magsunod gyud na regardless ug unsay here? No, because you can only deduct it
mahitabo sa kompanya- 2021, 2022, 2023. To as only against the RCIT. Mao to akong
illustrate, if in 2021 for example, your MCIT is giingon kung mamakak ka karon, make sure
Php 50k and your RCIT is Php 60k- here, you nga honest ka next year para makadeduct ka
pay the RCIT. But take note of your MCIT sa available nga excess MCIT. In the example,
excess in 2020, so you can carry over its you again have an excess of Php 20k. Can
portion on 2021. Ngano man? Because this you carry over the Php20k, this is for another
time, 2021, your RCIT is higher than your set of 3 years- that is until 2025.
MCIT. So you can deduct Php 60k, your Q: Kanang Php20k Atty. maadd na
payable in 2021 will be zero. We still have an nimo sa previous excess nga Php 40k?
excess of Php 100k- Php 60k, so we still have
Php 40k to carry over to 2022. So in 2022, if A: Yes. Your excess is already for a
your MCIT is Php 60k and your RCIT is RCIT total of Php 60k. BUT this is first in, first out.
is Pph 50k, you pay the MCIT. Here, can you Your excess in 2020 will expire in 2023. So if
carry-over the excess? No, because your you pay the RCIT this year, you will first use
MCIT is higher than your RCIT. Instead, you your first MCIT excess of Php40k. Kung nag
will another excess of Php 10k that you can MCIT gihapon ka sa 2023, pag2024 expire na
carry-over for the next 3 years. ang Php 40k MCIT excess ang pwede nalang
TAXATION 1 - ARANAS 28 EH 306, A.Y. ’19-‘20
macarry-over ang Php20k. Bottomline, kung units. At that time, nagsugod pa man sad ang
tan-awn nimo ang equation in its entire spread, concept sa housing. Ang volume of transaction
the taxpayer is just supposed to pay the niya is not that much but it withholds high
Normal or the Regular Corporate Income Tax amount of money. While in retail or in
(NCIT/MCIT), you monitor your MCIT and manufacturing business, the transaction is
recover the excess MCIT in the following voluminous of lesser value. At that time, it was
years. In effect, there is really no still impractical for them to require
confiscation or oppression even if it is manufacturing or retail business to do a
based on gross income. The argument of the withholding. Of course, now, it’s not the case.
petitioners was, “Nganong dili man ninyo Everyone is already required to withhold
apilon ang ubang expenses, it’s included in the although there’s a proper although naa lay
business expenses.” But the point is, if you proper classification of taxpayers.
look at the entire duration, naconsider ra siya.
This is just more of a deterrent to discourage Related to the due process clause is the equal
the practice of overstating expenses. Mao to protection clause, wherein, the law must
niigon ang Supreme Court, “Where is the operate uniformly on all persons under similar
evidence”. If wala, the presumption is that the circumstances and all persons are treated in
MCIT is constitutional. the same manner if the condition is the same
both in the privileges conferred and liabilities
Q: What if Atty. in two succeeding imposed. Here, favoritism and preference are
years your MCIT is higher than your RCIT, not allowed. The constitutional provision for
maaccumulate ra ang previous MCIT this is found under the 2nd part of Sec. 1, Art. II
excess? which states, “Nor shall any person be denied
the equal protection of the laws.” Basta naay
A: Yes, it will be accumulated. It’s just substantial distinction which is real, material
that the running of the carry-over is 3 years and not superficial, then that is considered
difference. That is why there has to be a as NOT a violation of the equal protection
proper monitoring. Ang MCIT excess in 2020 clause. So you have a criteria for equal
will expire in 2023. While your MCIT excess in protection, these are:
2021, will expire in 2024. Your MCIT excess in
2022 will expire on 2025. So pagka2023, kung 1. When the law operates uniformly:
RCIT na ka, ang una nimong ideduct nga
MCIT excess kay ang pag 2020. If dili nimo ni a. on all persons
mause nga excess by 2023, wala na maexpire b. under similar circumstances
na. That’s a loss already on the part of the
company. 2. All persons are treated in the same
manner:
While on the Creditable Withholding Tax
(CWT), it’s very common, every business a. the conditions not being
regardless of what type, are required to different
withhold. During those days, it was found
effective in foreign countries that taxpayers are b. both in privileges conferred
required to withhold and if they fail to withhold, and the liabilities
they can no longer claim that expense. imposed
Between the buyer and the seller, who is
required to withhold? It is the buyer who is c. favoritism and preferences
required to withhold. Diba ang seller naay are not allowed
income? In a withholding tax system, si buyer
mobayad man ni seller, pero si buyer gisugo In People v. Cayat, this is where we discussed
siya ni BIR nga a portion of the payment the reasonable classification, that:
should immediately be deducted from the 1) There must be a substantial
amount he will remit to the seller. And that distinction that make a real difference;
withholding tax will be remitted by the buyer to
the BIR. So medyo hasul siya kay girequire 2) It must be germane or relevant to
gud ka nga ikay mowithhold nya if dili ka the purpose of the law;
mowithhold ikaw ang ipunish sa government.
Mao na nireklamo sad si Chamber. But the 3) It must apply not only to the present
Supreme Court said that there is a valid but also to future conditions; and
distinction. Sa inyoha, sa real estate business, 4) The distinction must apply to all
the volume of transaction is not that much kay persons belonging to the same class.
dili pa man to uso that time ang mga condo
TAXATION 1 - ARANAS 29 EH 306, A.Y. ’19-‘20
Use can use the mnemonic, FC-SG or Feeling A: RA 7227 granted those businesses
Close si Security Guard. inside the economic zone with certain
privileges such as tax exemption. The law has
Again, in Chamber, the Supreme Court said been assailed as unconstitutional. Also, EO 97
that inequalities resulting from singling out a which the President passed in defining the
particular class for taxation or exemption metes and bounds where the RA 7227 is to
infringe no constitutional limitation. Basta naay take effect was also assailed unconstitutional.
substantial distinction. You might say na, “Oh They argued that the law is violative of the
Sir so violation na equal protection clause ang equal protection clause. The Supreme Court
tax exemption sa mga non-stock, non-profit said that the law was valid because the
educational institutions ug proprietary petitioners can actually conduct their business
educational institutions?” The answer is not inside the economic zone if their resources will
necessarily because they are classified allow. Also, the law does not violate the equal
differently. protection clause because the purpose of the
In Ormoc Sugar Company v. Conejos et. al., I law was to encourage big investments. So it is
think you’ve read this case. This case is pretty just proper to give them tax incentives.
much straightforward. Here, the ordinance Q: In short, was there a violation on
passed by the Municipality of Ormoc was the requirements of reasonable
nullified by the Supreme Court. Ngano man? classification with the establishments
Because the Municipality of Ormoc, back then, inside and outside the free-port zone?
specified that a tax shall be imposed to Ormoc
Sugar Company, gispecify gyud ang name sa A: …
ordinance. Nireklamo si Ormoc Sugar
Company. In defense, Ormoc said, “It cannot Q: Does the requirement that there
be a violation of the equal protection clause should be substantial distinction, was it
because you are the only sugar company in met?
the place.” But the Supreme Court said that is A: Yes, because those within the
a violation of the requirements for reasonable special economic zone- they were meant for
classification because the taxing ordinance big investors who can meet a certain threshold
must be also applicable not just to present and not it does not prohibit people from the
but also to future conditions. In this case, outside to engage in the business if they would
the Supreme Court ratiocinated if naay laing want to also enjoy the privileges of tax
sugar central nga musulod in the future, dili to exemption.
nimo masubject to tax because what is only
specified in the ordinance is the Ormoc Sugar Q: Does the requirement that it
Company. The SC said that the ordinance should be germane to the purpose of the
must not be singular and exclusive as to law, was it met?
exclude any subsequently established sugar
central of the same class as the plaintiff for the A: Yes.
coverage of tax.
In Tiu v. CA, this is where the Supreme Court We had this case during the early days of
distinguished economic enterprises from those establishment of economic zones, free-port
business outside the economic enterprises. zones. Mao na nga giquestion ni ngari. But
Q: What happened in this case? now it’s very common, we even have it, there
in Mactan. The point of the SC here is that
*calls a student there is a substantial distinction between
establishments located inside and outside the
A: RA 7227 was a law passed to said zone. Niingon si Supreme Court that it is
convert the military basis into commercial well-settled that the equal protection guaranty
areas. The exemption from tax was only does not require territorial uniformity of laws.
granted to the business located inside the Niingon ang Supreme Court nga, “Kamo
base and not to the locality around it. petitioner gagmay lang mo nga negosyo. But
those businesses inside the ‘secured area’
have billion-peso investments and produce
In short, to the free-port zone which is thousands of new jobs. On the other hand, you
basically a fenced area. do not have such magnitude. Sari-sari store ra
mo. The former has national impact. While
*calls another student to continue the narration you, you only have a local impact. Makahiubos
of the case diba ang distinction hahaha. Even more
TAXATION 1 - ARANAS 30 EH 306, A.Y. ’19-‘20
important, at this time the business activities That is the general rule. However, there is an
outside the "secured area" are not likely to exception wherein the non-impairment clause
have any impact in achieving the purpose as limitation to taxation specifically pertaining
of the law, which is to turn the former military tax exemptions pursuant to a contract and the
base to productive use for the benefit of the contract is described as a unilateral contract.
Philippine economy. There is, then, hardly any The constitutional guaranty of non-impairment
reasonable basis to extend to them the clause can be invoked in the grant of tax
benefits and incentives accorded in RA 7227.” exemption which is provided not pursuant to a
Basically, local businesses here are asking for law but pursuant to a contract. Recall our
the same incentives kay pareha man sila discussion on some corporations having their
negosyo paron nganong sila ra man? Because own charter? And they are granted a tax
of the discussion of the SC- that equal exemption on their charter, that is pursuant to
protection does not require territorial infirmity a law passed by the legislature. Meaning kung
of laws, as long as there is an actual or ichange n ani Congress nya isubject na sila to
material differences, the subsequent law which tax, there is no violation of the mentioned
is the Special Economic Zone Act where PEZA constitutional provision because this is not
(Philippine Economic Zone) was created- it is pursuant a contract. ABS-CBN, for example,
provided in these laws that these zones are, kung dili marenew ang franchise, pwede ba
by fiction of law, foreign territories. That is sila moingon nga impairment no of contracts?
why they have different tax laws, customs laws No, they can’t say it because the grant is
inside the economic zone. But then again, as pursuant to a law or franchise which can be
what I have mentioned, once the CITIRA bill taken anytime. What the rule then in relation to
becomes a law, that could entirely change non-impairment of contracts? The rule, if we
unless contested before the Supreme Court. have to simplify it, is:
And if you’re following the DOF page, they
already released a statement from Sen. 1. If the exemption from taxation was
Cayetano nga niingon nga they will be passing granted for a valuable consideration
already the law. Let’s wait and see kung unsa on the basis of a contract, as a rule,
ang final version if mopasar. it cannot be revoked.

Non-impairment of obligations of contracts, 2. If the exemption from taxation was

you have this specific provision under the granted by contract, where the
Constitution- Sec. 10, Art. III, “No law impairing government enters into a contract
the obligations of contracts shall be passed.” with a private entity, it cannot be
We discussed this already that the power of unilaterally revoked by the
taxation is subordinate to this particular government.
constitutional mitigation. General rule, Meaning, it must be pursuant to a
however, that the power to tax is exercised for mutual consent. This is common among
law, so when you say obligation to pay taxes, projects entered into by the government
this is imposed by a law. Pasabot the non- wherein in the contract it is provided that the
impairment clause does not apply because it gov’t will shoulder the tax or will be exempted
only applies to an obligation imposed in a from the tax and kun naay gipasar nga baong-
contract. In ObliCon, there are 5 sources of ng balaod ang Congress, exception to to that
obligations: law, contracts, quasi-contracts, amendment (?).
delicts and quasi-delicts. This provision of the
constitution only presupposes obligations This also the very issue which is raised
steaming from a contract and not a law. by PEZA companies because before they can
Meaning to say, the obligations to pay tax in register in the PEZA, they have to have a
the Tax Code and the Tax Code is amended by registration agreement which is in essence a
the Congress pwede ba ka maaingon nga, contract. And that agreement is signed by the
“This is a violation of the non-impairment of private entity and the PEZA director who is the
contracts.”? The answer is no because this representative of the gov’t. In the Economic
is pursuant to a law and not to a contract. Zone Act, naa didto nakabutang nga the PEZA
So pwede ba magTRAIN Law amendment or was created as a corporate body and that the
mag CITIRA Law amendment? The answer is director is the representative of the
yes. They can change the tax credit to tax government. One of these PEZA companies’
deduction or increase the tax rate within this arguments was that the agreement was
much, this is not within the prohibition of this onerous and not gratuitous because there is a
constitutional limitation. valuable consideration because dili man ka
maregister kun dili ni nimo mameet nga
particular investment. They said that alone is a
TAXATION 1 - ARANAS 31 EH 306, A.Y. ’19-‘20
valuable consideration. That was what they the exercise of civil or political rights.” The
are trying to raise. They alleged that if the coverage of the prohibition is covered under
incentives or tax exemption will be changed or Consti II which are (1) the freedom to choose
revoked under the new CITIRA Law, if it religion, (2) freedom to exercise one’s religion
becomes a law, then it will be a violation of the and (3) prohibition to establish a national
non-impairment clause. religion. The very essence is that you do not
use the power of taxation, either to
This is different in the case of a franchise encourage or discourage, the
because the basis is a franchise granted by establishment of a particular religion. This
Congress which is a law. is because of the basic concept of the
3. If the basis of the tax exemption is separation of the church and state. Two
a franchise granted by Congress important case here: Jimmy Swaggart, this is
and under the franchise or the tax an old US case, where is was stated that the
exemption is given to a particular free exercise of religion clause does not
holder or person it can be prohibit imposing a generally applicable sales
unilaterally revoked by the gov’t tax on the sale of religious materials by
through Congress. religious organization. And that the sale of
religious articles can be subject to VAT. What
Common example is the PCSO, but PCSO as cannot be taxed is the exercise of religious
an entity is still exempt, what I mean is PCSO worship or activity. The income of the priest
winnings. Ato nya idiscuss later on that the if from the exercise of a religious activity cannot
you win any amount in sweeptakes, that is tax- also be taxed. What you need to reconcile
free. But now, under the TRAIN Law, it is now here is this statement nga pwede kuno mag-
subjected to tax. But there are still minimal impose of sales tax on the sale of religious
portions that are exempted like mga daug materials by a religious organization because
nimo sa swetres. Why is that, is that not a in the Philippines, we have the case of
violation of the non-impairment clause? The American Bible Society.
answer is no because the grant of the
exemption was pursuant to a law and not to Q: What happened in the case of
a contract. Daghan kaayu na example kay American Bible Society?
pareha katong akong giingon ninyo nga ang A: There was a religious organization
mga instrumentalities nya naa man na sa selling transcription of the bible in the local
silang charter nakabutang that instead of dialect and they were assessed of local tax of
paying the regular tax rate, they will just pay a the city of Manila…
minimal franchise tax in lieu of all taxes.
Pwede man gud sad na nga recommend si Q: Duha man to diba, on (1) sales
DOF labi na tong wala nagremit ug tax sa tax and (2) license fee. How did the
national treasury, pwede gyud na kuhiton nila Supreme Court rule on these?
ang Congress ug ipaamend nila ang Charter
but it’s very difficult to do so. Why? Because A: …
the directors in these government *calls another student
instrumentalities kay mga padrino man sad sa
Congress so dili gyud na nila hilabtan. A: …
Nagkasinabut ta? So kanus lang ni moapply?
If there is a contract and the signatory is a *calls another student
representative from the government especially A:
if for valuable consideration, there should be
no impairment of obligations of contracts *He said read nalang the case and we’ll
by simply passing a general law amending differentiate the 2 cases next meeting (pero
the tax treatment or exemption. Moprevail murag wala nato sha giremind haha so
gihapon ang contract. magprovide ko digests)
We have this case of Jimmy Swaggart, this is You read nalang the case. Basically, the point
on the non-infringement of religious freedom. of conciliation is which is prevailing in the
Under Sec. 5, Art. III of the Constitution, “No Philippines when it comes to sale of bibles and
law shall be made respecting an establishment other religious articles. Can it be subjected to
of religion, or prohibiting the free exercise sales tax? Which is subject to sales tax and
thereof. The free exercise and enjoyment of which is subject to license fees? Because we
religious profession and worship, without distinguished already that a license fee is not a
discrimination or preference, shall forever be tax. In so far as the power of taxation is
allowed. No religious test shall be required for concerned, pwede ba niya itax ang sales sa
TAXATION 1 - ARANAS 32 EH 306, A.Y. ’19-‘20
bible? Which is applicable in the Philippines, appellant an exemption from its generally
the Jimmy Swaggart case which is a 1990 applicable sales and use tax.
case? Take note that this case is a case of US,
has this case been relied to in PH? Or is it the On Establishment Clause
American Bible Society case? Is there a The Establishment Clause prohibits
distinction between the two? “sponsorship, financial support, and active
Jimmy Swaggart Ministries v. Board of involvement of the sovereign in religious
Equalization of California (1990) activity.”

FACTS: From 1974 to 1981, JSM conducted The “excessive entanglement” prong of the
numerous “evangelistic crusades” in tripartite purpose-effect-entanglement Lemon
auditoriums and arenas across the country in test, requires examination of “the character
cooperation with local churches. At the and purposes of the institutions that are
crusades, appellant conducted religious benefited, the nature of the aid that the
services that included preaching and singing. State provides, and the resulting
Some of these services were recorded for later relationship between the government and
sale or broadcast. Appellant also sold religious the religious authority.”
books, tapes, records, and other religious and Applying the Lemon Test, we hold that
nonreligious merchandise at the crusades. California’s imposition of sales and use tax
JSM also published a monthly magazine, “The liability on appellant threatens no excessive
Evangelist,” which was sold nationwide by entanglement between church and state. First,
subscription. The magazine contained articles we note that the evidence of administrative
of a religious nature as well as advertisements entanglement in this case is thin. Second,
for appellant’s religious books, tapes, and even assuming that the tax imposes
records. Appellant also offered its items for substantial administrative burdens on
sale through radio, television, and cable appellant, such administrative and
television broadcasts, including broadcasts recordkeeping burdens do not rise to a
through local California stations. constitutionally significant level. Most
In 1980, appellee Board of Equalization of the significantly, the imposition of the sales and
State of California informed JSM that religious use tax without an exemption for appellant
materials were not exempt from the sales tax does not require the State to inquire into the
and requested appellant to register as a seller religious content of the items sold or the
to facilitate reporting and payment of the tax. religious motivation for selling or purchasing
JSM responded that it was exempt from such the items, because the materials are subject to
taxes under the First Amendment. the tax regardless of content or motive.

ISSUE: WON the sales and use tax law of Cali Accordingly, because we find no excessive
violates both the Free Exercise and entanglement between government and
Establishment Clauses. religion in this case, we hold that the
imposition of sales and use tax liability on
RULING: No. appellant does not violate the Establishment
Clause.
On Free Exercise Clause
American Bible Society v. City of Manila (1957)
The sales and use tax are not a tax on the
right to disseminate religious information, FACTS: American Bible Society’s Philippine
ideas, or beliefs per se; rather, it is a tax on the agency has been distributing and selling bibles
privilege of making retail sales of tangible and/or gospel portions thereof throughout the
personal property and on the storage, use or Philippines and translating the same into
other consumption of tangible personal several Philippine dialects. On May 29, 1953,
property in California. There is no danger that the acting City Treasurer of the City of Manila
appellant’s religious activity is being singled informed plaintiff that it was conducting the
out for special and burdensome treatment. business of general merchandise since
November,
We therefore conclude that the collection and
payment of the generally applicable tax in 1945, without providing itself with the
this case imposes no constitutionally necessary Mayor's permit and municipal
significant burden on appellant’s religious license, in violation of Ordinance No. 3000, as
practices or beliefs. The Free Exercise Clause amended, and Ordinances Nos. 2529, 3028
accordingly does not require the State to grant and 3364, and required plaintiff to secure,
within three days, the corresponding permit
TAXATION 1 - ARANAS 33 EH 306, A.Y. ’19-‘20
and license fees, together with compromise religious societies, like for example they will
covering the period from the 4th quarter of say, “Yes, we are leasing the property. But we
1945 to the 2nd quarter of 1953, in the total are leasing this to buy medicines of the ailing
sum of P5,821.45 priest.” Mao na ang justification nila. But it is
also common with bishops and archbishops,
ISSUE: Whether or not the ordinances of the who have properties and even stock
City of Manila, Nos. 3000, as amended, and investments. These are the things that make
2529, 3028 and 3364, are constitutional and you realize ng ana-abuse na sad ang religious
valid. freedom vis-à-vis their proprietary nature. But
The ordinances are constitutional but such are the problem is that the DOF can’t assess these
inapplicable to plaintiff. Defendant is ordered priests or bishops then and there because (1)
to return to Plaintiff the sum of P5,891.45 wala nag ani silay TIN, dili sila registered
unduly collected from it. before the BIR and definitely (2) it will backfire
to the gov’t especially we are taking about the
In this case, it may be true that the price asked Catholic Church because 80% of us are
for the bibles and other religious pamphlets Catholics. Kining mga politico mangayu man
was in some instances a little bit higher than gani ni silage endorsements sa mga Katoliko
the actual cost of the same but this cannot or Iglesia nya gukuron na nuun nila? Mao na,
mean that appellant was engaged in the life is unfair haha.
business or occupation of selling said
"merchandise" for profit. For this reason, we Freedom of the Press. Sec. 4, Art, III of the
believe that the provisions of City of Manila Constitution provides that, “No law shall be
Ordinance No. 2529, as amended, cannot be passed abridging the freedom of speech, of
applied to appellant, for in doing so it would expression or of the press.” Kani ba, pwede ni
impair its free exercise and enjoyment of its iraise nga ground ni ABS-CBN? Because one
religious profession and worship as well as its of the issues raised by administration against
rights of dissemination of religious beliefs. the ABS-CBN is that they are no paying their
proper taxes. But the ABS already entered into
With respect to Ordinance No. 3000, as a compromise with the BIR on its tax liabilities.
amended, which requires the obtention the But the point is, the power of taxation should
Mayor's permit before any person can engage not be used to abridge the freedom of
in any of the businesses, trades or speech, of expression or of the press. Kani
occupations enumerated therein, we do not lang, sa Tolentino v. Sec. Finance, it was
find that it imposes any charge upon the stated that there is curtailment of press
enjoyment of a right granted by the freedom and freedom of thought and
Constitution, nor tax the exercise of religious expression if a tax is levied in order to
practices. suppress this basic right and impose a prior
restraint. However, it does not mean that the
It seems clear, therefore, that Ordinance No. press is exempted to tax. The press is subject
3000 cannot be considered unconstitutional, to tax but the tax should be reasonable not
even if applied to plaintiff Society. But as oppressive, not arbitrary. What is not allowed
Ordinance No. 2529 of the City of Manila, as is to impose tax on the exercise of an activity
amended, is not applicable to plaintiff- which has a connection with freedom of the
appellant and defendant-appellee is powerless press. For example, a license fee for freedom
to license or tax the business of plaintiff of expression or magcollect of tax if naay
Society involved herein for, as stated before, it magrally. But permit has to be secured
would impair plaintiff's right to the free exercise because this is no longer an exercise of the
and enjoyment of its religious profession and power of taxation but more on police power.
worship, as well as its rights of dissemination
of religious beliefs, We find that Ordinance No. Then, power of the President to veto any
3000, as amended is also inapplicable to said particular items in a revenue or tariff bill. The
business, trade or occupation of the plaintiff. point here is that the president can veto a
particular line or the veto the entire law. For
taxation purposes, for example line item veto
Let’s continue, no appropriation for religious ang gina-exercise ni President wherein those
purposes. In short, this simply states that no vetoed provisions will not be implemented and
tax can be imposed favoring one religion. But those provisions not vetoed will be imposed.
this presupposes that there is a religious Next meeting, we’ll discuss religious freedom
activity. Of course, if it is a proprietary and then proceed to Situs of Taxation. *Class
activity, that is no longer covered under this
provision. This is a common defense by
TAXATION 1 - ARANAS 34 EH 306, A.Y. ’19-‘20
was dismissed early kay Atty. has pakal to Q: What distinguishes an OFW from an
attend. ordinary resident citizen earning income
abroad without proper documentation from
RECAP on Indirect constitutional any agency on labor law?
Limitations
Examples:
1.Due process clause
2.Equal protection clause 1.Manny Pacquiao he won in a boxing match
3.Freedom of religion in Las Vegas. He is a resident-citizen but he
4.Non-Appropriation is not an OFW.
5.Power of the president to veto … (etc.)
Q: Is his income taxable in the Philippines?
SITUS OF TAXATION
A: YES. Because the government is still
required to protect him even if he is abroad.
Situs of taxation - refers to place of taxation
2.Concerts. Say ASAP performs in Tanis. They
Q: Why do we need to know where is the collect ticket for a fee. They receive a share
place of taxation? on that.

A: Because that is one of the criteria to answer Q: Is that income taxable?

the question whether this is taxable or not. You
don’t just look at the personality of the subject A: Yes. Following the jural concept.
or the object but you also look at the location.
Q: What are the specifics rules observed in
fixing tax situs?
When it comes to the place of taxation or
situs of taxation we basically look at two A: It depends on the type of tax.
things, based on the:
If poll capitation or community tax, we base it
1. physical or geographical location of the on the residence of the taxpayer.
property or
2. jural nexus or bond between the taxing But is this strictly followed in the actual
authority and the tax payer situation? NO. Because in reality, local
government units have their own interests.

Geographical location of the property So it is not strict enough that If you are not a
- referring to the physical location resident of that LGU you won’t be issued a
- this manner of determining the place of COC because that would be unfavorable to the
taxation is applicable for taxable properties LGU. It is more favorable that even if not a
resident, they would still issue a COC. And
General Rule: If your property is located that’s very common specially for companies
outside it is not taxable, if within the located in one locality with employees residing
Philippines, taxable. in another or different locality.

But when it comes to income taxes, as a rule, Example: You are from Minglanilla, and you
we follow the jural concept or nexus or bond. working in Cebu City. If you follow the rule you
should get the CTC in Minglanilla but in reality
If the one earning the income is a resident it doesn’t happen because if your employer is
citizen or a domestic corporation that needs in the city , for your employer to remit his
protection by the government, then if they earn permit it is required by the city to present the
income outside the country then they ought to CTC of the employee. Alangan naman the
still pay the corresponding income tax. employee would go back home to Minglanilla
to get the CTC. What happens is he’ll get the
That presupposes there that they’re not CTC here in Cebu City. Alangan naman
classified as ofw, cause overseas Filipino balibadan ka sa Cebu City nga di ka issue-han
workers are exempted from taxation for their kay taga Minglanila ka tabla ra gani - gi
income there in abroad. balibran niya ang grasya? So issue-han gd ka.
Because that forms part of the local fund of the
TAXATION 1 - ARANAS 35 EH 306, A.Y. ’19-‘20
LGU. But situs should be the resident of the organized and constituted in accordance
tax payer. with Philippines laws;

Domestic corporations - meaning registered in

For Property Tax we have to check if it is real the Philippines. If you want to transfer the
or personal. shares then you have to pay corresponding
taxes here even if the tax certificate is located
1.Real - we follow lex res sitae/regardless of outside the country or even if the owner is
the owner’s residency. outside the country, nevertheless if gi-tranfer
na nimo diri sa Philippines required jud ka to
If the real property is located here, then produce the tax certificate here in the
taxable here in the Philippines. If the real Philippines.
property is located outside, then that should
not be tax because for property we follow
geographical location. 3.Shares of stock and, obligation, bonds
issued by foreign corporations: 85% of its
2.Personal - we follow mobilia secutor business is located in the Philippines. It’s
persona or movable follows the person subject to donor’s tax.

Meaning to say kung asa ang tag iya at the 4.Shares or right in a partnership or
time of taxation then didto siya I subject to tax. business or industry established in the
This is applicable to transfer taxes, donors tax Philippines.
and SK tax.
5.Shares of stock and, obligation, bonds
Example: Pagkamatay niya diri sya namatay issued by foreign corporations used
sa Pilipinas so tendency if ma declare ang which acquired business situs when
tanang properties niya at the time of his death, sanction in the furtherance of business of
in the Philippines, because movables follow the foreign corporations.
the person.

Sec 104 however of the Tax Code however, Basically, even if their owners is not here in the
provides exemption wherein even if the Phil. But you belong nganhi ( referring to the
personal properties are not here in the five exceptions) then it is taxable here in the
Philippines and even if the owner of the Philippines.
personal property is not here in the
Philippines, these exceptional transaction are Clarification: What do we mean by foreign
still subjected to tax here in the Philippines. corporation acquiring business situs here in
the Philippines and “how do we compare that
to 85% of its business is located here in the
MEMORIZE THESE EXCEPTIONS (favorite Philippines”?
daw sa bar)
When we say business situs, it means it
What are these exception? Bisan if nikuha ka has presence here in the Philippines. In short,
sa gawas ug dokumento pero dili ni sila gi it may have a branch office here in the
exercise sa Pilipinas, taxable gihapon sa presence, it may have a representative office
Pilipinas. here in the Philippines but, it is not doing
business here in the Philippines. Because its
What are these TRANSACTIONS or Personal clients are in abroad but, taxable in the
Properties? (calls a student) Philippines.

1.Franchise is exercised here in the Not under number 3 since he doesn’t

Philippines conduct business here in the Philippines but
- so even if the franchising or the franchisor is under number 5 because it has business situs
outside of the country, but diri ka namaligya here in the Philippines.
diri nimo gi exercise imo franchise, taxable
here in the philippines Now if it doesn’t have a branch
representative here in the philippines but it is
doing business here in the Philippines.
2. Shares of stock and, obligation, bonds Because the portfolio of his clients are based
issued by domestic corporations here in the Philippines then number 3 applies,
TAXATION 1 - ARANAS 36 EH 306, A.Y. ’19-‘20
“85% of its business is located in the
Philippines.” Income tax - most comprehensive situs.
- we follow the nationality theory, meaning
But in practice, what the BIR will look into where you are a citizenship. If you are a citizen
is not the 85% or how many percent but of the Philippines then taxable in the
whether you acquired a business situs in the Philippines. Your income earned whether
Philippines. Because number 3 is regularity of within or outside.
transaction here in the Philippines.
- We also follow the Domiciliary theory where
Number 5 doesn’t necessarily require even if you are not a citizen of the Philippines
transaction for as long as you maintain an but you are a resident in the Philippines then
office or a branch or headquarters here in the your income is taxable here in the Philippines
Philippines you are deemed to have acquired while you are a resident.
business situs here in the Philippines.
- and source rule of income, so if the income
TN: This is subject to reciprocity rule. is here in the Philippines, if your source of
income is the service you rendered in the
Q: If it is taxable in the Philippines, is there Philippines, then following the source rule the
anyway legal way for you to avoid paying source of the income is in the Philippines.
tax? Should be subjected to tax in the Philippines.
So it’s really comprehensive in short wala kay
A: Yes, if there is a treaty involving the lusot.
business profit or involving the transfer of
these personell properties. You will learn under individual taxation that
if you are a resident citizen, following the
One common example is the shares of stocks nationality principle theory, you’re taxable for
issued by the domestic health commission. As your income earned within and outside of the
a rule for this to fall under the exemption you country.
don’t look at the location of the stockholder but
it’s common among double taxation But if you are a resident alien not a citizen
agreements (DTA) that if the stockholder of the (foreigner residing in the Philippines) you are
shares of stocks… kaning shares of stock ba taxable for your income earned within the
by domestic corporations taxable na diri, even Philippines following the domiciliary theory
if the stockholder is a foreign entity but it is because you are residing here. The income
common among (treatises), DTA’s, nga kung outside is not anymore subject to tax since you
ang stockholder sa shares of stocks is a are not a citizen, you’re just a resident.
foreign stock or entity and the transferee or the
the buyer of the shares is another foreign If you are a non-resident alien but you
entity they can apply for tax treaty relief para earn income here in the Philippines that should
dili na ma subject to tax na diri sa Pilipinas. still be subject to income tax here in the
Philippines, not following the nationality since
Why? Ang binayranay mahitabo man sa you’re not a citizen not also domiciliary since
gawas or outside of the Philippines. The only you’re not a resident but following the source
thing they will pay is the applicable rule since you are no from the Philippines. So
documentary stamp taxes. So there is that is why it is comprehensive situs when it
reciprocity. Then again as a rule kanang lima comes to income tax. (so much for that, will be
taxable sa Pilipinas. discussed further in Tax II)

Business tax - it is the place of business

Excise tax - where the task is performed or Transfer Tax (will be discussed in Tax II)
the occupation is pursued - we look at the residence or citizenship of the
Sales tax - where the sales is consummated tax payer or the location of the property cause
Personal property - we follow Mobilia this usually involves a real properties, specially
Sequuntur Personam for estate taxation.

TN: Sales tax is an old term. The current term Franchise tax, the state which granted the
is percentage tax on sales transaction. The franchise can still basically collect the
other aspect of the sales tax lang is the value franchise tax. These are primary franchises. If
added tax. But for VAT we follow as a rule the in your charter it states that you will just pay
cross-border doctrine. 2% of franchise of course the one who will
TAXATION 1 - ARANAS 37 EH 306, A.Y. ’19-‘20
collect is the Philippine government, because Q:If the debtor is non-resident-alien and the
they are ones who granted the franchise. creditor is a resident-alien, will it be subject
to tax here in the Philippines? The
Value-added Tax (VAT) - cross-border residence is not in the Philippines. But take
doctrine, usually ang malimtan sa bar. note of that the debtor is a resident-alien.

Tax on interest income - when it comes to A: NO because this is loan and not an income
tax on interest income take note the situs is on service rendered by a resident-alien in the
the residence of the borrower not the Philippines. If it was service, then it is the
residence of the creditor. It is the residence of place where the service was rendered.
the borrower who pays the interest irrespective
of the place where the obligation is contracted. Creditor Debtor
RA + NRA = Not taxable
Example(s): You have the creditor and you
have the debtor. Q: What if the creditor is a resident citizen
and the debtor is non-resident alien? Is it
1.The creditor lent 1M to the debtor. The still taxable?
debtor is obliged to pay 10% interest to the
creditor. What he will return to the creditor is A: YES following the nationality theory -
the principal 1M plus the 10% interest of regardless of the place where it is earned,
100,000, total of 1.1M. whether within or without, it doesn’t matter
because you are a resident citizen, world-wide
Q: What is subjected to income tax here? income.
A: Only the 100,000 because that is the only
income. The 1M is the capital so no income at In this case, the concern is more of being
all. a citizen earning an income.

Of course whether resident-citizen or

TN: When it comes to interest income it is the resident-alien taxable here in the Philippines
residence of the borrower that matters not the regardless of classification of the creditor.
residence of the creditor.
It’s the residence of the borrower not the
2.If the creditor is non-resident alien nationality of the borrower.
(foreigners not residing in the Philippines).
The creditor is also a non-resident alien. But Borrower nimo pwede either resident-citizen or
their loan transaction, or their loan agreement resident-alien, foreigners in the Philippines,
where the execute and signed, in the they can pay interest income taxable in the
Philippines. Philippines.

Q: Will the 100,000 loan interest be

subjected to tax here in the Philippines? DOUBLE TAXATION

A: NO. Because he’s a non-resident. It’s the

residence of the debtor, regardless of the 1.Direct Double Taxation/Direct Double
place where they contracted the loan. Even if Duplicate
diri nila gi execute sa Pilipinas katong 2.Indirect Double Taxation/ Indirect Double
bakasyon nila sa Boracay for example. The Duplicate
interest income, wala ta. Out si Philippine
government out si BIR. I.Direct Double Taxation/Direct Double
Duplicate
Q: But if the creditor is a resident alien and
the debtor is also a resident alien, is the the It means:
interest income subject to tax in the - taxing twice the same subject or
Philippines regardless of where they object
executed it. - for the same purpose
- by the same taxing authority
A: YES. Because the debtor is a resident of - within the same jurisdiction
the Philippines. - during the same period
- covering the same kind or character
of tax.
TAXATION 1 - ARANAS 38 EH 306, A.Y. ’19-‘20
In short, everything is the same. If
everything is the same there is direct double EXAMPLE: In 2020 when I get a business
taxation. If any one or two of these requisites permit, it will be based on my gross sales on
is/are missing then that’s what we call indirect 2019. So my local business tax for 2020 is
double taxation. based on 2019. Karon palang daan, lahi ang
taxing authority, lahi na daan ang taxing
period. There can be no direct but rather
Q: Why do we need to know whether it’s indirect.
double taxation or not?
II.Indirect Double Taxation/ Indirect Double
A(student): So that we’ll know whether or not Duplicate
double taxation has been imposed and
whether we can assail that imposition when it When it comes to indirect, this is allowed
is inequitable or oppressive. At the same time, especially if different ang nature or character.
by also knowing whether there is double
taxation we can erase or ease the burden or Indirect taxes can be further classified into two:
the grievance by engaging max securities, for
example. 1.Domestic indirect Taxation - Tax collected
by national and tax collected by
Q: Is double taxation prohibited? local.
A (STUDENT): There is no constitutional 2.International indirect Taxation - income tax
provision on double taxation however the is paid in the Philippines and
practice is frowned upon. also paid income tax abroad because you
earned it abroad
What is not allowed is direct double
taxation. But there is really no express That is why there are treatises between
constitutional limitation against double friendly nations. If they have a businessman,
taxation. But when it comes to direct double he will only be taxed where he is a citizen or
taxation, that is deemed violative of the due where he is a resident. In the foreign country
process clause and the undue confiscation of where he is doing business, he is exempted
property. from taxation.

Q How about indirect double taxation? Is it Example: We go back to the Manny Pacquiao
allowed? case. He won in Las Vegas and he was
A (STUDENT): Yes. subjected to income tax in Las Vegas and
because he’s a resident-citizen, he was also
When you look at the government setup of subjected to tax in the Philippines.
the Philippines. There are actually so many
double taxation situations. That is why foreign
investors very often do not understand our To ease the burden, we have provision for
taxing system. tax credit, tax treaty or tax negotiation.

Why? Because the BIR would ask tax based Relevant Doctrines in Income Taxation:
on sale, the LG would also ask for tax based
on sale, that would be double taxation already ● Direct double taxation is not allowed
but indirect therefore allowable. because it amounts to confiscation of
property without due process of law.
How is it indirect? There are different taxing
jurisdiction, different taxing period and different If you ask the basis of direct double taxation of
taxing purpose. questioning direct double taxation it is violation
of the due process clause. You can question
Why is there a different taxing period? It is the validity of double taxation in violation of
different because for BIR, for example VAT. due process, equal protection or uniformity of
VAT is based on your gross sales. If it is gross taxation.
sales for 2019 you pay the VAT for 2019. But
when it comes to local business tax, the ● Doubts as to whether double taxation
percentage is also based on gross sales but has been imposed shall be resolve in
the period for local business tax is advance favor of the taxpayer. (check cases daw)
payment for the year based on the sales of the
preceding year. They are different.
TAXATION 1 - ARANAS 39 EH 306, A.Y. ’19-‘20
● Warehousing business is INTERNATIONAL DOUBLE TAXATION
considered separate from operation of
sugar central. • comparable taxes in two or more states
on the same taxpayer with respect to
Q: Is it allowed that there is tax in the the same subject matter and for
warehousing business and there is also a identical period
separate tax in the sugar central? YES
• allowable
Q: Is there double taxation? YES, but indirect
Classic example: Manny Pacquaio. If he wins
double taxation.
in las vegas, he’s subject to income tax in Las
Vegas. And because resident citizen man siya,
● License tax on business or within and without, he’s also taxable in the
occupation different from the tax on the
Philippines.
land or property or property tax.
DOCTRINES IN DOUBLE TAXATION
● License fee may be imposed on the
same business or occupation for 1. Direct Double Taxation is not allowed
selling the same article and this is not a because it amounts to confiscation of
violation of the double taxation. property without due process of law

● “Tax on every bottle” is different 2. You can question the validity of double
from the “tax of the act of selling for taxation if there’s a violation of the
the business of selling”, although it is equal protection clause or equality or
imposed on the same taxpayer or the uniformity of taxation
same entity. (Pepsi Cola Case)
3. Doubts as to whether double taxation
That’s why you say there is double taxation, has been imposed should be resolved
because, I am a single taxpayer with a single in favor of the taxpayer
business yet I’m paying two taxes. But since
it’s for a different purpose, it covers different Summary of principles discussed in cases:
object or subject matter it’s just indirect double no direct double taxation
taxation.
1. Ang gitaxan Warehousing business
and the other is sugar central, the
● Occupation of fishing and fish SC said indirect double taxation
pond is different
● Storing of copra and tax on 2. A license tax levied upon a
finished product, also different business or occupation is different
from a business tax on a property
These are the mechanisms to ease the burden
of double taxation and recovery from double 3. Both a license fee and a tax impose
taxation. You can claim taxed paid abroad as to the same business or
tax deduction or tax credit. occupation is not in violation of the
rules against double taxation
Credit - peso per peso, reduction on your tax
liability 4. Bottle gi-subject to tax, manner of
Deduction - adto tas taas in effect 30% lang selling gi-subject sa tax, that’s
ang bayaran indirect double taxation

● There is an exemption, provision or [Pepsi cola case]

there is a treaty with other state which
is known as the DTA or also known as Argument: Sir ngano man
the double taxation agreements of makaingon man ka na double
payments or allowance to the principle taxation?
of reciprocity.
Because isa raman gud ka
taxpayer ang nishoulder sa different
If on abroad this will be the percentage of tax
types of taxes
of a Filipino that earns this income there and in
the Philippines we’ll reduce the percentage of Usa ra ang negosyo nako,
tax earned by citizens of the friendly country. nagabayad ko income tax,
nagabayad ko vat nagabayad ko
TAXATION 1 - ARANAS 40 EH 306, A.Y. ’19-‘20
local business tax. Kana palang where the concept of indirect taxation comes
daan 3 na ka type of taxes. Sobra in. Recall the distinction between direct and
pa sa double taxation. indirect. Shifting can only be done for indirect
taxes.
Means employed to avoid Double
Taxation
TWO ASPECTS OF SHIFTING:
1. Tax Deduction
Impact - that point on which the tax is initially
2. T a x C r e d i t - p e s o f o r p e s o
imposed and the impact there falls on the
compensation.
statutory taxpayer. But since it is an indirect
There is a corresponding limit to the tax, the statutory tax payer can shift it to the
credit that you can claim. consumer or the customer, as long as that is
the incidence of taxation.
Naa nay gitawag na per country
limitation, worldwide limitation (to be WAYS OF SHIFTING:
learned later as the discussion 1.Forward
progresses) 2.Backward
3.Onward
• To claim tax credit is stricter
than to claim tax deduction. Forward Shifting - from production or
Just like what happened to manufacturing tax is shifted to wholesaling
Pacquiao then shifted to retailing then it settles down on
the consumer or in the one who consumes or
3. If there’s an exemption under the law the customer.
4. If there’s a treaty with other states; That is why if you are an employee you
Double Taxation Agreement (DTA) will never become rich because from taxation
alone there is already withholding from your
States enter into an agreement that
employer. If you are an employee, you are also
when a resident of one country does
a consumer you will bare ultimately the burden
business in the other’s country,. “Ayaw
of indirect tax. Unlike if you’re a businessman,
na siya isubject sa tax, ako na lang ang
pasa-pasa ra kas taas. Mubaligya ka naa kay
musubject to tax. Exempted na na siya”
halin, shift lang nimo ang burden of the tax.
Example: (chika chika sya about pag negosyo )

If ang US citizen, mag do business sa If forward shifting, it will happen if the

ph. di na siya isubject to tax, ang us na demand is greater than the supplies because if
mag tax. you shift the tax, you’re price is in pieces. So if
your commodity has low demand, mu transfer
Condition: Not all tax. Specified what ang customer sa other seller na wala ni shift.
tax lang ang exempted. This is common in commodities where the
demand is greater than the supply, retail
products, basically.
FORCE OF ESCAPE OF TAXATION
But when it comes to high-end luxurious
product where the supply is greater than the
- means to either minimize payment of tax
demand and very volatile ang pricing. Real
liability or not pay any tax at all.
estate for example, the 12% for 1M is already
high if for a middle-income earner. It is a
1.Shifting
deciding factor. So when it comes to this high-
2.Capitalization
end luxurious products what happens usually
3.Transformation
is backward shifting.
4.Avoidance
5.Exemption
Backward shifting - instead of adding 12%
6.Evation
sometimes inclusive ang computation,
sometimes no additional VAT at all. And the
SHIFTING
seller will just think of ways kung asa niya
- tax burden is transferred from statutory
marecover ang tax nga gi shoulder niya.
taxpayer or the impact of taxation to the
consumer or the incident of taxation. This is
TAXATION 1 - ARANAS 41 EH 306, A.Y. ’19-‘20
It creates a situation where businessmen CONCEPT OF AVOIDANCE
tries to avoid the indirect tax and goes - think about ways to avoid tax. When you say
underground. Not declaring properly the sales, avoid, it’s not “evade”
not issuing invoice or official receipt. Because Avoidance is using the legally permissible
if they issue invoice or official receipt ma-track alternative tax rates or work methods of
na. assessing tax property or income in order to
avoid or reduce tax liability.
Onward shifting - on the other hand, tax is
shifted 2 or more times, either forward or Diri musulod ang mga estate planning
backward. schemes, income tax planning schemes or
capital gains schemes.
Producer shifted to wholesaler but the
wholesaler realized that there are not much Example:
demand so si wholesaler nalang ang ni ● Which is better, sell this as ordinary
shoulder sa tax. From forward, became asset or capital asset? Things like that.
backward, pag abot ni retailer, si retailer ● If I am a self-employed individual,
decided to shift it to the consumers then it which is better 35% or mag 8%.
becomes again forward shifting. That’s what ● When it comes to card deduction
we called onward shifting. which is better, optional or itemized
deduction.
Q: Which is best itself?
A: Depends on the type of business. Because This is where the concept of tax
it is not advisable under all circumstances nga avoidance.This is also where concept of gray
mag forward shifting ka. areas in taxation comes in. Why? This is
where usually musulod ang tax planning
Q: What if you’re selling airplanes? What is scheme so long as it’s deemed gray area.
the value of that and you’ll already shift a Meaning to say, even the BIR doesn’t know
12% VAT? how to tax that item or how to implement
taxation.
A: Of course, it’s common nga ga lease ra na
ang mga airlines, it very seldom that the Example: Online selling. We still do online
company owns their own airline, for practically selling here. There is already an RMC that
reasons. Point is, if mag backward shifting ko, you are going to voluntarily declare your sales
what are the ways to recover the tax that we online but it’s not clear on how it is being
shouldered - implemented.

CAPITALIZATION Q: How does the BIR verify the income of

the seller who is into online selling?
- where you are going to capitalize the
value of future taxes on your properties sold. A: Of course the best thing is, you have to
This is capitalize , you record it as an asset declare voluntarily everything. But how much
and then eventually depreciate it over time. of your expences can you claim as a reduction
Didto ka mubawi sa depreciation aspect. (This of income tax. So this is some gray areas that
is more on accounting so don’t mind it much. the BIR needs to settle.
Will be discussed when we take up allowable And recently I learned from, because
deductions) somebody contacted me, that he wanted to
sue some bloggers. Kana bitaw nga mga
TRANSFORMATION blogger naa na silay kontrata with some
- common among manufacturing firms corporate entities. As far as I understood from
who also shoulders the tax wherein ang his message, wala na sunod ang contract nila
buhaton ra nila, is to recover by improving the with the blogger. And I think they have already
efficiency of their production. The concept of given something to that blogger. So ganahan
manufacturing is, “ there more you produce, nila Ipa-gukod sa BIR. Unsaon man sad pag
the lesser the costs per (hyphen?).” So didto gukod sa BIR kung sya mismo wala sya ni
nalang sila mamawi. They will make sure that declare.
they will have several customers of simil,r
orders didto nila bawion, thereby turning up as Because if it were a normal transaction, it
units at a lower price. can be traced because there you have OR,
you have invoice, you have withholding but in
that case it’s different.
TAXATION 1 - ARANAS 42 EH 306, A.Y. ’19-‘20
CONCEPT OF TRANSFER PRICING Exemption is an immunity or privelege, it is
freedom from a financial charge or burden.
- what if sister-company mo, ang accounting
ninyo two companies, one accountant. Unsaon Evasion
pag distribute sa costs sa expense ni - meaning to say you really have the
accountant, sa sweldo sa accountant over the intention to defraud the government.
2 companies. - it is punishable by law
- it is also known as tax-dodging
The term for that is minimization and the
other one is exemption. As a rule it is not allowed.

EXEMPTION Evasion takes into consideration the three

- forms of escape from taxation. When we say elements. Because this is a state of mind.
exemption what is important there is the
double nexus rule. If this is the element, in the commission of
a crime, the end to be achieved which is
Double nexus rule (Requisites): payment of less taxes or no payment at all, an
1.you must be able to prove that there is a accompanying state of mind which is
specific statutory provision exempting you described as evil, bad faith, willful and
from taxation. deliberate, meaning not just a simple mistake.
2.You must be able to show that you qualify for Not just an honest mistake, a course of action
the particular exemption. which is considered as unlawful. It is
considered unlawful because there is express
One of it is very basic. One is grant of prohibition under the law.
exemption under tax laws. You don’t apply that
automatically. You have to ask for a ruling from Pwede musulod ang avoidance if there is
the BIR. Basically, asking permission from the no express prohibition yet provided under the
BIR that there is an existing provision under law or under the rules.
the law, this is how I’m organized, this is how I
operate, uyon baka nga I-exempt ko. And if the When it comes to tax evasion since it
BIR agrees with your position that’s when the involves a state of might we look at
BIR issues either a certificate of exemption or manifestations.
a favorable ruling that you are exempted.
Q: What is usually the common indicators
Example: cited by the BIR?
It’s not advisable that, if you’re a proprietary,
it’s common that you have exempt A: Failure to declare for taxation purposes your
transactions and you have taxable true and correct income for two consecutive
transactions. Usually, it’s okay if you’re non- years or more than two years; or substantial
profit because if you are non-profit for as you under declaration of income tax returns for four
don’t earn income for proprietary activity, consecutive year coupled with unintentionally
malusutan na nimo even if wala pay ruling or overstatement of deductions
even if walay pay certificate of exemption. But
it’s very difficult for a proprietary company Q: How do you know nga wala ni declare or
having sales or activities for profit and having ni under-state or overstate?
activities which are not for profit. Kana
kinahanglan jud ka mag ask certificate for tax A: It takes two to tango. In a transaction you
exemption or ruling, Otherwise, I-take na ni have the buyer and you have the seller. Who
BIR tanan nga taxable. Maglisod naka ana has the tendency not to report the income? Of
later on pag explain. course, the seller. Ikaw buyer, I-report nimo as
Because when it comes to taxation the an expense because that is a reduction to your
rule is exemption is the exception..except if taxable income.
you are a government entity because if you All the BIR will do is compare the reported
are a government entity exemption is the rule purchases of this party versus the reported
because that’s part of the inherent limitation, income of the other party. Inig banga dili mag
katong governemnt entity exempted from match there is already deficiency.
taxation. And there are also anonymous report to
the BIR which is being done by mga
gipangkasab-an nga bookkeeper, kanang mga
tig file sa mga tax return. That’s why we tell our
TAXATION 1 - ARANAS 43 EH 306, A.Y. ’19-‘20
clients that if naa moy pangdown sa kompanya 2. Capitalization
ninyo labi na kung naa mo gi tago taguan.
Tagai jud na ang bookkeeper ug tig file ug tax • Irecord nimo siya as asset basically. You
return ninyo, kay sila nakabalo pila gitaguan just have to capitalize the value of the
nimo, basin ikaw pa ni sugo na tagui ni nga future taxe s on the property sold. Imbis na
amount, etc. At the end of the day if kasab an I-charge off nimo siya separately, i-apil
ra na nimo, paresignon na nimo, anonymous nimo siya pag record sa cost sa property.
letter lang na sa BIR (inaudible) (more Pero kana karon given the current scenario
discussion in tax II on remedies when the BIR that required na ang both party to do
tries to inflict fraud) withholding etc etc its very difficult to
capitalize the tax. Siguro internally you can
Because if naa man gud mu file case for do it but in so far as the BIR is concerned
fraud or evasion, paspas ang collection ni BIR. documented man gud na kung pila ang
Pwede sya diretso mag file ug case without supposedly liability nimo sa transaction.
any valid assessment.
3. T r a n s f o r m a t i o n – c o m m o n i n
manufacturing. Si manufacturer ang
Distinction between tax evasion and tax nishoulder sa tax so ddto sya mamawi sa
avoidance: production. Because the more you produce
Avoidance - use of legal means/ use of tax- the lesser your fixed cost man and tax is
saving device sanction by law usually part of the fixed cost so ddto niya
Evasion - connotes fraud, outside of the lawful ihapak.
mean
4. Avoidance – dri musud ang trabaho ni
lawyer when it comes to taxation. You
FORMS OF ESCAPE FROM TAXATION
basically have to think of legally
-used to reduce your tax or not to pay tax at all permissible alternative tax rate or method
to minimize the tax exposure of your client.
1. Shifting This is also called as “tax minimization”. Dri
musulod ang estate planning scheme,
In relation to in direct taxes, capital gains scheme, corporate
restructuring studies, asa ka makasave if
The statutory taxpayer (impact of taxation; imerge nimo or asset purchase or share
one who remits the tax) shifts the burden of purchase.
taxation to the consumer or customer
(incident of taxation; one who actually paid Is this allowed? Yes this is where
for it) our services as lawyers come in.
• Forward shifting 5. Exemption - We follow the double nexus
rule. Even if you are certain that you are
o manufacturer/producer -> wholesaler -> exempt you have to point the law that
retailer -> Consumer grants such exemption and prove that you
are qualified for that exemption to the BIR.
o Happens when demand is greater than To be safe, if you want an exemption you
the supply have to ask for a certificate of exemption
from the BIR or a BIR ruling.
• Backward shifting
o 6. Evasion – this is the illegal or the
Happens when it is not shifted but
fraudulent means to lessen the tax
rather shouldered by the statutory
liability. Aka “tax dodging”.
taxpayer
o
• Criminal violation so go to the elements
Supply is greater than the demand
of the crime: end to be achieved(non-
o Usually involves product of high price or payment or reduction of tax liability), an
high value, Manufacturing and Service accompanying state of mind (evil,
industry bad faith, willful, deliberate and not
accidental so they are knowledgeable
• Onward shifting enough but still did not comply) and a
course of action or failure of action
o Multiple shifting of tax either backward which is unlawful
or forward
TAXATION 1 - ARANAS 44 EH 306, A.Y. ’19-‘20
• Needs proper finding by the BIR if a particular class is exempted and another
because it is a criminal offense so proof class is not as long as there is substantial
beyond reasonable doubt is needed. distinction or valid classification.

i.e. Mighty Corporation – pag- Q: What is the rule when it comes to taxation?
inspect sa BIR sa warehouse
niya kay nasakpan nga A: Exemption is the exception. However,
tampered or fake ang excise tax when it comes to a government entity,
certificate na gipapilit sa exemption is the rule and taxation is the
cigarilyo so automatic criminal exception kay inherent limitation man nga
and civil offense but usually exempted si government entity
kung bangga2x ra sa sales ug
expenses pwede man Note: For Rationale of Tax Exemption and
mudefend si taxpayer na this is G r o u n d s f o r Ta x E x e m p t i o n r e f e r t o
an honest mistake or simple Sandeesuan notes since atty said it word for
negligence word

Indicators/Manifestation of Tax Evasion: fail Chavez v. PCGG

to declare your true and actual income from
PCGG, in its mission to recover ill-gotten
your business for two consecutive years or
wealth, it entered into an agreement with the
there is a substantial under-declaration of your
Marcoses that if they will surrender their
ITR for 4 consecutive years coupled with an
wealth, they will be granted tax exemption. Of
intentional overstatement of deductions
course giquestion ni and the SC said di mo
To determine true and actual income – through kapagusto ug grant ug tax exemption kay dili
withholding, in a transaction kay naa kay buyer man kamo ang gaimpose sa tax. Neither can
ug seller so kung girequire ang isa to withhold, Congress itself can grant tax exemption in the
makit an jud ddto ang tinuon nga halin nimo. case at bar because it will violate the equal
protection clause of the Constitution because
Nevertheless even if there is no withholding, what makes the Marcoses special as
the fact na gireport to sa other party as compared to those who also have ill-gotten
expense unya ang gireport nimo nga income is wealth. So dili mgrantan ug exemption.
understated or wala kay gideclare nga income,
makit an jud na ang discrepancy. TAX EXEMPTION AS TO BASIS

So if consistent na every year nga sige ug 1. Constitutional – i.e. Exemption of

gaunder-declaration of income or Educational Institution
overdeclaration of expenses pwede na ba
2. Statutory – i.e. Exemption of Religious
muconclude ang BIR nga fraudulent or ga-tax
Institution because ang RPT to ang
evasion na? YES
iyang constitutional exemption
TAX EVASION v. TAX AVOIDANCE (was
3. Contractual – i.e. govt bonds and
asked in 1 bar exam)
debentures
Tax Evasion – Connotes fraud by the use of
TAX EXEMPTION AS TO FORM
pretenses and forbidden devices; scheme
used is outside of the lawful means. It can either be expressed or implied. In
the PH however, we follow express
Tax Avoidance – used by the taxpayer as a
because of the double nexus rule.
tax saving device within the means sanctioned
by law. TAX EXEMPTION AS TO SCOPE OR
EXTENT
EXEMPTION FROM TAXATION - immunity
and privilege, freedom from financial charge 1. Total
TN: This is a personal privilege so dili pwede i- 2. Partial
assign. Genrally revocable except if the
exemption is granted pursuant to a contract
entered into by the govt and it is onerous.

This is in effect a waiver on the part of the

government and not necessarily discriminatory
TAXATION 1 - ARANAS 45 EH 306, A.Y. ’19-‘20
CONSTRUCTION OF TAX EXEMPTION Desistance or refraining from exaction,
STATUTES enforcing something as well as the restore
what has already been taken. The remission of
GR: In cases of ambiguity, it has to be taxes due and payable to the exclusion of
construed “Strictissimi Juris” against the taxes already collected does not constitute
taxpayer. unfair discrimination.
XPNs: TN: Exemption, Amnesty, Condonation.
1. When the statute granting exemption Amnesty - all encompassing, it applies to all
provides for a liberal interpretation taxpayers who wants to avail of it for this
thereof particular tax type.
2. Special taxes relating to special cases Tax Remission – on a case to case basis, nga
affecting only special classes of gipasaylo ka for a particular reason.
persons
Q: Kinsa ang nay power to condone a
3. Exemptions refer to public property particular tax liability?
4. Exemptions granted to religious, A: As a rule it is the Commissioner of Internal
charitable and educational institutions Revenue but there has to be proper
or their property application for condonation or remission. But in
practice this is not common. Kay ug ang
5. Exemptions in favor of the government, ipacondone nimo kay millions kay lingkuran ra
its political subdivisions or intawon na sa Comissioner. Ang last remedy
instrumentalities sa taxpayer is to enter into a compromise nga
naa gihapon kay bayran pero gamay lang or to
6. There is express mention or if the
enter into condonation and its being approved
taxpayer falls within the purview by
by CIR.
clear legislative intent
Tax Amnesty V. Tax Exemption
TAX AMNESTY – pardon on the part of the
government of your previous sins; basically Tax Amnesty – immunity from all criminal and
described as looking backward and forgiving civil obligation; a general pardon given to
you of your sins; partakes of absolute taxpayer covering a particular period.
forgiveness or waiver by the government of its
right to collect Tax Exemption – immunity from civil liability
only. Walay criminal liability kay in the future
-granted to tax evaders who wish to relent and paman ni mahitabo.
are willing to reform
TAX ASSUMPTION
There is that provision in tax amnesty na kung
muavail ka ana it does not necessarily Very recently defined by SC in a 2017 case of
constitute as an admission on your part and it Mitsubishi Corp v. CIR:
cannot be used an evidence to prosecute an
applicant of tax amnesty Q: Is Tax Assumption the same as Tax
Exemption? A: NO.
Who grants tax amnesty – the one who
imposed the tax (Note: This is assigned to you so please do
read it kay wa pa ni nigawas sa BAR)
Congress – can grant amnesty if it imposes
the income tax Facts: The President entered into an
Executive Agreement with the Prime Minister
LGU – can grant amnesty for local business of Japan. It is sort of a mutual cooperation
tax and RPT but not income tax between the two countries and in their
agreement, Japanese engineers will be sent to
VS. PH to oversee the construction of the power
plant.
TAX EXEMPTION – looking forward
In that agreement, the executive dept agreed
TAX REMISSION OR CONDONATION
to assume all the tax liability for the income
pursuant to the services performed in the PH
which is supposedly taxable. So nianhi sila
TAXATION 1 - ARANAS 46 EH 306, A.Y. ’19-‘20
through Mitsubishi. Mitsubishi did not know occupation, in effect were actually enforced by
that there is this executive agreement, so the occupying government. So ITR that was
giwithhold sa Mitsubishi ang tax sa mga filed and paid during that period were
engineers and giremit sa BIR. considered to be valid and legal. Such tax laws
are deemed to be laws od the occupied
Belatedly, Mitsubishi realized that the territory and not of the occupying enemy.
executive dept shall assume the tax liability
pursuant to the executive agreement so it now Atty side chika: Diba so nindot kayo ug
claimed for a refund from BIR. BIR said we utangan ka ug dako sa BIR mag ampo lang ka
cannot refund because it is tantamount to an nga nay gyera pareho anang Mickey Mouse
exemption. And being an exemption there Money file kag tax return mickey mouse
must be a 2/3 vote by Congress and that money imong ibayad
agreement does not have ratification by
Congress. So it reached SC. 2. It is Civil Not Penal

Contention of Mitsubishi: This is Tax Mao lagi na nga the mandate of the BIR is not
Assumption not Exemption. to file a criminal case even if a simple violation
of the tax law is a criminal liability. Mao nang
Contention of BIR: This is Tax Exemption. mubayad nalang ka ug compromise penalty.
There must be ratification. It cannot be a
simple agreement between two head of State.
CONSTRUCTION OF TAX LAWS
Ruling: The SC said it is Tax Assumption.
Because in the agreement there is nothing
Prospective in application unless otherwise
there na dili sila pabayarun ug tax. It is just a
stated nga retroactive.
voluntary assumption being made by the
executive department. And because it ia a tax But if favorable to taxpayer then it may
assumption, there is no need for a ratification be given retroactive effect. Mao na ang
by the Congress. tax amnesty laws retroactive in
application.
Atty side chika: Basta in ani nga mga make up
class ba dri na nimo makita ug kinsay uyab, ug When legislative intent is clear we stick to
kinsay pwede magkauyab. Sa classroom di the intention
man nimo maatikan.
When there is doubt, since taxes are burden to
Q: What is the Nature of Internal Revenue the taxpayer, it is not to be presumed beyond
Laws? what the statute clearly and expressly
declares.
1. Not Political in nature.
In grant of tax exemption – to be construed
A: It is deemed to be laws of the occupied
strictly against the taxpayer
territory and not of the occupying enemy.
Therefore the tax laws continue to be in force When the language is plain – rule on strict
during the Japanese Occupation. construction against the government does not
apply
The issue here was before the Japanese
Occupation , there is this tax assessment Public purpose is always presumed
issued by the BIR to the taxpayer. The
taxpayer paid that assessment during the Provisions of the tax act are not to be
occupation. So after the Japanese Occupation, extended by implication
ang BIR kay nangolekta again sa taxpayer nya
ana ang taxpayer nakabayad naman ko. But Tax laws are special laws and they prevail over
the BIR said it is not a valid payment because general laws which is our Civil Law
you paid it at the time of the Japanese
occupation. If there is ambiguity in a tax law, kang
kinsa nato na i-interpret strictly?
So the question is unsa man diay ang nature Against the GOVERNMENT when it
ani? Kay if Political in nature, abrogated sya comes to imposition of taxes because it
during belligerent occupation but here SC said is a burden on the part of the taxpayer
it is well known that our Internal Revenue law and kinsa man ang responsible
is not political in nature. Therefore it continued nganong na-ambiguous na? It is not
to be in force during the period of enemy the taxpayer but the government.
TAXATION 1 - ARANAS 47 EH 306, A.Y. ’19-‘20
BUT when it comes to ambiguity in the General Rule: If i-repeal ang RMC, RR, RMO,
grant of tax exemption. It will be it is not retroactive, it is prospective.
construed against the TAXPAYER Revocation of any rules promulgated by the
because taxation is the rule exemption Secretary of Finance and CIR shall not have
is the exception retroactive effect especially if it is prejudicial to
the tax payer.
AUTHORITY OF THE SECRETARY
OF FINANCE TO PROMULGATE Exceptions: (Nigawas ni sa bar so imemorize
RULES AND REGULATIONS lang)

When it comes to tax laws, when you If the taxpayer deliberately misstates or omits
implement the tax law, kung normal na material facts from his return or in any
nga balaod you have the IRR. But for document required of him by the BIR
taxation we have the so called:
If the facts subsequently gathered by the BIR
Revenue Regulation (RR) issued by the are materially different from the facts on which
Secretary of Finance not the CIR. Because the the ruling is based
CIR merely has a recommendatory power to
the DOF. If the taxpayer acted in bad faith

Revenue Memorandum Order (RMO) In short, ug pagpangayo nimo sa ruling,

issuance by the CIR addressed to the agents namakak ka, pwede bai reverse to later on nga
of the BIR as well as its officials and ruling to your disadvantage? YES. Because in
employees kung unsay buhaton nila internally the first place you are not truthful on the facts
of the documents presented before the
Revenue Memorandum Circular (RMC) bureau.
issuance by the CIR addressed to all
stakeholders: taxpayers including the officers
INCOME TAX
or employees of the BIR. This is a specific
clarification to provision under a tax law or
Revenue Regulation. Q: What is Income Tax
A tax on all yearly profits arising from property,
Possible man gud na nga nay kay tax law nya
professions, trades or offices, or A tax on a
nay mugawas nga RR para ana imbis nga
person’s income, emoluments, profits & the
maclarify, mas maglibog na hinuon ka so to
like.
clarify the CIR will issue an RMC. Apil diri ang
mga updates.
Q: What is the diff between capital and
Revenue Ruling (RR) pero lahi nis Rev income
Regulation. This is issued by the CIR to a Capital is the property that a person has at a
particular taxpayer who asks for a ruling or an specific time. Also called as the tree
opinion coming from the BIR. Dili klaro ba like Income is the flow of the wealth, OW it is the
gray area so you ask for Revenue Ruling or fruit of the tree
otherwise known as BIR ruling.
Q: What is being subjected to Income Tax?
Revenue Audit Memorandum Order (RAMO) The Income
issued by CIR that provides guidance both to
the taxpayers and BIR officials how the Q: Let’s say for example, 1 borrowed P1000
examination of the taxpayer’s books will be from you and paid you the same amount, is
conducted part of procedural due process. there income in there?
No, because income tax pertains to flow of
Q: Pwede ba na irevoke ni successor? wealth and in the example, as there is no
Kay ang muissue sa RMO, RMC, RR, profit, there is no income tax to speak of.
RAMO kay CIR man, kung mapulihan
si CIR kay kuyog mana sya sa Q: If I pay you 1000 principal and 100
president, so can the suceessor revoke interest. Where does the income tax apply,
those issued by predecessor? YES. to the total amount of 1100, the principal of
1000 or interest of 100
Q: Is Revenue ruling binding in so far To the interest of 100 because in effect, it is
as CTA is concerned? NO. Not binding what we call the return on investment.
but treated with respect and with great In essence, when we talk of capital and the
weight. capital is returned to you, that is a return of
TAXATION 1 - ARANAS 48 EH 306, A.Y. ’19-‘20
investment. If it is a return of investment, as a Gross Income: for taxation purposes is
rule, you do not subject it to income tax. basically the gross sales or gross receipts less
the cost of goods sold but for service
Q: What is the nature of income tax? enterprises (gross sales or gross receipts less
1. it is national – it is collected by BIR the direct expenses)
2. it considered an excise tax because it refers Net Income: after getting the gross income,
to the performance of one’s privilege to earn you deduct the operating expenses (these are
money usually the indirect expenses)
3. it is also a direct tax – because the burden
is to the statutory taxpayer For accounting purposes, we usually use the
4. it is general – it imposes tax on all types of term net sales. Net sales, meaning, net of
income. discounts
5. source blind – regardless of the source, For taxation purposes, we use gross sales or
whether legal or illegal, the government will gross receipts. But understandably of gross
collect tax on the specific income sales and gross receipts must be net of the
discounts.
Q: So if you earn income from drug
pendling. Taxable or not? If the tax rate is multiplied with gross income.
Taxable
Let’s take for example, MCIT, that’s basically
Q: From prostitution? Taxable or not? under the concept of gross income taxation.
Taxable Under normal circumstances, if you are self-
employed or if you are a corporate entity, the
Atty: Of course, it will not declare it as income tax base net income.
from drugs, gambling or prostitution but the
point is source blind. Take note class that what Accounting – net income
is source blind is the income tax—the tax that Taxation – net income/taxable income
will be imposed on the income we do not
include the expense or the allowable deduction Why the distinction? There are certain
to your income because when it comes to a accounting rules that are different from tax
deduction to your gross sales or gross rules. There are some income and expense
receipts, that is strictly being implemented by that you can recognize for accounting
the BIR. purposes but don’t recognize for taxation
purposes. But when there are no complication
Income Tax is a tax on all yearly profits arising on the non-recognizable income or the non-
from property, professions, trades or offices, or deductible expenses, the net income for
A tax on a person’s income, emoluments, accounting should equal your taxable income.
profits & the In reality and in practice, net income from
like. accounting differ from taxable income for
taxation purposes. Which is why we have
Nature: some reconciling item and we will discuss that
1. national as we move along with our discussion.
2. excise
3. direct Passive income distinguished from ordinary
4. general income
5. source blind
Passive income – from the word passive,
Brief historical background: niabot na ang income sa imoha without you
Our tax law is primarily based on the US—the doing anything. It is not the bread and butter of
IRS, until currently, we now have RA 10963 your company. It is not your daily effort or
(TRAIN Law) activity.
Passed December 2017 which took effect on Passive income example: Prizes and winnings
Jan 1, 2018. It is the latest package under the except if panginabuhi na gyud na nimo ang
comprehensive tax reform program of the pagapil ug contest, pwede na pang ordinary . If
government. RA 10963 primarily deals with it is just once in a blue moon, prizes and
personal income taxation winnigns could be considered as passive
income
Income: Return on Capital
Capital received again: Return of Capital;
there is no taxable income to speak of
TAXATION 1 - ARANAS 49 EH 306, A.Y. ’19-‘20
Ordinary income – income you ordinarily incur. Non-Resident Alien Not Engaged in
The bread and butter of your compaby. You Trade or Business (NRANETB)
work for it on a day to day basis
Corporate Taxpayer
Q: Why do we need to determine if it is a Domestic corporation
passive income or ordinary income? Resident foreign corporation
If it is ordinary income, subject to ordinary tax Non-resident foreign corporation
rate. What we will be discussing moving
forward, we will focus on the ordinary or Atty:
regular tax rate but we will spend some Later on when we reach individual income
session discussing about passive income and taxation, we will basically be distinguishing
the passive tax rate. resident citizen from NRA, DC from NRFC.
Because this is the very first thing when it
Passive income is subject to different set of comes to tax compliance—you should know
rate which is primarily collected through the how the taxpayer shall be classified kay mo
means of withholding. matter kung unsa nga tax return ang fill-up
nimo, Mo matter kung unsa nga tax rate ang
One’s income could either be passive, it could gamiton nimo.
also be ordinary. It is not straightforward
ordinary or straightforward passive. It depends When we talk about resident citizen as well as
on nature of the business, it depends on the domestic corporation. I have already
situation. mentioned this with you already RC and DC,
there is a nexus or a bond between the taxing
Example: Interest income authority or tax payer. Which is why a if a
resident citizen or a domestic corporation
Ordinary business is manufacturing, and you earnes income outside the Ph, it will still be
deposit money in the bank, the interest earned taxable here because Ph gov is obliged to
is considered passive income so far as the protect them even if they are outside of the
company is concerned. Because the ordinary country.
business is manufacturing, you are not doing
anything to earn that interest income. NRC, Alien Individual FC = taxable only for
If you are a bank, a financial institution, that income they earn within the Ph pursuant to
interest income is your ordinary income domiciliary theory (their place or residence) or
source rule (if sourced within the Ph)
Prizes and winning
If it is not often, once in a blue moon, you join Ofw or seafarers, as expressly provided in the
a contest or raffle and you won, that is a tax code, even if kadyot lang wa ka ni lapas 6
passive income months, you are taxable only for income you
But if it is your bread and butter, tanan contest earn within (part of the benefit if duly
imong apilan = ordinary income. registered with proper government agency)

General principles of income taxation (pls Diba tig 1 or 2 years man gyud na? the answer
memorize, this came out in one bar exam is yes normally, but therec could be instances
question) when they would not continue their 1 or 2 year
In income taxation, we have different contract, after 2 month, they would go back to
classification of taxpayers. the Philippines. Supposedly kung normal na
RC, not OFW. Income earned abroad should
For tax purposes, a taxpayer could be an have been taxable but because they are
individual taxpayer or corporate taxpayer. recorded as OFW, income abroad not taxable
as it is also part of the privilege of being suc.
KINDS OF TAXPAYER
RC. – within or without
Individual Taxpayer NRC, RA, NRAETB, NRANETB – within
Resident Citizen (RC)
Non-Resident Citizen (NRC) DC- within or without
Resident Alien (RA)
Non-resident Alien (NRA) RFC - within
Non-Resident Alien Engaged in Trade
or Business (NRAETB)
TAXATION 1 - ARANAS 50 EH 306, A.Y. ’19-‘20
OFW – within Gross Income Taxation Net Income Taxation

- Tax base is gross income - Tax base is Taxable income

Seafarer- refers to international services Example:
1. Could be applied to PEZA
Example:
Net income taxation is 30% for the
rendered abroad as a member of the companies because the 5% rate there
is based on the gross income with
corporate taxpayer. The 30% is
multiplied by taxable income
complement of a vessel engaged exclusively selective deductions which are the
direct expenses.
in international shipping. This is not the 2. MCIT

seafarer of cokalion or oceanjet—merely inter-

island boats.
Q: What are the features of Income
Taxation
SYSTEM OF INCOME TAXATION
Individual Taxation Corporate Taxation
Systems of income taxation.
- Usually follow schedular tax system - Usually follows the global concept
TN: was asked in one bar exam - Usually tax rates are progressive of taxation
(from 0%-35%) - Except for resident foreign
- Once it reaches 35% and up, it corporations, they’re entitled to
becomes digressive deductions
Q: What are the different systems of - For individuals earning business - Basically net income taxation for
income, it’s now optional for them domestic corporations and resident
Income taxation and what is the difference reach 0-35% or 8% under certain foreign corporation
conditions.
between the two - 8% based on the gross. NOT
GROSS INCOME but gross
receipts or gross sales, there just
certain deductions. We’ll discuss
1. Shedular Tax System that.
2. Global Tax System - Both follow the pay as you file system.
3. Semi-Schedular or Semi-Global o The moment you file, expected to pay immediately
Exception: if taxpayer is subject to electronic filing and
payment system (EFPS). It is not strictly pay as you file
system because under the EFPS, payment may come
later as long as it does go beyond the deadline.
Schedular Tax System Global Tax System
Example: deadline is April 15, 2020 and EFPS filing
- It depends on the kind of taxable - All income is considered as one ka, and if mo file ka, let’s say for example February,
income that the taxpayer is paying. and 1 tax rate is applicable. pwede ka mo pay April 15. Di na gyud parehas sauna
For each kind or type, there is a - Applicable mostly to corporate atong manual pa na dili dawaton ang filing nimo unless
different tax rate. taxpayer you pay right then and there.
- Applicable mostly to individuals - One tax rate is applicable to all - But in some instances both are subject to the pay as you earn system
- Usually there are different rates for - Basically put all income away o TN that it is also applicable to corporate taxpayer which
different types of income. (naay ni ubo mga mars) subject to is basically pertaining to the withholding tax system.
- For Individual, we must segregate if same tax rate which is 30% The moment you earn that particular income, it will
it is for (naay ni lihok na chair) automatically be subject to withholding tax.
income or for business income

Q: Why there are semi-schedular and semi- SOURCES OF INCOME

global?

Hybrid comes in primarily because of the Sources of income

distinction as to the type of income you are 1.Capital – in a business where your capital
earning—if it is ordinary income or passive would be returned to you (similar to that of a
income, subject to diff rate. loan where the principal amount is returned
to you) you don’t subject that to tax. You only
If it is ordinary income it is subject to a different subject the excess to tax.
rate, if it’s passive income, it is also subject to 2.Labor –
a different rate. This is where the concept of Mao na maka ingon ta na life is unfair for
semi-global or semi-schedular comes in. labor because whne it comes to labor, if you
earn income out of your labor. You don’t
Personal input: I think what this means is that consider the cost of labor. Everything is
the company is to lump all passive income and taxable.
do the same to all ordinary income and subject Mao na sige ingon nako, kung empleyado
them to different rates therefore, it becomes ka, lisod gyud ka madato.because
schedular as it has different tax rates but also empleyado—unsa puhunan nimo? It’s your
global because you group together those labor. So everything you receive, that’s
which belongs to the same group. already taxable income for taxation
purposes. But if you are a business person—
Q: Difference between Gross income negosyo ka, you have capital, naa say labor
taxation and net income taxation ana nga aspect but what is subject to tax is
only the excess of your capital or otherwise
the net. So kung maayo ka mot ago sa
imong excess, wala kay tax bayaran but if
you are an employee, askto man nga
gisweldohan ka, unsaon paman na nimo
pagtago-tago? But
TAXATION 1 - ARANAS 51 EH 306, A.Y. ’19-‘20
3.Both labor and capital agreement, you are to return the 5,000 but
4.Sale of property you have already recorded the income. But
- Sale of land, house. No matter what type you have already reported income, So in
of property-ordinary or capital property. such a case, you would just make
Elements adjustements in yur tax return minuasn
TN: pls memorize nimo ang income nimo by 5,000. But in
practice, i-uli ba gyud na nimo ang
1. there is gain or profit – that which is on excess? DILI.
top of one’s capital. Must be derived from a
close and completed transaction. The rule is that Everything you received
even if it you have not yet delivered, it will
2. The gain or profit is realized or be considered as taxable income. But later
received. Either actually or constructively if you return a certain amount, you make
TN: diri mo come in ang comprehensive the necessary adjustments in your taxable
nature ni taxable income. TN: realized or income
received (not an “and")
Realized: they do not have any 3. Such gain or profit is not exempt under
deliverable. You basically fulfilled your any law or treaty maybe if there is a
obligation provision of law recognizing the taxing of
Received: you just received the money but the income, of course, that is taxable. But if
you have yet to deliver whatever obligation naay nakabutang na exempted, maybe
you have. Once you receive it actually or that’s not subject na to tax (I’m not sure
constructively, that is already taxable. kay nag ubo si atty. In between sentences)

Example. A client comes for your services Important: all of the three must be present. But
and you ask for professional fee and the the tendency of BIR is mo focus man siya ma
downpayment is 40%. The client deposits miss ni niya nga concept that there must be a
for the expenses for 10,000. That gain or profit from the close or competed
downpayment, once you receive that, is transaction.
that already taxable?
This simply means that there must be an
A: yes because you already actually actual transaction. This is not just through
received even if you did not realize it yet. implication
There lies the diff bet taxation and
accounting. Bec for accounting, if u have Example: nasayup ka ug declare sa purchases
not delivered your obligation and you nimo. Na understate nimo ang imong
already received the payment in advance, purchases. Let’s say for example, pagbangga
you do not yet report that as income. But in nila sa purchases, ang Nakita nila the actual
taxation, if you received payment in amount is 1M but ang na declare nimo is 900k.
advance, even if you haven’t rendered there is a diff na 100k. the treatment of
anything, then that should already be underdeclared purchases is they are taxable
considered as taxable income because income. Naa kuno kay savings because when
your received already. you underdeclare purchases, smaller ang
deduction to your income. Naa kay wala gi
If you ask for deposit for expenses. That declare na income. That’s subject to tax
deposit for the expenses before is a grey
area. There was confusion as to its Ug overderlare sad nimo ang purchases or
taxability because one would return it to his expenses nimo, taxable income gihapon
client but it was settled in the time of because nakasave ka sa bottom figure kay ni
Henares and it was consistently upheld decrease ang net income nimo. Acc to them,
that if you receive deposit for expenses, taxable income gihapon.
operating expenses, that is considered as
taxable income deemed received. Why? TN: when we say taxable income, there must
Because constructively, you already have be gain or profit. As a rule, when we say
control. In sum, that is considered as your taxable income, there must be gain or profit
operating expense revenue. from an actual transaction. Closed or
completed transaction.
Diba ang deposit is 10,000 but pag
liquidate, actual expenses is 5,000 So Declared Actual
there is an excess of 5,000. In your Sales xx xx
TAXATION 1 - ARANAS 52 EH 306, A.Y. ’19-‘20
Expense 100 200 taxable income would naturally go higer by
100.
difference: -100
Ang nakapait kay kung na underdeclare ang
Interpretation: there is taxable income income
Why? Kay naa daw kay wala gi declare. naa
kay gitaguan na expense or goods Q: What is the ruling of Supreme Court on
What they (BIR) usually does, instead of that? (under declaration situation: table #1)
ingnon ka ug “oy, dugangi ni ug deduct ug 100 That presumption is not a valid presumption.
because ang actual nimo kay 100 man” Under declaration of purchases or expenses
would not necessarily result to taxable income
Of course, di mo ingon si BIR ana. Why? because kung huna-hunaon nimo class,
Because if increasan nimo to 200, mo ubos nakaginansya na baya ang government kung
imong taxable income. na under declare ang purchases or expense.
Because if you under declare the purchases or
Q: dO YoU fOlLoW? expense, that will lead to higher taxable
income. BIR cannot impute that they were able
Q: What’s the argument? to save due to the under declaration because
There is a diff of 100. Instead mo ingon silage there was no actual transaction there.
dugangi ang deduction nimo of 100 ang iingon
nila “naa kay taxable nga 100.” TESTS IN INCOME TAXATION

Q: Ngano na akay taxable nga 100?

Ang interpretation nila, nakasave man ka kay To further guide us on how to apply these
gi declare nimo 100 instead ang sakto kay elements, we have the so-called tests:
200. Savings kuno on the part of the company
kay nag underdeclare. 1. FLOW OF WEALTH TEST
Q: what is this flow of wealth test?
Q: is there actual gain or profit which will if naa ba gyuy nisulod na resources or kwarta.
be subjected to taxable income? If you did not declare it, then that should still
Implication nga naa kay savings is merely be subject to tax. Even if the wealth comes
based on suspicion. The usual ig-on gyud from illegal activities then it would still be
namo ana to question that assumption. subject to tax
That the gain or profit must be based on the
closed or completed transaction. So unless, This was the principle used in Napoles case.
the BIR can pinpoint that there is a closed BIR said that her net worth (assets - liabilities)
and computed transaction, kay naka earn in one year will be compared to your net worth
ka ug 100 then that’s the time it becomes a the following year. If her net worth this year is
taxable income 1 million and if compared to her net worth the
Declared Actual
following year which is 10 million, there is a
Sales xx xx difference of 9 million. There is already there a
Expense 200 100 flow of wealth. The question now is if she
declared the 9 milllion for taxation purposes. If
a portion of it is not declared, then it may be
subject to tax under the flow of wealth test.
difference: 100
Interpretation: difference is taxable income 2. REALIZATION TEST OR MACOMBER
TEST
Q: Why? Q: what is this test?
Taxable income gihapon because in this case, unless the income is deemed “realized,” there
gi oversate man nimo, so na understate ang is no taxable income. Revenue is generally
income nimo by 100. recognized when both of the ff. conditions are
met:
In this case, if overdeclaration, pwede pa ma a) The earning process is complete or virtually
justify kay gi overstate man nimo imong complete, and
expense, leading to a lower net income. So gi b) An exchange has taken place.
invalidate lang basically ang 100 nga gi
overstate. Once there be invalidation, your S: if you actually received the income from a
closed transaction for example:
TAXATION 1 - ARANAS 53 EH 306, A.Y. ’19-‘20
stock dividends, No taxable income until there Personal input: each shareholder has with
is a separation from capital of something of them 20 shares, the company declares that
exchangeable value, thereby supplying the they have 10% stock dividends, meaning this
realization or transmutation which would 10% will be added to your existing shares.
result in the receipt of income also known as After having received the additional stock
the realization test dividends, no flow of income nor realized
income as the initial and final % shares or
Q: What is a dividend? shareholding remains the same. (refer to
S: the profit of the corporation sometimes they column 3 and 6)
would declare it as cash or as property or
stocks of shares. Q: What are the instances where there will be
taxable income?
Notes: Issued by a corporation to the 1.if the shareholder will sell his/her share to
stockholders let’s say as a share sa net profits a 3rd party or to the corporation. The
ni corporation. It can be a cash dividend, corporation may buy back the shares that
property dividend or STOCK DIVIDEND they sold.
There will be taxable income already
Atty: So meaning to say, if stock dividend ang because ang puhunan niya good for 20
gimention, gi dugangan lang ang raman, unya gibaligya good for 22 na.
shareholdings nimo sa companya. If: naka ginansya siya ug 2 hares.
Receive of Taxable or not? Reason Gibaligya nimo, that becomes taxable
Cash dividend Taxable There is flow of money income.
Property dividend Taxable There is flow of money
Personal input: the stockholders bought 20
shares from the company in the beginning and
If the stock dividend is sold by the stockholder pursuant to their agreement, ni saka ila
to a buyer. Or gipa-ulian niya sa company. number of shares kay agi sa stock dividend na
That stock dividend does not necessarily lead gi add sa ila existing shares. If I baligya nimo,
to an increased ownership in the company. naa na flow of wealth or profit kay nagsugod
Especially if all the stockholders received the ka ug 20 nya pag baligya nimo 22 na ka
same percentage of stock dividend. In shares. So, if you multiply that to the selling
essence, their shareholding remains the same price, the company or the 3rd party will have to
so walay income nga na realize. Following the pay higher for the 2 additional shares.
realization or Macomber test, there is no
income. 2. In one case, the stockholders are made
to choose if they will receive stock
(huhu be prepared mga beshies.) dividend of 10%, cash dividend or
To illustrate: ABC Corporation is a corporate property dividend
entity, so dapat naay shares of stocks.
Stockholders Shares Initial % Dividend Total (shares+ Final % share
shares of choice dividends) or
Stockholders Shares Initial % Stock Total Final % shareholdings shareholdings
shares dividends (shares+stock share (total/ (20shs/100) (total/total)
(20shs/100) (10%*20) dividends) total)
A 20 20% Stock 22 21.15%
A 20 20% 2 22 20% dividend
(10%*20
shares)
B 20 20% 2 22 20%

C 20 20% 2 22 20% B 20 20% Cash 20 19.23%

dividend *remains as 20 because
did not receive any
D 20 20% 2 22 20% additional shares.
Money raman iya gipili

E 20 20% 2 22 20%
C 20 20% Property 20 19.23%
dividends *remains as 20 because
Total: 100 Total: 110 did not receive any
additional shares.
Property dividend
raman iya gipili

So upon receipt of stock dividend, mao ra D 20 20% Stock 22 21.15%

Dividend
gihapon ang shareholdings nila. Pareho ra
gihapon sila ug shares. E 20 20% Cash
Dividend
20 19.23 %

Total: Total: 104

If ibaligya na nila ilang shares, instead of the 100

selling per share multiplied by 20, it will now be

multiplied by 22. If they were to dispose it, Q: What are taxable?
there would be no benefit on the part of the Those who choose cash and property
shareholder. dividends are immediately taxable

Q: Why?
TAXATION 1 - ARANAS 54 EH 306, A.Y. ’19-‘20
Because there is flow of wealth Q: Are these taxable income when the
company distributed stock dividedn to all
Q: How about those who chose stock shareholders.
dividends? Taxable because they earned—na change ang
Still taxable shareholdings.

Q: Why? Q: Whose are the taxable income? (refer to

There is already benefit to the stockholder who final shareholdings)
chose stock dividends. They are earning Shareholders C,D,E
income despite the fact they chose stock
dividends. Kung pangutan-on ka, will there be taxable
(see final shareholdings -pertaining to income? Imo tubag is:
shareholdings or % shares after shareholders Yes, especially for C, D, E because their
chose a dividend) shareholdings increased from 20% to 22%.
Of course for A and B, alkanse pa gani sila kay
Those who chose stock dividends has an na dilute man so wala silay income to speak
increase of 1.15% in their shareholdings while of.
those who chose the other kinds of dividend
received lower shareholding because their Q: kAsABot mO Sa pUNtO?
shares have already been diluted.
GR: if it’s just distribution of stock dividends of
Q: T/F Stock dividend is not subject to income the same % or the same number of shares to
tax all shareholders, following the realization and
It depends. It will not be subject to income tax flow of wealth test, it is not taxable
if all the shareholders received the same
dividends. If naay statement nga all Exceptions:
stockholders are received stock dividends, 1.Stock dividends is issued with some other
then natural they will not be subject to income types of dividends and the stockholders
tax because their shareholdings remains to be are allowed to choose what kind of stock
the same. dividends they are to receive. Definitely,
there could be taxable income especially
But if only a few receive of the shareholders for those opted for the stock dividend
receives stock dividend, then it becomes because this results to the increase in their
already a taxable income. It’s not the entire shareholdings or shares.
amount tho, what is taxable is only the excess. 2.Stock dividend issued is of different
percentage, different number of shares per
The 20% is the capital while the 1.15% shall stockholders, those who received more
be considered as flow of wealth therefore, only could have taxable income.
the 1.15% shall be taxable.
No computation, if ever there is, it would be
Q: dO YoU fOlLoW? very simple. 1 share each 5 shareholders then
1/5
Q: ABC Corporation distributed: (pls see stock
dividend distributed column) Atty: Now let us go to the 3rd type of test

Share
holders
Shares Initial %
shares (shs/
Stock
Dividend
Stock dividends
(Stock dividend
Total shares
(shares+stock
Final %
share (total
3. ECONOMIC BENEFIT FLOW OF WEALTH
sum) Distributed distributed x 20)
*atty didn’t follow
dividends) shares/sum) REALIZED
through with
normal

S: Under Economic Benefit the flow realized is

computation kay
murag nalibog ta
ug nawng basta
supposedly, you are
to multiply taxable only insofar as the taxpayer is
distributed
dividend
percentage to the
economically benefited
number of shares of
each shareholder

A 20 20% 10% 2 22 16%

Q: What do you mean by that?
S:
B 20 20% 20% 5 25 18%

C 20 20% 25% 10 30 22%

Q: What is a Stock Option
D 20 20% 25% 10 30 22%
A: Your company/employer is giving you the
E 20 20% 25% 10 30 22%
opportunity to become an owner of the
sum:
100
sum: 137 company if you exercise the option kay option
TAXATION 1 - ARANAS 55 EH 306, A.Y. ’19-‘20
man na class, you have the opion to exercise evasion ba. When your properties and your net
and not to exercise. worth are compared in a specific period. The
main or overall effect is you have unexplained
In ABC Corporation. It is common among key wealth.
management personnel. Buhaton na nila to
prevent the poaching (kanang mo balhin ra Q: can that wealth be subject to tax?
diritso kanang mga CFO, given naman na nga Yes, it is the usual treatment of BIR against tax
stockholder. Even mga managers) evaders.

Q: When do you exercise stock option? Moral of the story: kung dato mo, masmaayo if
A: Ang companya man gyud class, especially if magpa low key lang mo. Mao na gibuhat nila
it’s a listed company, it’s shares are listed in Napoles but ilang mga anak wala na briefing.
the Philippine Stocks Exchange and has daily Makita sa ilang Instagram nga lag didto, lag
buying and selling of grade. Usually makit-an dinhi unya hagbong diay to sa skwelahan. So
sa newspaper, sa business section. Mosaka or aha man na gikan ang kwarta? So applying
mo ubos na ang shares. the Net Effect test there is something that is
hidden.
Stock Option is a simple piece of paper and
the corporation is to give to Jan Ross the
option to purchase a given amount at a 5. CLAIM OF RIGHT DOCTRINE
predetermined price. So as an employee of a Atty: This is an interesting Doctrine.
listed company, you will monitor the PSE and if
the price would increase, you could exercise Q: What is this?
the option and buy it at a lower price. S: What is examined is the ownership of the
person so pertains to the right of the person to
Personal input: So kaning stock option, naay collect the claim of his/her ownership?
gisabutan nga presyo nga pwede nimo ma buy
ang shares of stock (lezz call it ZZZ stocks) in Q: Is it actual ownership or mere exercise
the future. So if in the future, kung imo i- of ownership?
compare ang stock price ZZZ stocks based sa exercised or control
PSE nga ibutang sa newspaper nya
masbarato ang gi-agreehan ninyo sa Q: Kato kinawat? Subject to tax?
company, pwede ka mo exercise sa imong Usual claim of the corrupt: No income (natural
right to buy from the company as expressed in kay kinorupt man) wala gihagu-an walay
your stock option. capital, walay labor; therefore, no taxable
income.
Q: if gi exercise na nimo, naa kay income
wala? Let’s say its selling price in the But according to the Supreme Court: if it’s
market runs at P100 but it’s only priced at a product of embezzlement, a product of
50 in your stock option. theft or you exercise ownership over it,
A: There is already savings of 50. So when claiming a right over it—it is subject to tax
you exercise it, there is income under the claim of right doctrine.

Q: if wala nimo gi exercise? Of course, in the other equation, if you are not
A: There shall be no income to speak of claiming any right out of it kay gihalaman or gi
because there is no economic benefit because lease lang na nimo, then it should not be
all you have is a piece of paper that embodies subjected to tax.
the shares of stocks at a predetermined
amount at a future date 6. ALL EVENTS TEST
Atty: Most famous test used by SC in cases
4. NET EFFECT TEST OR NET WORTH resolving if the transaction is taxable or not.
TEST
Q: What is this? Q: What is an all events test?
S: Applied when there is confusion between 1) right to collect the income or an obligation
gain and profit, it is used to look at the entire on the
substance of the transaction, not necessarily other party to pay the same
the wording of the transaction 2) the amount if liquidated/certain

Atty: If dili gyud klaro kay in the first place you *I just copied from the notes coz Mr Velasco’s
don’t have any report, wala ka nagfile— voice was inaudible.
TAXATION 1 - ARANAS 56 EH 306, A.Y. ’19-‘20
Q: The company gave you a watch on you
Q: What are the things we need to see here 10th year of Service. Will that be considered
in order to apply this kind of test? as taxable compensation?
1 Amount must be liquidated Yes
- Must be determined. No more issue on
how much is the collectible amount. 2. gross income derived from conduct of trade
2. You already have the right to collect or business
- applicable to both individual as well as
Atty: Under the all-events test, it will already be corporate taxation
taxable if the two concur. It is also related to 3 gains/income derived from dealings in
Macomber test basically na accrue na ang property
right sa imoha. You have already delivered the - pertains to the so-called ordinary
obligation and agreed on the amount that will property. Later in we will be discussing
be paid but you have not received anything. about capital asset or property and will
be subject to a different rate of tax and
Q: Could that be declared as income? will not form part of ordinary income
Yes, kung tan-awn nimo when it comes to tax.
income taxation it is comprehensive because 4. interest
sa accounting man gud diha gisukod* ang - ordinary income
accrual or tax basis but in taxation saksak - Could be passive depending on nature
sinagol kung naa kay nadawat bisag wala pa of business or nature of transaction but
kay nadeliver, received, taxable pero kung could also be ordinary.
wala kay nadawat pero nakadeliver, kung wala - If it is passive income, you will not add it
kay nadawat pero nakarender na ka ug service here *I’m not sure where “here” is,
that is already realize so taxable. probable pertains to income kay
*wa ko sure if that’s the right word inclusion of income man?*
5. rent
You received something but you have not yet 6. royalties
delivered = received = taxable 7. dividends
You haven’t received anything but you already 8. annuities
delivered = realized = taxable 9. prizes and winnings
- if it is passive because you seldom win
Usual mo gawas ana class kay ang all-events *not sure if this is the right word*, it’s
test. If ang all-events test ang ipa explain sa not really your work, then you do not
inyoha, katong duha ka factors nga gimention add it here
ni meloujane, you should be able to cite that 10. pensions
because that’s how the SC explained the all 11. partner’s distributive share from the net
events test. income of the general professional partnership

#4-10 must be ordinary income because they

INCLUSIONS TO GROSS INCOME can also be passive.
1-3 given na ordinary
Q: what are the inclusion to gross income? These eleven, added to your gross income
You have to memorize this because this is ordinary income, these are the income that
where our discussion will revolve until the you will report in your annual tax return.
very end of your life
This list is not exclusive. This is only for our
1. compensation for services rendered in guidance, as we have discussed earlier
whatever form income tax is source blind. Apil pa gani ang
Atty: In labor law you have learned that income nimo from illegal activities I sulod nimo
compensation must only be monetary OW it sa income from trade or business kay income
will be considered as invalid. man gihapon na, illegal lang. or exercise of
But for taxation purposes, it being profession, profession baya gihapon na, mag
comprehensive. Even if you received training baya gihapon ka para makaperform
something in kind pursuant to ee-er ka.
relationship that will be considered as taxable
compensation. (continuation of discussion on what constitutes
gross income CG2IR2DAP3 )
TAXATION 1 - ARANAS 57 EH 306, A.Y. ’19-‘20
The Inclusions we discussed are ordinary taxation purposes, we don’t limit lang on the
income as distinguished from passive income monetary amount received by the employee
as passive income is subject to a different tax but also on the gifts received by the employee
rate, different tax return. Diba CG2IR2DAP3 pursuant to an EE-ER relationship. It’s taxable
man to diba? So you have interest, rents, and to declare that for taxation purposes, we
royalties, dividends, and annuities. look at the cash equivalent of the thing
received from the employer. Mao na we apply
For interest, let’s say for example, if you are the what we call “the Cash Equivalent
not into financing, rent is passive. But if you’re Doctrine”.
into financing business or banking business,
then that’s ordinary. Cash equivalent doctrine. This is applied if
an employee receives compensation in kind
Rent. If it’s just casual rental, it’s not your main pursuant to an EE_ER relationship. So what
line of business, pero usually main line of will be declared for taxation purposes is the
business man gyud na. So if you are into equivalent market value of the property
renting out or leasing, that’s ordinary. received by the EE.
Royalties. If you’re not into franchising, you’re Q: Kung other than the basic salary, hatagan
not into developing a particular product para nimo ang empleyado nimo og balay or
ma-available in the counter for sale, then, sakyanan or laptop, is that taxable
royalties is passive. Pero if you are into compensation?
franchising, you are developing this product to
market later on and you get something from Ans: Yes, because it has something to do with
the licensing for it later on, then that becomes the ER-EE relationship
ordinary income.
TN: Section 78 of the NIRC. Four instances
Dividends. If you’re not into investing gyud, where there is NO legal withholding
you’re not into stocks, you’re not a dealer or a (exempted):
(inaudbible) company or Investments
Company, dividends is passive. But if you’re (1) For agricultural labor paid entirely in
an investments co., broker, dealer, etc., you’re products of the farm where the labor is
into stocks exchange then it becomes ordinary. performed, or
(2) For domestic service in a private
Prizes and winnings. home, or
(3) For casual labor not in the course of
Annuities and pension. It is covered if it is the employer's trade or business, or
already part of the operations of business. (4) For services by a citizen or resident
Kung naa kay employees, naa kay pension of the Philippines for a foreign
fund, (inaudible) there is a portion that is government or an international
declared as taxable income. There is also a organization.
portion that is exempted.
Partner's distributive share from the net Kani, sa NIRC. Lahi pa ang sa special law. Sa
income of the general professional special law, katong Minimum Wage Act, that’s
partnership. That’s an ordinary income. a given wherein minimum wage earners,
they’re not subject to tax. Therefore, they are
not subject to withholding tax on
compensation. Other than that, we have these
Sec 32 (A) four where there is no withholding.
1. Compensation for services in TN: The fourth one is just the general law.
whatever form paid, including, but We still need to look at the charter or the treaty
not limited to fees, salaries, wages, covering that special organizations. No
commissions, and similar items problem for foreign embassies and diplomatic
For compensation income to form part of the missions. Given gyud na exempted sila. But
gross income, it refers to remuneration for for international organizations, there are some
services by an employee in an EE-ER international organizations nga sa treaty nila,
relationship. Your source here is not capital but ang gina-exempt lang kay only the foreign
your source of income is labor. And when it employees, not covering the Filipino
comes to remuneration, it could be monetary employees. Kato ra, we follow that because
or it could be non-monetary or in kind. Sa that is more specific as compared to this
labor, you learned there that a salary must be general provision. Again, the compensation
paid in money otherwise, it is illegal. But for
TAXATION 1 - ARANAS 58 EH 306, A.Y. ’19-‘20
includes the cash value of all remuneration Q: What’s the manner of collecting tax in
paid in any medium other than cash. compensation? How does the government
collect tax on your compensation?
“Exclusionary threshold” or “Exclusionary
rule” When it comes to taxation, the Ans: Through withholding.
compensation of an employee, we have
thisrule. Meaning to say, basta dili mulapas ani Q: Who withholds the tax:
nga threshold, ang additional benefits nga Ans: The employer
gihatag nimo sa empleyado nimo, you will not
be subject to tax. So longevity pay, 13th month Kay i-withhold man ni employer, deduct-an ang
pay, hazard pay, and other benefits, shall be sweldo. The primary method of collecting tax
excluded from compensation income if it does from compensation is withholding by the
not exceed 90k effective 2018. Ang i-include employer. This is what we call as creditable
lang sa compensation is the excess of the 90k. withholding. Later on, we will distinguish
Before it was 30k, then increased to 82k, now CWT from FWT. Kaning FWT more applicable
it’s 90k. Pasabot ani, basta di ka minimum nip ag passive income kay ang passive
wage earner. Kay kung minimum wage earner income kay (inaudible) transaction man na.
ka wan a man nay lalis gyud. Exempted na Kani, ordinary man na, ang term, creditable.
man ka from income taxation. Kung di ka Exception where there is no need to
minimum wage earner, and you’re receiving withhold because exempted sila from income
these basic salary (inaudible), kanang basic taxation in the first place is if the employee is
salary nimo taxable na. On top of that, if you’re employed by foreign embassies, diplomatic
receiving other benefits, di ban aa may 13th missions, and certain international
month pay, naa kay hazard pay, tan-awn pila organizations with exemption from taxation
ang total nganha og dili na mulapas 90k, then (eg. UN, WHO, JICA, Red Cross) if they work
walay tax. Kung nay sobra, like ang total nga here in the Phils pwede i-subject to tax. There
nadawat nimo is 120k, so nay sobra nga 30k. are certain rules on that and is being
Ktong 30k, mao lang to i-add sa basic summarized in the RMC 31-2013. This RMC
compensation nimo and subject to tax. basically has 2 major parts. The first part talks
about exemption of employees of foreign
Backwages, allowances and benefits embassies and dimplomatic missions. The
awarded in labor disputes, ang rule ana is second part talks about exemption of
subject to withholding tax in compensation. employees of international orgs. Lahi-lahi ang
Q: What’s the nature of backwages? exemptions. For examination purposes, focus
on the more famous orgs (UN, WHO, ADB,
Ans: When the EE sues the ER, it is the JICA). Kay naka-specify man adto kinsa ang
amount that should have been paid to the exempted: ang foreign employees ra ba, or
employee during the pendency of the suit; Filipino employees, or both.
amount that the EE had not been given when
he should have received it. Distinguish from Fringe Benefits. In
individual income taxation, we will be
Basically that’s your sweldo unta if it had not discussion about this fringe benefits. These
been that you were not illegally terminated. are the additional benefits given by the
Kay sweldo man gihapon na nimo supposedly, employer to an employee who is occupying a
you apply the appropriate tax rate. Per supervisory or managerial position, but not to
experience nako sa NLRC, withhold-an man rank-and-file employees. Rank-and-file
na nila. employees can still receive benefits but insofar
as the tax code is concerned, it’s not strictly
Q: How about awards for damages for some termed as fringe benefit.
cases like mga moral damages, nominal
damages, especially cases involving torts, is it Q: Nganong kinhanglan man nato i-distinguish
taxable? kung kinsa ang recipient benefit?
Ans: It is not, so long as it is considered Ans: Because if the recipient of the benefit is a
compensation for the death or the injuries supervisory or managerial employee, that is
sustained by the taxpayer. BUT if it is actual called a taxable fringe benefit subject to fringe
damages for loss of profits on breach of benefit tax. Whereas if the recipient of that
contract cases, that portion is taxable. WHY? benefit is a rank-and-file employee, there is no
Because that’s supposed to be a taxable profit fringe benefits tax.
kung wala lang na-breach ang contract. Kay
nidaog man ka, it becomes realized profit. Example:
Taxable.
TAXATION 1 - ARANAS 59 EH 306, A.Y. ’19-‘20
Manager ka. Diba sa labor code, kung sources (like when you have business
manager ka, wala man ka aning mga OTP, abroad, and you get income from converting
premium pay. But if you’re rank-and-file, you foreign currency to peso).
have them. There are some employers ngato
encourage their executive officials, para maka- In service enterprises, your gross income there
attract og executive officials,they provide is the difference of the total receipts less
benefits. For example, hatagan nila og balay the direct cost and expenses. When we talk
sa employer nimo. Supposedly, part of your of direct cost and expenses, these are
compensation na subject to tax based on the outflows you declare for the generation they
value of the house. But under the law, there is receive or generation of the client.
a distinction with the recipient, if manager or Examples of direct costs and expenses
rank-and-file. If manager, that’s termed as (depende sa kungunsa ka nga service
fringe benefit subject to fringe benefits tax. enterprise) RMC 4-2003 as amended by RMC
Mas dako ang fringe benefits tax—35%. Per 30-2008 *
kinsa ang mu-shoulder sa fringe benefits tax?
It’s the employer. That’s part of the perk of Q: Why do we need to determine the gross
being a supervisor or manager. income?
Whereas kung ang nidawat sa balay is a rank- Ans: Because we have the gross income
and-file employee, that’s part of the taxation. For gross income taxation purposes
compensation subject to tax. Kinsa ang mu- ang pag-apply sa 2% MCIT. Kung sayop ang
bear sa burden of the tax? It’s the employee, pag-compute nimo sa gross income, sayop
not the employer. gyud ang pag-determine nimo sa MCIT. If
you’re not subject to MCIT, not much of an
Compensation vs Fringe Benefits issue.

Compensati Fringe b. Professional income (for lawyers,

accountants,etc.)
on Benefits
This is more for individual taxpayer rather than
Applies to: Rank-and- Supervisory corporate taxpayer. The fees received from
f i l e a n d professional by the practice of profession,
provided there is no EE-ER relationship, is
employees managerial considered as gross income from the from the
positions exercise of profession.

Subject to Income tax F r i n g e These are who we call as the self-employed

individuals. Kung corporate taxpayer, mao sad
what tax: benefits tax ni ang usual proceeds ni corporation.
Who bears Employee Employer
ORDINARY ASSET V. CAPITAL ASSET
the burden
of paying
the tax
3. Gains derived from dealings in
property

2. Gross income derived from the This is where the distinction of ordinary asset
conduct of trade or business or the vs capital asset comes in. When it comes to
exercise of a profession inclusions from gross income under Sec. 32, it
must be a gain from dealing in property
To Compute the gross income from: classified as ordinary asset, not capital asset.
a. Trade or business we have the case Sec 39 (1) Capital Assets. - The term 'capital
of (inaudible). assets' means property held by the taxpayer
(whether or not connected with his trade or
For manufacturing, merchandising, or mining
business), but does not include stock in trade
business, that’s the difference of total sales
of the taxpayer or other property of a kind
less cost of goods sold PLUS other income
which would properly be included in the
from other investment or from incidental

* paki-check nalang ang RMC guys kay medjo taa-taas siya

TAXATION 1 - ARANAS 60 EH 306, A.Y. ’19-‘20
inventory of the taxpayer if on hand at the condominium unit, that’s (inaudible) primarily
close of the taxable year or property held by of your sale, right? But you also own an
the taxpayer primarily for sale to customers in administrative building. That building is used
the ordinary course of his trade or business, or for administration purposes. That could still be
property used in the trade or business, of a ordinary asset because it is used in trade or
character which is subject to the allowance for business.
depreciation provided in Subsection (F) of
Section 34; or real property used in trade or The fourth instance “real property used in
business of the taxpayer. trade or business of the taxpayer: applies if
you’re habitually engaged in the sale of real
Ordinary asset: properties. Ganus-a ma-consider nga
habitually engaged?— If there are sale
1. stock in trade of the taxpayer or other transactions exceeding 6 transactions in one
property of a kind which would properly taxable year. In this case, ordinary asset na
be included in the inventory of the siya and the gain there is ordinary.
taxpayer if on hand at the close of the
taxable year; or Importance of distinction:
2. property held by the taxpayer primarily If it is ordinary asset, it means normal business
for sale to customers in the ordinary of selling or using these assets. Ang income
course of his trade or business; or tax nimo normal—0% to 35% og 30%. Is that
your only tax liability? No. You can also be
3. property used in the trade or business, subject to business tax because you have a
of a character which is subject to the business man.
allowance for depreciation provided in
Subsection (F) of Section 34; or If it is a capital asset, those nga wala naapil sa
4 instances sa Sec 39—does not form part of
4. real property used in trade or business your stocks in trade, not primarily held for sale,
of the taxpayer not subjected to depreciation, not used in trade
- Applies if you are habitually or business, that becomes a capital asset. If it
engaged in the sale of real is capital asset, there is a different tax rate
properties applicable to it and there is no applicable
business tax kay di man ka engaged in the
- Considered as habitually business of selling or using these assets.
engaged if if there are sale
transactions exceeding 6 Q: Is ordinary income subject to withholding
transactions in one taxable tax?
year. Ans: Yes. Magkuyog na. Basta subject ka to
- income tax, you can be subject to withholding
tax. Kung di ka subject to income tax, dili ka
If you sell out that property as an ordinary subject to withholding tax.
asset, the gain or the profit (selling price-the
cost of the property), is subject to the normal Withholding tax is not a type of tax. Rather, it’s
tax—for individual (0%-35%) and for just a manner of collecting the income tax by
coporation (30%). withholding the tax. When you’re asked, is this
subject to withholding tax, ang imo ipangutana
BOTTOMLINE: Basta kana nga property nimo is “Is this an income subject to income tax?” If
recorded under the financial statement as a yes, then by all means it would be subject to
property of business, even if you’re not using withholding tax.
it, that is considered as an ordinary asset.
Kung capital asset na siya, it’s not subject man
Q: What if di namo ma-determine kay dili mao to ordinary income tax, so it’s not subject to
ang gihatag? withholding tax.
Ans: You can look at the nature of the Example: Your business is into manufacturing
business of the taxpayer. If the taxpayer is into of buwad. And then you closed out your
real property leasing or dealing, all the real business. Ibaligya nimo ang factory nimo. Is
properties which are owned by this enterprise your factory an ordinary asset or capital asset?
are considered ordinary assests. Dili lang ang
primary (inaudible) for sale. Dili lang Ans: It’s ordinary asset because it’s used in
(inaudible) but also those used in business. trade or business. It’s subject to ordinary
Let’s say developer ka. You’re developing this income tax, to withholding, subject to VAT.
TAXATION 1 - ARANAS 61 EH 306, A.Y. ’19-‘20
Ang mga negosyante in practice, they want Capital Asset:
that their property be classified as capital asset
kay mas gamay man ang tax basta capital Although our illustrations are real properties,
asset as compared to being classified as they’re not only limited to real properties. If you
ordinary asset. sell your capital assets higher than the cost,
then you gain capital gains. The capital gains
If there is a sale of land, you have to classify if tax depends on the type of capital gain.
it’s an ordinary asset or capital asset. Dili man
mu-matter ang acquire. Ang mu-matter sa BIR a. Real properties
kay ang current use or non-use of the Capital Gains tax:
property. If it’s part of my inventory, if I use it in
business, then akong i-sell, then that’s an Rate depends on what type of capital gain.
ordinary asset insofar as I am concerned even
if si buyer gamiton na niya as a residential Sale of real property located within the
house—factory himuon niyang residential Philippines- 6% based on the selling price
house, it doesn’t matter. It’s still ordinary asset. or fair market value of the real property,
whichever is higher
If kanang factory, ordinary. Unya si buyer
gihimo niya’ng residential property, unya si So imagine 6% vs 35% ig baligya ninyo sa
buyer 1 gibaligya niya ni buyer 2, that now property.
becomes a capital asset. Dili mu-matter an Ex: Ordinary asset:
intention ni buyer. Ang mu-matter kay ang
current use or non-use sa property. Value- 10M – (35%+ 12%)
Q: If used in trade or business, unsa’y pwede Capital Asset
buhaton para ma-convert siya from ordinary to
capital legally? Value: 10M – 6%

Ans: There is a provision in regulations issued This could be part of estate planning. Usually,
by the BIR that if an asset remains idle, or some don’t want to pay estate tax. Ang
unused for more than two years, you can have buhaton nila, maghimo sila’g corporation
it converted from ordinary to capital. But there isulod nila ang yuta didto sa corp. para
is a need for you to apply for a ruling from eh igkamatay sa parents, walay estate tax
Bureau and part of that requirement is the bayaran.Okay to sauna kay dako man ang
certification from the Barangay that such estate tax pero karon estate tax is only 6%.
property is not being used in trade or business. Kung buhaton pa nimo na nga arrangement,
If ganahan ka capital asset para mubayad og that may not be very sound especially if the
lower tax, have it declared. But it takes time. corp is just for landholding nga dili nimo i-
develop and venture into business utilizing the
Q: What if I use it for both residential and for real property. Kung nasulod na sa libro sa
trade or business? corporation, that’s already ordinary asset even
if you’re not using it.
Ans: Look at the declaration. BIR looks at the
classification insofar as the assessor is If ouside of the Philippines ang real
concerned because for the assessor, that property nimo, it’s not subject to 6%. If
could be considered entirely as commercial resident citizen ka, taxable man ka sa income
building. If in your tax declaration, there is an nimo within. Peroif naa kay balay sa Japan,
indication that that is a commercial building, unya gibaligya nimo ang balay didto,
even if ang 4th flr gigamit as residential, that residential, so capital asset. But even if it’s
wouls be treated as entirely commercial by the classified as capital asset, this is not subject
BIR. to capital gains tax because it’s outside the
Philippines.
The second one is even if muingon ka nga
partly residential ni, but the entire thing is Q: In the situation above, libre na’s tax?
depreciated, gi-record sa financial statement
nimo nga and entire building gi-subject nimo to Ans: Dili kay taxable man ka within and
depreciation, insofar as the BIR is concerned, without (referring to resident citizen) Pasabot
the entire property is for commercial and lang, ang proceeds lang sa property nimo
therefore ordinary asset. located abroad will just be declared in your tax
return as ordinary incomesubject to the 0-35%.
If corp ka unya naa kay property didto,
recorded lang as ordinary subject to 30%.
TAXATION 1 - ARANAS 62 EH 306, A.Y. ’19-‘20
Selling price (SP) or fair market value (FMV) b. Considered as capital gain,
subject to CGT
Even if ang gibutang nimo nga SP is P1 but
the FMV determined by the BIR is 1M, i- CGT- 15% of the net capital gain
multiply ang 1% sa 1M. dili sa P1. Under this
scheme, even nga i-underdeclare nimo ang Net Capital Gain- (selling price- cost of
selling price, it’s not an issue kay i-apply man acquisition of the shares of stocks)
ang 1% to whichever is higher. Computation of CGT (shares of stocks)
Computation of CGT (real property) Listed but not traded OR Not listed and not
Example: traded in the stocks exchange

Real property classified as capital asset SP- 10M

FMV- 20M
SP- 10M Cost- 5M
FMV- 20M
Cost- 5M CGT= 15% x (10M-5M)
CGT= 750k
CGT= 6% X 20M
CGT= 1.2M In this example, iyang gibaligya at a discount.
Ang FMV is 20M but ang SP is only 10M.
In this case, even if the SP is lower than the There is a difference of 10M. This difference of
FMV, it’s not deemed gift by the BIR because 10M could be deemed gift. Insofar as the BIR
the CGT is computed based on whichever is is concerned, ang interpretation niya ana
higher between the selling price and the fair nihatag ka og gift by selling it at a discount.
market value.
Q: Subject ba ni to tax?
b. Shares of stocks
Ans: Yes, but not income tax. It’s subject to
There are three kinds of shares of stocks: donor’s tax. Excess of the fair market value of
the shares over the selling price of the
1. Listed and traded in the stocks consideration shall be subject to donor’s tax.
exchange
c. Sale of other capital assets
a. Shares of stocks are treated
ordinary kay listed so didto ra These are your personal properties that you do
nimo i-baligya sa stocks not use in business.
exchange
Example: laptop, cell phone that you use
b. Not subject to CGT personally and not issued by the company
c. Subject to Stocks Transactions
Tax (STT). It’s a type of
percentage tax. If it’s SITUS OF INCOME TAXATION
(inaudible), there will be a
different declaration for income
taxation purposes as ordinary Ang gidiscuss before kay situs of taxation,
income. karon kay focus ta sa situs of income or the
place of income.
2. Listed but not traded in the stocks
exchange Why do we need where the income was
a. Over-the-counter gipangbaligya generated?
- for us to know properly whether it is subject
b. Considered as an isolated to income tax or not.
transaction. Therefore,
whatever gain you earn is 1. Compensation income
capital gain. 2. Business income
3. Income from Sale or Exchange of
c. Subject to CGT Property
3. Not listed and not traded 4. Interest Income
5. Rent Income
a. Commonly found in family 6. Royalties
corporations. 7. Dividend
TAXATION 1 - ARANAS 63 EH 306, A.Y. ’19-‘20
8. Annuities Letter C is challenging, ngano man? Diri
9. Prizes and Winnings gimanufacture, sa gawas gibaligya. When it
10. Pension comes to regulation, when it comes to
11. Professional Income of professional monitoring, it is quite difficult. Mau nang unsa
partners man ang gi igo nila nganhi? Gi igo nila diri ang
mga incentives. Manufacturing here in the
Philippines generate employment so para dili
Ang uban ani nadiscuss na when we na maglabad labad ang gibuhat ni government
discussed situs of taxation kay they have the incentives, the PEZA. Ang
buhaton nalang ana nila, minimal amount of
Compensation income income tax ang i-collect. Diri sad sa letter C
• Place where the services is or are rendered, musulod ang concept of transfer pricing.
not the place of the customer. Mau na ang Usually ang mga manufacturing sa Pilipinas,
BPO industries, compensation of their naa jud silay parent or marketing armed
employees, even if ang customer nila is from abroad. What they will do, ishift nila ang
the abroad, the compensation of the BPO production or manufacturing diri sa Pilipinas.
employees is still taxable here in the But when it comes to the BIR, ang tan awon ni
Philippines because the service is rendered BIR is the independent or arms length
in the Philippines. transaction. Kung between parent and
subsidiary, really, wala silay profit na i-record
Business Income kay at cost man na paliton sa gawas. In that
• A bit complicated because there are different situation, alkansi ang Pilipinas, mau na si BIR
types of businesses. lay down transfer pricing rules. Ingon si BIR,
• Simple if tan awon but in practice it becomes kung ing ana ang situation ninyo. You
complicated specially if the company have manufactured here in the Philippines, i-ship ra
several branches and there is a need to na nimo abroad, you should still record a
consolidate the income tax. certain amount of profit based on certain
• Ang nakanindot ra diri kay lahi ang situs ni amount of profit based on industry or market
income, lahi sad ang situs ni business, you entities.
will learn that in VAT.
Example: sa market industry, ang usual profit
Merchandising, Farming, Mining ana, dili related, is 10% so the company
- Place where the business is should also record a profit of at least 10%
undertaken. even if gideliver ra na niya to parent company
or marketing armed abroad.
Manufacturing
a. Goods manufactured and sold within This is for income tax ha, not for business tax.
the Philippines — income derived For business tax, specifically for VAT, I think
purely within. we mentioned the cross boarder doctrine na
b. Goods manufactured & sold outside kung mugawas ang goods outside of the
the Philippines — income derived Philippine territory, we do not subject it to VAT
purely outside. because it will be consumed outside of the
c. Goods manufactured within the country, but that doesn’t mean na dili nato siya
Philippines and sold outside the i-subject ti income tax. Ngano man? Diri man
Philippines — income partly within and siya sa Philippines gimanufacture.
partly without.
d. Goods manufactured outside the
Philippines and sold within the Income from Sale or Exchange of Property
Philippines — income partly within and
partly without. a. If it involves personal property: the place of
the sale
For manufacturing, it depends. You need to b. In the case of sale of transport documents
distinguish asa gimanufacture and sold. Why (e.g., bill of lading, airway bill, etc.): the
do you need to distinguish? Because as you place where the transport document is sold
very well know we have manufacturing zones, c. If it involves real property: the place or
we have economic zones. Ang nahutabo diri, location of real property
they will just manufacture it here but the selling
is being done outside. So, kinahanglan ta
mushare on the proceeds.
TAXATION 1 - ARANAS 64 EH 306, A.Y. ’19-‘20

Interest Income
Annuities
Tax Situs: residence of the debtor/borrower
Tax Situs: place where the contract was made
In other words, if the creditor is a foreign
corporation and the debtor is a Filipino citizen Prizes and winnings
residing here in the Philippines, then the
debtor must withhold the amount of tax upon a. If on the account of services rendered: place
payment to the creditor. where the services where rendered
b. If not on account of service rendered: place
where the same is given
Rent Income
Pension
Tax Situs: place where the property
subject of the contract is located Tax Situs: place where this may be given on
account of services rendered
TN: There is no qualification whether the
property subject for lease or rent is a personal Professional Income of professional
property or a real property. partners

Royalties Tax Situs: place where the exercise of

profession is undertaken
Tax Situs: place where the intangible is
used
EXCLUSIONS FROM GROSS INCOME
Dividends

Received from a domestic corporation: that is Exclusions - These are still flow of wealth, but
income purely within we do not subject it to tax. Either because dili
siya musulod sa elements of taxable income or
Received from foreign corporation outside the even if musulod siya sa elements of taxable
income of the foreign corporation in the income, there is an expressed provision under
Philippines during the last preceding 3 taxable the constitution or under the tax code
years, the following rules shall apply, to wit: exempting jt from income taxation.
• The income is purely within if the income
derived from the Philippines is more than 85% We focus this time of the exclusions under the
• It is purely without if the proportion of its Statute. These are exclusions are provided in
Philippine income to the total income is less the tax code not exclusions as provided under
than 50% the Constitution.
• There should be an allocation if it is equal to
50% to 85% of the foreign corporation’s Example 1: Exclusionary threshold of P90,000.
income is derived within the Philippines When you received that benefit, there is an
(insofar as the dividend is concerned) inflow but because there is an expressed
provision na dili pa-tax-an ang up to P90,000
Unsa man diay style if foreign corporation? then we will not subject it to tax.
They avail of the exemption in the treaties. Ang
buhaton, tax treaty relief application. Example 2: Minimum wage earner ka, there
still a flow there, there is an income, but it is
Example: A foreign corporation which is based not taxable income because thee is an special
in the US and it has 85% of operating here in law exempting it from taxation.
the Philippines but the one earning the
dividend is an american citizen, that could be Make sure you’d be able to distinguish
covered by the treaty provision. Ngano man? exclusions from deductions.
Taga gawas ang nag-issue, taga gawas ang
nagreceive, it is just na naa diri ang operation. Deduction- These are outflows, expenses that
Of course, kung dili ka mu-avail, pwedi ka tax- are allowed by the tax code to be claimed for
an. Kung pinoy, definitely that is taxable. the computation of the net income.

Example: Business expenses, rent expenses,

salaries with your employees.
TAXATION 1 - ARANAS 65 EH 306, A.Y. ’19-‘20
• This does not necessarily covered life
Exclusions from Gross Income insurance. It could be life, it could be non-
1. Life Insurance life.
2. Amount Received by Insured as Return of • If it is just a return of premium then it is
Premium excluded.
3. Gifts, Bequests, and Devises
4. Compensation for Injuries or Sickness. Amount Received by Insured as Return of
5. Income Exempt under Treaty Premium. - The amount received by the
6. Retirement Benefits, Pensions, Gratuities, insured, as a return of premiums paid by him
etc. under life insurance, endowment, or annuity
7. Miscellaneous Items. contracts, either during the term or at the
maturity of the term mentioned in the contract
or upon surrender of the contract.
Life Insurance
• TN: What is excluded here is the return of
A: Why is this excluded? premium still related to your life insurance and
S1: Because the recognizes that life is not just any other type of insurance
priceless. The proceeds of the life insurance
only takes effect upon the death of the insurer.
A: So, it is basically indemnity for the life or Gifts, Bequests, and Devices
the loss that you suffered. Because it is
priceless, dili jud ka makaingon na mau ra Why is this excluded?
ni ang value sa life niya nya ang nadawat - It is excluded because it is already subject
nimo ang excess or income. But are there to donor’s, transfer or estate tax. The reason
instances that the life insurance will be for this is that it is a rule under the Tax Code
subject to tax? that no taxpayer will be subjected to two
S1: Yes. Example would be if an insurer sells direct taxes at the same time. Take note that
his insurance to other person. donor’s, transfer and estate tax are direct
A: Pre-termination basically, so what tax.
happens then?
S1: Upon selling, for example the premium he Donor’s tax and transfer tax, this is also an
would get is 4 Million and he sold it for 5 excise tax, more or less belonging to the same
Million, the difference of the cost and the family as that of income tax. Ang difference
selling price would be subject to tax. lang niya, sa income tax naa kay puhononan,
A: You will learn in your insurance law that an sa donor’s transfer or estate tax wala kay
insurance is assignable. So, if you assign an puhonan because these are given to you
insurance at a profit, the profit there can be voluntarily so it is subject to a different set of
considered already as taxable income, ngano tax which is income tax.
man?Kay wala may nahimatay na nahitabo.
Another instance where it is subject to tax.
S1: . . Compensation for Injuries or Sickness
A: If there is an agreement between the
insurer and the insured na igkamatay sa
insured, dili i-disburse diretso ang proceeds, W h a t ’s t h e r u l e w h e n i t c o m e s t o
rather the insurer will keep it and the insurer compensation for injuries or sickness?
will use it for investment purposes, naa lay - amounts received, through Accident or
fixed amount na madawat ang beneficiary. The Health Insurance or under Workmen's
income from that amount will now be subject to Compensation Acts, as compensation for
tax. personal injuries or sickness, plus the
amounts of any damages received, whether
Example: Proceeds is 1 Million, but the by suit or agreement, on account of such
agreement is i-invest. For example, P500,000, injuries or sickness shall not be subject to
that P500,000 is now taxable. income tax

Why is it excluded?
Amount Received by Insured as Return of - it is premised of the fact that the
Premium government should not be happy of your
loss or injury
• Why is it excluded? - because it is just a
mere return of capital
TAXATION 1 - ARANAS 66 EH 306, A.Y. ’19-‘20
A: Are there instances na mataxable ang Income Exempt under Treaty. - Income of any
compensation for injuries or sickness? kind, to the extent required by any treaty
S2: . . obligation binding upon the Government of the
A: Example, negosyante ka og bugas, Philippines.
magdeliver na unta ka sa bugas nimo,
gibanggaan ka, natural matagak ang rice, dili Basis: reciprocity among nations
na nimo madeliver, nahugaw, etc. Na injured
sad ka, so what you did was you claimed for S: This is because of the rule on reciprocity
damages. You claimed for (1) actual payment where the treaty has an executory force of a
for damages in the vehicle, (2) loss profits for contract. If we are (inaudible) from another
the undelivered rice, and (3) payment for country, we follow pacta sunt servanda where
hospitalization and medication. Which of the we comply whatever is said in that treaty in
three is excluded and which of the three can good faith.
be considered as taxable?
S2: A: When it comes to income exempt under
A: The loss profit would be taxable, payment treaty there are typical types of income that
for the damage of the car and the payment for are exempted:
the hospitalization would be exempt because 1. Dividends
that is compensatory in nature. 2. Interests on loans
3. Royalties - usually this is covered under
Calls another student the treaty that if the income earner is a
A: For example ang giclaim nimo na damages resident of the other contracting party then
for the sakyanan, pagclaim nimo duka it will be subjected to tax lang in that
gibayran, there is comprehensive insurance. foreign contracting party.
Ang nahitabo, gicover sa insurance sa 4. Business profit - even sale of personal
company ang damages sa sakyanan, gicover property. Common example is the shares
sad ang hospitalization kay apil man na there of stock issued by a domestic company but
i s c e r t a i n p o r t i o n l a n g n a g i c o v e r. the shareholder is a foreigner abroad unya
Nevertheless, you still received at some point ibaligya na niya to another foreigner
in time from party at fault for damages of the abroad. So, nahitabo ang sales transaction
car full amount, for hospitalization full amount, og binayranay sa gawas. Typically, taxable
for loss profits. For loss profits, we said this is na sa Pilipinas because it was issued by a
already taxable, how about for car and domestic corporation. But it is a common
hospitalization? Still exempt. provision in the treaty na kung adtua tanan
S3: Dili. sa gawas and resident citizen in this
A: What’s the rule? Naa na sa civil code, foreign country party to a treaty, it is
katong mau ra ni ang dapat icollect unya exempted.
sobra ang nadawat nimo. Double indemnity
in latin it is solution indebiti What’s the rule A: Is an exemption to a treaty automatic?
when it comes to solutio indebiti insofar as S:
taxation is concerned? A: For example client ko nimo, example British
S: . . . . ko, niingon ko nimo I will purchase the shares
A: Basically, whatever excess from the amount of you, another British. These are shares of a
covered by the insurance company, that Philippine corporation. There is this treaty
excess is now considered as taxable income. between UK and Philippines, this is the
If iuli nimo, that is not taxable income, but if provision: If the buyer and the seller are
you do not return it following the claim of right foreign entities and the domestic corporation
doctrine that can be considered as taxable ( mau ninang usual provision man sa mga
income. Also aside from insurance in excess, treaty), kung walay significant real property
loss profits and even damages from breach of holdings sa domestic corporation, exempted
contract, that can be considered also as sa taxation. Musud nas taxation if naay
taxable income. Kato if you are illegal significant real property holdings. We can
dismissed and you received as part of the qualify because the Philippine corporation is
decision of the NLRC, give you backwages, only BPO, it is only Leasing, it is not in the real
that is taxable even if compensation unta to for property, BPO man, owned by you, I want to
illegal dismissal. purchase it from you in foreign currency, we
can qualify. Unsay buhaton nimo? Would you
still go to the BIR?
Income Exempt under Treaty
TAXATION 1 - ARANAS 67 EH 306, A.Y. ’19-‘20
S: Considering that you are not a national in there is a requirement na kung 10% na, i-
the Philippines, it is not automatic, you still withhold nimo ang 10%.
have to . . .
A: TN class when it comes to exemption in the If it is business profit, kana muapply ka og
treaty, it is not automatic, even if both parties TTRA.
are very sure that they qualify in that provision.
What’s the rule? We still follow the double
nexus rule, meaning, prove to the BIR that
there is this provision in the treaty granting you
that exemption. It is not you who determines if Retirement Benefits, Pensions, Gratuities,
you are qualified, otherwise qualified jud ka etc.
kanunay, biased man ka. Who determines? In
the first place it is BIR mau nang naa tay A: Let’s talk about separation pay first,
gitawag na TTRA which stands for Tax Treaty when is it excluded?
Relief Application, i-file na nimo didto sa S: when it is due to death, sickness, or other
national office. physical disability or for any cause beyond the
control of the employee.
For some types of income that are very A: what article in the labor code?
common among parent company and Filipino S: . . .
subsidiaries, katong interest, dividends, and A: authorized causes or just causes of
royalties. Under the ease of doing business termination para ma-exempt?
rules ni BIR there is no need to apply for a S: . . .
TTRA. Ngano man? Daghan kaayo S2: authorized causes
requirement and it takes around 2-3 years A: what are the authorized causes?
before the BIR can issue TTRA. So dili S2: Death, sickness, physical disability,
marealize ang transaction because maghuwat redundancy, retrenchment due to financial
pa mi sa BIR? The answer is dili, the usual losses, installation of labor-saving devices.
practices, basta nakafile naka ka sa BIR, you A: So, separation pay given due to these
can actually proceed in the transaction. That authorized causes, taxable or exempt?
pending application in the Bureau is that a S2: they are exempt
defense in the BIR nganong gi-exempt man ni A: Why?
nimo. If question-on nganong gi-exempt man S: They served as indemnity for being
ni nimo, what you will say is, well, you have involuntarily terminated.
this position and the position is already A: Alright. Pareha ra japon sa nature ni
pending before the BIR national office. indemnity or compensation, therefore,
excluded. However, if your termination is due
Pursuant to the ease of doing business, dili na to just causes, are you entitled to separation
ka mag TTRA kay dugay, ang isubmit n animo pay? What are the just causes?
kay ang the Certificate of Residence for Tax S2: . . . .
Treaty (CORTT). Kung mag TTRA it is life filing Serious misconduct, willful disobedience or
a pleading in court, you have to make a insubordination, gross and habitual neglect of
position. It is up to the BIR whether to agree or duties, fraud or wilful breach of trust, loss of
not on your position. CORTT on the other confidence, commission of crime or offense,
hand, this is just a mere submission to the and analogous cases. (Labor Code)
Bureau, informing the BIR that ako subsidiary, A: You are not entitled diba to separation
nibayad ko og interest income to my parent pay, pero pwedi ba ka hatagan og
and this is exempted sa particular provision of separation pay ni employer?
the law. S1: it depends on the eemployer.
A: Alright. In that case, is that taxable or
Atty. showed an example of a CORTT. exempt?
S2: Taxable.
It is just a mere four page certification unlike A: For just causes, habitual absenteeism,
sa TTRA na mag position paper dayon ta. This insubordination, in short party at fault si tax
CORTT basically applies to three types of payer. Kung naa kay separation pay although
income: Interest, Royalties, and Dividends. it is not required under the law, that separation
The important thing is you can cite the pay is already taxable. How about early
applicable treaty, what article, what paragraph, retirement? Taga PAL ka, apil ka sa early
and unsa ang preferred rate. In tax treaties the retirement, gihatudan kag package as a
rate is usually lower or exemption. However, separation pay, taxable or exempt?
S2: If you retire below 50 y.o. that is taxable.
TAXATION 1 - ARANAS 68 EH 306, A.Y. ’19-‘20
A: Let’s say for example, lahi ang retirement This pre-supposes, nga employee si tax payer
benefit nimo, on top of the retirement benefit, in a private company. Pwedi man employee of
gihatagan pa jud ka og separation pay, the the government, for example employee ko sa
point there is that it is early retirement or government, niretire ko sa government for
voluntary retirement, it is already within the example at the age of 40 y.o., then nitrabaho
control of the employee. If naa kay nadawat na ko og private company, I worked there for
separation pay apart from your retirement pay, another 20 years. When I reach 60, niretire ko,
that is already taxable. Of the retirement can I avail of this exemption?
benefit what is the rule?
S2: We have to comply with the requisite for it S: Yes. The first one is not included because it
not to be taxable. was not a private company. So it was only
availed of once.
Requisites (for the retirement benefit A: Kung duha ka private to, example, at least
gross income): 50 y.o. niretire ko in one private company,
1. The private employee or official must be at exempted. I transferred to another company it
least 50 years of age at the time of his is not exempted, ngano man? Kaduha naman
retirement; na nga availment of the exemption. But what if
2. He must have rendered at least 10 years of there is no private benefit plan that was really
service to the employer at the time of approved by the BIR? What’s the rule then?
retirement; There is reasonable private benefit plan, but it
3. There must be reasonable private benefit was not approved by the BIR.
plan; S2: . . .
4. Reasonable private benefit plan may be in S1: . . .
the nature of pension plan, profit sharing plan, S3: . . .
stock bonus plan or gratuity; S4: When there is a collective bargaining
5. The reasonable private benefit plan must be agreement.
approved by the BIR; A: Kung naay CDA pwedi jud ma-exempt, but
6. The employer must give contribution and no that CDA should follow what law? That CDA is
amount shall inure to the benefit of a particular usually compliant na sa balaud, either RA
employee or officials; 4917 or RA 7641. Other than CDA,
7. This can be availed of once. The S4: RA 7641, it provides about the retirement
subsequent retirement benefits received from benefits. . .
another private employer is no longer exempt S5: This is the new retirement law.
but subject to tax. However, if the second
employer is a government entity or institution, Art. 287. Retirement. – Any employee
still you can avail of the exemption of the may be retired upon reaching the
retirement benefit. retirement age established in the
collective bargaining agreement or
A: What is required basically is that there must other applicable employment contract.
be a private benefit plan beyond the control of
the employer. In short, it is managed by a third "In case of retirement, the employee
party (bank or retirement benefit company). shall be entitled to receive such
What is crucial in this particular provision in the retirement benefits as he may have
tax code is that, the private benefit plan must earned under existing laws and any
be duly approved by the BIR, pasabot, you still collective bargaining agreement and
have to comply with the approval of the BIR other agreements: Provided, however,
with regards to the retirement benefit plan That an employee's retirement benefits
which I tell you is not very easy. Usually under any collective bargaining and
medyo lenient si BIR sa approval if there is other agreements shall not be less than
already an established organization, kana those provided herein.
bitawng union. Paspas ang approval because
established manggud na ang retirement In the absence of a retirement plan or
benefit plan. If unorganized, dugay and agreement providing for retirement
magdepende kinsa sad ang third party benefits of employees in the
company na naghandle sa retirement benefit establishment, an employee upon
plan nimo. reaching the age of sixty (60) years or
more, but not beyond sixty-five (65)
TN: 10-50-1, 10 years of service, 50 y.o., and years which is hereby declared the
can only be availed of once by the tax payer, compulsory retirement age, who has
served at least five (5) years in the said
TAXATION 1 - ARANAS 69 EH 306, A.Y. ’19-‘20
establishment, may retire and shall be Past service cost - premium payments to the
entitled to retirement pay equivalent to retirement company na nagmanage sa fund for
at least one-half (1/2) month salary for the previous year services of the employee.
every year of service, a fraction of at
least six (6) months being considered Pwedi man na ang fund na-establish na nimo
as one whole year. (art. 287 RA 7641) on the 10th year na or on the 20th year na
unya ang tenure nimo magcount baya ta from
A: Exempted or taxable? the start of the employment of the employee.
S: . . So, ang bayad nimo kung na establish na ang
A: It will be exempted. Otherwise, gamay lang fund on the 20th year, mubayad ka og service
kaayo na kompanya ang ma-exempt and cost for the past 20 years. Kung approved by
retirement benefit, to remedy that situation we the BIR, katong payment nimo for past service
have RA 7641. What is the provision under RA cost, you can claim it as expense. If not
7641? 60 or 65, not exceeding 65. Basta approved, the only expenses you can claim
mameet na nimo ang condition then you can are the current service cost payment of your
be exemption, and also the CBA, ang CBA employee.
usually ang provision ana sa retirement age,
makuha ra na between 50 - 65 and between But there are companies na dili nalang magpa-
10 and 5 years. So the new retirement benefit approve becausebof tge high turn over of
plan RA 7641 or under old retirement benefit employees. BPO company is the most
law under RA 4917. common example, very seldom na naa jud
muretire at the age of 50, at the age of 60 na
Conditions: under RA 4917 nidugay for 10 years. Mau nang ang buhaton
1. At least 50 nila, instead of having budget for retirement
2. 10 years of service benefits, they just have the budget of
3. Private benefit plan temporary happiness of the employee
4. it must be in the nature of pension plan, (pagkaon, ice cream, etc.).
profit sharing plan, stock bonus plan,
approved by the BIR and this can only be Also excluded are SSS benefits, gratuitous
availed of once. pensions, similar benefits received by the
Other option: under RA 7641 residents or non-resident citizens or resident
a.) Collecting Bargaining Agreement (CBA) aliens from foreign institutions as expressly
b.) or in the absence of CBA, the bebefits are provided under the covering laws, veterans
excluded from income tax if: benefits, SSS and GSIS benefits, that is also
1. The retirement employee must have exempted from taxation.
served at least 5 years and
2. not less than 50 y.o. and not more than A student asked question
65 A: For the private benefit plan it is the
employer who apply, not the employee.
Sir 70 man lagi ang judge? Kana sila lahi na
ang judiciary or SC because they are A: for life insurance policy which is mixed with
considered autonomous man, automatic jud na investment, if namatay ka dili siya taxable
sila exempted. (exempt if mutual fund), if buhi naay
withholding.
Atty katong sa race horse jockey?
Covered na sila sa special law. If there is a
special provision in that special law na Miscellaneous Items
exempted sila then they are exempted.
(7) Miscellaneous Items. (Suan Notes)
This discussion is on the side of the employee. a. Income Derived by Foreign Government. -
On the side of the employer, there is an Income derived from investments in the
advantage if the retirement benefit plan is Philippines in loans, stocks, bonds or other
approved by the BIR on the cleaning of tge domestic securities, or from interest on
expense. Ngano man? Kung ako si employer deposits in banks in the Philippines by (i)
and I have a retirement benefit plan duly foreign governments, (ii) financing institutions
approved by the BIR, naa man tay gitawag na owned, controlled, or enjoying refinancing from
past service cost contribution or current foreign governments, and (iii) international or
service cost. regional financial institutions established by
foreign governments.
TAXATION 1 - ARANAS 70 EH 306, A.Y. ’19-‘20
b. Income Derived by the Government or its redemption of shares of stock in a mutual fund
Political Subdivisions. - Income derived from company as defined in Section 22 (BB) of this
any public utility or from the exercise of any Code.
essential governmental function accruing to
the Government of the Philippines or to any
political subdivision thereof.
c. Prizes and Awards. - Prizes and awards
made primarily in recognition of religious, Miscellaneous Items
charitable, scientific, educational, artistic, A.Income derived by Foreign Government
literary, or civic achievement but only if: B.Income derived by the Government or its
i. The recipient was selected without any Political Subdivisions
action on his part to enter the contest or C.Prize and Awards
proceeding; and D. Prizes and awards in Sports Competition E.
ii. The recipient is not required to render 13th Month Pay and other Benefits
substantial future services as a condition to F. G S I S , S S S , M e d i c a r e a n d O t h e r
receiving the prize or award. Contributions
d. Prizes and Awards in Sports Competition. - G. Gains from the Sale of Bonds, Debentures
All prizes and awards granted to athletes in or other Certificates of Indebtedness
local and international sports competitions and H.Gains from Redemption of Shares in Mutual
tournaments whether held in the Philippines or Fund
abroad and sanctioned by their national sports
associations.
e. 13th Month Pay and Other Benefits. - Gross Prizes and Awards given in Recognition of
benefits received by officials and employees of Religious, Charitable, Scientific,
public and private entities: Provided, however, Educational, Artistic, Literary, or Civic
That the total exclusion under this Achievements.
subparagraph shall not exceed Thirty
thousand pesos (P30,000) which shall cover: i. Conditions:
Benefits received by officials and employees of i. The recipient was selected without any
the national and local government pursuant to action on his part to enter the contest or
Republic Act No. 6686; proceeding, and
ii. Benefits received by employees pursuant to ii. The recipient is not required to render
Presidential Decree No. 851, as amended by substantial future services as a condition to
Memorandum Order No. 28, dated August 13, receiving the prize or award.
1986;
iii. Benefits received by officials and
employees not covered by Presidential decree Example: You joined beauty contest of Ms.
No. 851, as amended by Memorandum Order Wasaywasay, you won, there is a prize and
No. 28, dated August 13, 1986; and iv. Other award, is it taxable?
benefits such as productivity incentives and
Christmas bonus: Provided, further, That the It is taxable you acted, naa bay nijoin sa
ceiling of Thirty thousand pesos (P30,000) beauty contest na wala nipaso unya nidaog.
may be increased through rules and You basically acted by participation on your
regulations issued by the Secretary of part.
Finance, upon recommendation of the
Commissioner, after considering among What about these contests in Showtime?
others, the effect on the same of the inflation Tawag ng Tanghalan, Feeling Lucky, you
rate at the end of the taxable year. joined those contests and you won.
f. GSIS, SSS, Medicare and Other Taxable of exempt?
Contributions. - GSIS, SSS, Medicare and - It is taxable because there is active
Pag-ibig contributions, and union dues of participation.
individuals.
g. Gains from the Sale of Bonds, Debentures Raffle draw, naay gipafill-upon nimo, ni-
or other Certificate of Indebtedness. - Gains inom ka sa thirsty, taxable or exempt?
realized from the same or exchange or - taxable, nifill-up jud ka, nipalit ka in the first
retirement of bonds, debentures or other place para muqualify so there is active
certificate of indebtedness with a maturity of participation.
more than five (5) years.
h. Gains from Redemption of Shares in Mutual
Fund. Gains realized by the investor upon Example sa exempt?
TAXATION 1 - ARANAS 71 EH 306, A.Y. ’19-‘20
S: You found a lottery ticket? champion with a prize or 10K. Is that 10K
A: Lahi sad nang istoryaa, kana rang excluded or subject to tax?
Religious, Charitable, Scientific, Educational, ‣ If approved by the Philippine Olympic
Artistic, Literary, or Civic Achievements. Committee, it is exempted. But in
S: For scientific, you won a prize on your reality, a barangay sports competition
literary work? does not have approval from the POC
A: Alright, ing ana ba, mga panangka. The and thus your winning is subject to
point is wala na nimo gibuhat para makadaog income tax.
ka sa award, gibuhat na nimo in a normal
basis, but you are being recognized without Exemptions are construed against the
any future condition or without active taxpayer. The last requisite is hard to prove.
participation.
MISCELLANEOUS ITEMS:
Examples of Prizes and Awards that are not A.Income derived by Foreign Government
taxable: B.Income derived by the Government or its
Artistic - the literary body recognizing your Political Subdivisions
work C.Prize and Awards
Sa business - entrepreneurship of the year D.Prizes and awards in Sports Competition E.
award. Wala kay active participation, you are 13th Month Pay and other Benefits
just being nominated. F. G S I S , S S S , M e d i c a r e a n d O t h e r
Alumni awardee of USC Contributions G.Gains from the Sale of Bonds,
Debentures or other Certificates of
S: Atty. sa OSCARS? Naa man jud nay Indebtedness
specific period para mukuan ka sa movie. H.Gains from Redemption of Shares in Mutual
A: Kung artistic nya inominate lang sila pero Fund
dili jud sila mufile sa application form nila didto.
I don’t know what’s the mechanic in Oscars,
perhaps musulod. A. Prizes and awards made primarily in
recognition of religious, charitable,
scientific, educational, artistic, literary, or
Prizes and Awards in Sports Competitions civic achievement

Requisites: Conditions:
i. Competition and tournament must be i. The recipient was selected without any
sanctioned or approved by the National action on his part to enter the contest or
Sports Association; and (e.g., CVRAA, proceeding, and
Palarong Pambansa, etc.) ii. The recipient is not required to render
ii. . The competition and tournament must substantial future services as a condition to
also be approved by the Philippine receiving the prize or award.
Olympic Committee, whether local or
international, whether held in the
Philippines or outside. (like Palarong B. Prizes and Awards in Sports
Pambansa, CVRAA, FIBA and etc.) Competition

Requisites:
TN: Exempted if award refers to tournaments i. Competition and tournament must be
or competitions held in the Philippines or sanctioned or approved by the National
abroad. Sports Association; and (e.g., CVRAA,
Palarong Pambansa, etc.)
If you are a professional athlete like Many ii. The competition and tournament must also
Pacquaio, that is taxable. If you are just be approved by the Philippine Olympic
amateur, that is exempted. Committee, whether local or international,
whether held in the Philippines or outside.
TN: Prize you received in sport competition, (like Palarong Pambansa, CVRAA, FIBA
not money you received in your endorsement, and etc.)
advertisement.

Illustration: TN: dili jud conclusive na amateur lang, pwedi

• Yo u j o i n e d t h e B r g y. Wa s a y - w a s a y man sad pod nay professional player basta
Badminton competition and you won as
TAXATION 1 - ARANAS 72 EH 306, A.Y. ’19-‘20
sanctioned by the NSA and POC. Common kinsa ang niapil sa team. In UAAP, NCAA, the
lang, amateur players. one who selects the team is the school, not the
National Sport Commission. Kung muingon ka
og sanctioned, si NSA ang muselecf, siya ang
Example Manny Pacquaio was awarded by muform sa team. Ayaw ko ingna na ang
the Gabriel Flash Elorde Foundation as the muselect sa team sa USC kay ang NCA.
athelete of the century with a monetary Definitely not, it will take ages. And it is not
consideration. Is that taxable or exempt? sanctioned by the POC, ngano man? Ang
mudaog sa UAAP og NCAA, ipadala sa
- This is exempted. Although the olympics? Diba dili. Kana pa lang daan, you
awards was due to his achievement in sports, can now say that it is not sanctioned by the
but really that falls on Civic Achievement, you POC. If there is monetary reward, I should say
look at letter A, the Prizes and awards made theoretically kay in practice dili man jud na ma-
primarily in recognition of religious, charitable, implement.
scientific, educational, artistic, literary, or civic
achievement, walay labot ang sports Sir, asa man diay ang dili taxable?
achievement. Usually sports achievement falls - kinsa man taga public nganhi? Diba
under Civic Achievement. you have the district meet? Unsa may sunod
sa district meet? Division, igkahuman kay naay
CVRAA, kung mudaog ipadala ka sa Palarong
Let’s change it, June Mar Fajardo, PBA Pambansa, kung mudaog ka sa Palarong
player, for example he was awarded as the Pambansa, apil na ka sa draft team, finally the
MVP comes with the award also is a NSA kung ipadala ka sa asang States? The
monetary consideration. Taxable or SEA GAMES, kung nadaog ka sa SEA
exempt? GAMES, you have Asian Games, after kay
adto ka sa Olympics.
What if instead of MVP, gi-award ra siya sa
mythical fight? Dili naman na based on Milo Olympics? Olympics man na so apil?
points, based naman na on overall - Milo Olympics is basically different
performance nimo. Dili ba siya mahulog sa entity. If you win that game, taxable.
2nd situation? Sa Sports Competition?
- this is more on the Sports Ironman Triathlon?
Achievement. When it comes to this sports - Taxable, it is not accredited.
achievement, you don’t look at letter A, rather
you look at letter B. The MVP award is taxable FIBA? It stands for what?
because it does not satisfy the two requisites S: Federation International Basketball
because PBA is a professional league, it is not Association.
sanctioned by the NSA or by the POC. A: May nalang naka-answer, nangutana kos
pikas, ana siya FIBA stands for Filipino
Example, apil kas Shakey’s V League, Basketball . . kadungog diay niya FiBAA.
champion mo, taxable or exempt? S: Exempt because it is an International
S: I think it is still taxable atty. because the Competition therefore it should be accredited
players in that competition are professional by both NCA and POC.
league players. A: Alright. TN FIBA is a qualifying match, you
A: Alright, it is a professional volleyball, it is have to qualify in Olympics. For you to join the
commercial so dili mameet ang duha ka FIBA, it has to be decided by the NCA kinsa
condition. ang apil didto and of course approved by the
POC, whatever amounts you get in that that is
UAAP, NCAA, champion mo, you have exempt.
money, exempt or taxable? Dean’s Cup?
S5: I think it has to be qualified. I am not sure if What if nidaog ka sa FIBA and gikuha ka
they are sanctioned or approved by the NS or endorser sa MILO, taxable or exempt?
POC, but if ever they are then they would be - Taxable, because diba prizes and
exempt. awards sa sports competition, sa sport
A: You have a point there. Kung out of 5, competition na award, walay labot ang mga
tagaan tikag 4 points. endorsement fees, whatsoever, incidental to
A: It is taxable class, because it is not your winning of the sports competition.
sanctioned. Kung muingon manggud ka og
National Sports Competition, kung association Novel Peace Prize?
of all barketball players who will draft kung
TAXATION 1 - ARANAS 73 EH 306, A.Y. ’19-‘20
S: Exempt because there was no active It is different ha when we say foreign company,
participation on the part of the awardee. it should be a financing institution owned,
A: Ramon Magsaysay Award? financed or controlled by foreign government.
S: Still exempted. It has something to do with a foreign
A: Still exempted, basically mameet niya ang government. Income by a foreign
condition. How about FAMAS award? MMFF government.
award? Let’s just assume naay monetary
winnings. Why is it excluded from taxation?
S: Not exempt, you have to apply your movie - This is pursuant to inherent limitation
to be part of that festival. of international comity. Because it is basically
A: For MMFF specifically, it is not exempted if an income of that foreign government so it is
ever there is a monetary award. First condition exempted.
pa lang na there is no effort on your part to
enter, wala na. There is a process to enter that Example, there is a Japanese bank, it is
competition. privately owned, however, nalugi, so the
Japanese Government refinanced the bank for
C. INCOME DERIVED BY THE it to be rehabilitated. The bank eventually had
GOVERNMENT OR ITS POLITICAL operations in the Philippines, it earned income
SUBDIVISIONS in the Philippines. Exempt or taxable?
- It is exempted by virtue of Chapter V I
Proprietary income or Governmental (7)(a) of NIRC.
Income?
S: Governmental Income Derived by Foreign
Government. — Income derived from
TN: the exclusion covers only governmental investments in the Philippines in loans,
income and public utility income and it must be stocks, bonds or other domestic
generated by the government through its securities, or from interest on deposits
political subdivision. in banks in the Philippines by (i) foreign
governments, (ii) financing institutions
What is the reason why it is excluded from owned, controlled, or enjoying
taxation? refinancing from foreign governments,
S: If they are performing governmental and (iii) international or regional
function, they are still part of the government. financial institutions established by
It is like giving or transferring money from one foreign governments. [NIRC Chapter
pocket to another. VI(7)(a)]
A: Alright. It is basically pursuant to that
inherent limitation TN of that, in one case, it was ruled that it falls
on that provision because it is being
refinanced by the foreign government. Wala na
gitan aw ang issue of whether gicontrol ba or
D. INCOME DERIVED FROM INVESTMENTS dili. The point is it was refinanced.
IN THE PHILIPPINES BY FOREIGN
GOVERNMENT OR FINANCING Refinanced - nalugi na na unya ang foreign
INSTITUTIONS government ang nigatag og additional capital,
basically additional entity. Kana pa lang daan,
Requisites: you can already say that whatever income
i. Recipient must be a: earned by that banking or financing institution,
A. Foreign government; it will be paid to that foreign government
B. Financing institution owned, financed ultimately. When we say refinancing it could be
or controlled by foreign government; through equity or it could be through a loan,
C. Regional financing institution, but the point is kung equity na, si foreign
international financing institution government na ang tag iya, if through a loan,
established by foreign government. the point is mubayad japon si finacing
ii. It must be an income received from institution to the government, essentially that is
investment in the Philippines. income japon of the foreign government.
Following international comity, it is exempted
TN: The source of the income is the from taxation.
Philippines.
TAXATION 1 - ARANAS 74 EH 306, A.Y. ’19-‘20
GAINS DERIVED FROM REDEMPTION OF you exceed in that minimum contribution that
SHARES OF STOCK ISSUED BY A MUTUAL is now taxable.
FUND COMPANY A: Yes, because that is provided under the law.
So long as it is within the mandated
contribution, that should not be subject to
Mutual Fund – you have smalls funds and you whatever income tax. In excess of that
pool it and you make bigger investments. So if however, that could be subjected to income
you redeem, it’s still excluded because its just taxation.
considered as your return of capital. There’s
no income gained. G. BENEFITS IN THE FORM OF 13TH
MONTH PAY AND OTHER BENEFITS
Each of you have money, we pool it together,
we form a mutual fund then it is invested. (Dili The entire amount would be excluded from
kay gamiton nimo kung naay magbirthday, taxation?
sinking fund na siya) If ever there will be loses S: Not the entire benefit because there is a
in the investment, the loses is covered by the ceiling of P90,000.
fund, the mutual fund. A: Alright, so insofar as exclusion is
concerned, how much is excluded?
Why is it excluded? S: within the range of P90,000.
- Yes, because they are encouraging A: So if you put it, 13th Month Pay and other
the people to invest their money in the mutual Benefits up to P90,000. So long as it is
fund. But the point is this is a diversified P90,000 that is exempt, in excess of that
investment, this is not an investment lang on a P90,000, that is already taxable.
particular portfolio or stocks wherein
maforesee nimo kung unsa ang potential
loses. Mutual fund basically, we pool our funds H. GAINS DERIVED FROM THE SALE,
and it is up to the fund manager where to EXCHANGE, RETIREMENT BONDS
invest, to stocks, bonds, properties, etc. The DEBENTURES OR OTHER CERTIFICATE
point is there is a potential that there will be a OF INDEBTEDNESS WITH A MATURITY OF
high gain or income na makuha si fund owner MORE THAN FIVE (5) YEARS
or there will be a high loss. In short, it is more
on speculation. So, the government basically, More than 5 years. These are what we call as
hands off, ngano man? Pwedi man ang the long term investments.
potential loss dako kaayo, pwedi man sad ang
potential gain dako sad kaayo. If you tax the If you pre-terminate it prior to the 5 year
gain in the mutual fund, it follows that you period, is there a tax consequence there?
allow deduction of potential losses in the fund - it is now taxable since it does not
and these potential losses could go very high, comply with the phrase “5 years or more”. It
times 1000%, etc.. If you do it, alkansi dayon will be subjected to final withholding tax
ang government. So, the decision is, di ka ranging from 5%, 12%, and 20%. It will be
makadeduct, dili namo tax-an ang gain. discussed in passive income taxation.

This is the very reason, if you look at VUL,

balik ta sa life insurance, VUL essentially uses ———-
long term investment, katong more than 5 Students asking questions
years, a long term investment which is
exempted from taxation, as well as to a mutual How about those COOP atty?
fund which is also exempted. This is an - Cooperative, that is exempted because that
effective way of managing investment, is provided under the Cooperative
effective waybof avoiding tax. Development Act (CDA) which is a special
act, to encourage people to invest in
cooperative.
F. CONTRIBUTIONS TO GSIS, SSS, PAG-
IBIG, AND UNION DUES If mu-avail ka og mutual fund naa kay tax
credit ana?
Why are these considered as exempted - walay tax incentive, naga-hands off lang si
from taxation? government, it is difficult man jud to monitor
S: because it pertains to the allowable the mutual fund because it is the fund
minimum contribution that is exempt so once manager who decides kung asa niya i-invest
ang mutual fund. If it is just passive
TAXATION 1 - ARANAS 75 EH 306, A.Y. ’19-‘20
investment, you cannot claim for tax credit. But the point is, if you have someone who
Kung dealer ka og stocks, pwedi siya maka- wants to have PERA, you go to a bank, BPI for
avail og tax credit as part of the ordinary example, and you will have to talk to a fund
income. manager, he will be the one to invest your
Unsa nang hedged fund? money.
- my understanding of the concept of
hedging, kung ma alkansi ka, naa kay gain The contributor in this case is entitled to
diri na side. Bottomline, wala kay alkansi. receive the amount contributed plus all income
Ang concept of hedging is like basketball, associated with the PERA account upon
Lakers vs Milwaukee, muingon ka sa usa retirement.
ka-migo nimo, ani oh, pusta didto “adto ka
pusta sa Lakers ha” unya sa usa ka amigo
nimo muingon ka, “Pustahanay ta ha, diri ko Unlike sa VUL na usually 10 years or 5 years
sa Milwaukee.” Tendency is whether without consideration kung ni-retire ba ka, here
mudaog or mapildi, marecover japon, that is reaching age of 55 of retirement is required or
the concept of hedged fund. Naa kay compulsory for you to avail of the benefits.
underlying investment na icover nimo. Mura Thereafter, you are entitled to a 5% income tax
jud manguyab ka, manguyab ka duha kay credit. You can recover the annual monetary
kung basted-on sa usa, naa pay usa.
contribution until the age of 55. For income
PERSONAL EQUITY & RETIREMENT earned through PERA, it’s tax-exempt; and
ACCOUNT unlike SSS or GSIS, it’s the investor who
EXCLUSION FROM GROSS INCOME— makes all the decisions with the help of the
UNDER SPECIAL LAW investment manager in choosing the
We have another exclusion under a special investment asset.
law, the Personal Equity and Retirement
Account. This is actually a voluntary retirement It is a hybrid between the VUL, and the GSIS/
program. The primary target of this law are the SSS. Because in the latter, you would have to
OFWs because when it comes to SSS, or the contribute and be given a fixed amount upon
Philhealth, they can register but only on a retirement. In the former, it’s quite a bit risky,
voluntary basis. And sometimes they can’t but you have a say where you want to invest—
even avail of it, considering that some only bonds, stocks, etc.
have 2 years of contract. Okay ra na if
magdugay ka sa empleyado nimo, but if you In PERA, makuha nimo under retirement age.
are under a contractual arrangement, it’s not If below retirement age, maging like VUL, na
that beneficial because maputol baya ang SSS you would only receive a fixed amount.
nimo if you can’t contribute.
So you can withdraw already at the age of 55.
So to address that, PERA became the product So here, if contract lang pangabuhi nimo, you
of RA 9505 or the PERA ACT of 2008. It took can avail of this. Kay if SSS which is another
effect on January 9, 2009. Under this, the option, gamay lang makuha nimo. Thus, if you
purpose is to establish a voluntary retirement want, you can have the PERA.
and savings account program for not
necessarily for OFWs but for pinoys. TN that not all banks offer PERA; I know of
BPI and dili pa na all branches.
The only thing here is that the PERA is only
being offered by limited banks. To encourage I included this one because wala pa ni
establishing this type of program, these are the nagawas sa bar, so in case this will be asked,
benefits (refers to law), but they are not widely you would already know.
publicized because there is no agency that
oversees the implementation. This is more of a So that’s all for the exclusions. If you look at it,
bank offering, an additional account kumbaga. it’s an exclusive list unlike sa inclusion, it’s not
because after all income tax is source blind
TAXATION 1 - ARANAS 76 EH 306, A.Y. ’19-‘20
Withholding Tax
ALLOWABLE DEDUCTIONS
Pero naa isa ka importante na principle na
dugang, and this is provided under the Tax
Now, we move to deductions. But this is just
Code; for you to avail of a deduction, there
an overview of the topic.
should have been proper withholding if
authorized by law.
(from slides)
Basic principles governing deductions
So diri musulod ang withholding. Kinsa ang
1. The taxpayer seeking deduction mu-claim sa deduction?
must point to some specific
provisions of the statute authorizing It’s someone who’s earning income. If you
the deduction. recall, if you’re a compensation income earner,
2. He must be able to prove that he is dili man ka maka-claim ug deduction. But if
entitled to the deduction authorized you’re a business or professional income
or allowed. earner, you can claim; basta kung gi-require ka
3. There should have been prior mag-withhold, you should have properly
withholding if required under the withheld.
law.
Unsa ni na withholding? This is what we call
as Creditable/Expanded Withholding Tax.
Kinds of allowable deductions
Creditable/Expanded Withholding Tax
1. Itemized deductions (Section 34A-K (CWT)
& 34M) This is not like a final withholding tax (FWT)
2. Optional Standard Deduction of 40% becuse the latter is considered full and final
of the Gross Income payment of tax. Kanusa usually mu-apply si
FWT? If it is passive income, or if it is an
isolated transaction.
So what are the basic principles?
If it is ordinary income, or business income, its
Exclusion v. Deduction pair is CWT which is just in the nature of an
We’ve already distinguished exclusion from a advance payment of the income tax on the
deduction and we said that if it’s an exclusion, income earner.
it is an inflow but because there is a provision
in the Constitution, or under the law, that a Again, is withholding tax a tax?
thing is not subject to income taxation, then
you do not tax that inflow. On the other hand, No. It is just a mode or manner of collecting a
deductions are considered outflow. tax. So, if you have a business income, the
government will basically ask the buyer/client
Double Nexus Rule nimo to collect the tax in behalf of BIR which is
We still have this have this when it comes to why the withholding tax system is also known
deduction, but there is one additional principle as the Pay as you earn system.
that you should always remember because
mao ni ang [inaudible] ni BIR when it comes to So now, unsa ang requirement?
assessment.
Maka-claim lang ta ug expense kung naka-
This rule states that a party claiming deduction withhold ka.
must point out to a specific rule authorizing
such and he must be able to prove that he is So asa ni na point of view ang gi-tan-aw nato?
entitled to the deduction authorized or allowed.
This is applicable also to availment of tax It’s the POV of the buyer, not the seller.
exemptions.
What are examples of CWT?
TAXATION 1 - ARANAS 77 EH 306, A.Y. ’19-‘20

Nakalista na sa Tax Code, most common is So basically kung corporate ni, diba corporate
withholding tax on the rent, or by a is 30%, so that’s times 30% tax rate, and so
professional like when you hire a consultant or the tax liability will be 3k supposedly but diba
a lawyer; or when you hire a professional involved man ang ni-remit na 500, so that’s
signer for an anniversary celebration. less the CWT which was withheld by the
lessee—of 500, so ang tax due will only be
What’s the consequence if you withhold? 2.5k. 2.5K will be the amount that will be
You can’t anymore claim it as an expense remitted by the lessor to the BIR.

Illustration: (Rent) So pila man gi-collect ni BIR?

There’s a lessee and the lessor. In the lease
agreement, monthly payment is 10k. Whether 500 + 2.5k = 3k. But in advance niya nakuha
withholding or dili si lessee, basta used in ang 500.
business ra, si lessor will report man diba rent
income; Si lessee, as the withholder, would Kay kaning 30%, lahi man ang time for filing
report rent expense. Pero unsa ang condition ani, usually quarterly.
for the lessee to deduct rent expense? The
lessee must withhold 5% withholding; this is What if the lessee fails to withhold the 500?
including 5% creditable withholding tax. At this
point forward, when you hear the word There is the tendency that this 10k will be
‘creditable,’ or ‘expanded,’ it’s the withheld disallowed by the BIR. Although there is
portion of your ordinary income. Kinsa ang already a memorandum circular issued by the
nag-withhold? Si client or si buyer. Kung mu- BIR in 2018, and that tells us s that if upon Bir
ingon ta na FWT, we tap that to a passive assessment, it was found out that taxpayer
income. failed to withhold or nag-under withhold,
allowed man still na deduct ang expense
In this case for example, the lessee will provided he pays correct amount of
basically pay rent to the lessor but the rent that withholding tax, surcharges, penalties, and
will be paid by the lessee to the lessor shall be interest. Bottomline, alkansi man still si
net of the withholding. So: taxpayer because of the additional payments.

Gross income of 10k Duha man puwede mahitabo ani. It’s either no
less: CWT which is 5% x 10K = 500 withholding at all or under-withholding. Like
this, the contract is supposed to be 5% pero
So, the net that will be paid to the lessor is ang gi-withholdan is only 3%, that’s under-
9.5K. This amount goes to the lessor. The 500 withholding. If BIR discovers this, you will be
goes to the BIR. asked to pay additional fees (see above).

In the rent expense that will be claimed by the In a withholding tax system, liken it to your
lessee, ang rent expense would be 10k kay mom asking you to buy something from a
wala man na iyaha ang 500, gi-remit man niya store, since here the government is merely
ni sa BIR. asking the buyer/lessee to colllect the tax for
and behalf the government. 84% of the taxes
In the rent income na gi-import ni lessor, ang entering the government does not come from
rent income na ireport niya is 10k. BIR collection, it comes from the withholding
taxes. Just imagine how many lawyers,
So, asa man diay ang 500? businesses there are for example.

So kay credit man, [inaudible] + other income But if the lessee fails to do the withholding, or
of the lessor, ibutang ta corporate na lang, commits a mistake in the withholding, kinsa
(thus it is multiplied by 30%) so you will ang ma-punish? Siya (lessee).
basically get the tax liability.
TAXATION 1 - ARANAS 78 EH 306, A.Y. ’19-‘20
The burden supposedly is on the income
earner so ang mahitabo karon if wala ka naka- Point is, if ang ka-transaction nimo is reporting
withhold is idisallow ang expense nimo. it as an expense, you should report it as an
Puwede iallow pero naay CWT plus other fees. income.

Examples: Now, lawyers-accountants, they form what we

Nindot example are artists. If they get call as GPP or General Professional
endorsements, it’s contractual basis. They Partnership. And you will learn later on in
receive professional fees. It’s subject right corporation law that GPP as an entity is
away to CWT. Kung ako si San Miguel and I exempt from income tax. So pagsabot, if ang
hired Marian Rivera, I paid her 50M, in my ma-bill nimo is GPP, ACCRALAW for example,
expense, withholdan gud ko nako to entirely you don’t subject that to withholding because it
ang 50M. Now, ang mahitabo is since is exempt from income tax.
individual ni sila, dili nila pag-ideclare. Of the
50M, ang ideclare only is 25M but really on the When it comes to allowable deductions, you
side of the income earner, ang apas ni BIR is have 2 types (see above).
not on the withholding, but WON s/he declared
correctly ang total income. So pagbangga pa Itemized Deduction (ID)
lang na daan, ang girecord ni San Miguel 50M, When we say itemized, this is enumerated
pero kay Marian is only 25M, deficiency na ani; under the law. You cannot claim all outflows as
because her dealer is a company who listed a deduction to your income tax so memorize
her professional fee as an expense. Lesson is lang. [He mentioned mnemonics]—expenses,
dili dali mag-artista. That’s why kasabot ko sa interest, taxes, grosses, [inaudbible].
mama ni Sarah.
Why do we need to have this acronym?
That’s why there are also some dealers na
underground—wala for example tarong na Because these are the common expenses that
registration, because once you go big, you we will use especially expenses and interests.
can’t easily get away. These are business expenses related to the
exercise of such business.
Let’s be clear, kung tax-exempt ka, you are not
subject to withholding. It wouldn’t make sense For ID, there must be proper substantiation.
because withholding is just advanced payment When we say proper substantiation, we refer
so if you don’t have liability in the first place, to agreements, the OR, to prove the
then you wouldn’t have withholding. incurrence of the expenses.

Now, for professionals. Kaning mga doctor, And there must also be proper withholding.
unsaon man? Dili man jud makit-an ang actual
and exact expenses and income. Point is, Now, if you lack either of the elements, such
kinsa ang client sang doctor? Dili man that you have proper substantiation and not
companies but individuals. Bisan mangayo ka proper withholding, and you’re afraid ma-
OR sometimes, gamiton nila as personal disallow ka, then the usual recourse is to go
expenses so it’s very difficult to trace how for the OSD.
much is the income really. If working in a
hospital, ma-trace maybe ang TF, but 40% OSD
sometimes dili ang walk-in. This is 40% of gross income if you are a
corporate taxpayer, 40% of gross receipts if
Mas lisod if lawyer ka. If you’re going to you are an individual taxpayer. But this will
notarize for example, you’d have an OR. But change once [inaudible] bill becomes a law.
when you just go to the City Hall, usually wala
na. But if ganahan jud si BIR ma-trace, ma- However, in the OSD, it’s only 40%. Pagsabot,
trace niya because we submit a notarial book naa jud 60% that is subject to tax. Whereas if
to the RTC then it goes to the Phil. Archives.
TAXATION 1 - ARANAS 79 EH 306, A.Y. ’19-‘20
ID, you can go for zero. But then again, you
have to prove this, substantiate. A: The work around there is, if dili magpa-
withhold si lessor, you can request for a sworn
Ang kaning mga OR dapat i-attach sa ITR? statement from the lessor that it is him who
requested that you should not withhold.
No. These documents for substantiation will
only be asked by BIR once you’re being In the case of doctors, the usual thing required
audited and once the BIR says, dako man ni by BIR is the list of patients of the doctor
kaayo expenses nimo, that’s where the considered indigent, na dili ma-subject to
substantiation comes in. withholding. Although again, even if naa na sa
regulation, it’s still difficult [vibrating sound;
As such, for all your documents in 1 taxable inaudible].
year, you should at least keep them for 10
years. 5 years hard copy, 5 years puwede na If you have business income, then you should
scanned copy. Naa ta may ginatawag Book of declare it for withholding; but if it is for
Accounts, this is where you record all your personal use—personal living & family
income and expenses. As required by law, the expense which we will discuss later sa non-
taxpayer must maintain his/her Book of deductible, there is no point in making a
Accounts for a period of 10 years. withholding.

Q: As regards the one you discussed earlier, Q: Puwede ba ang agreement na si lessor ang
na kung may withholding naay deduction, if mag-withhold?
walay withholding nahitabo, kinsa maka-avail
sa deduction? A: Puwede man. In some transactions, what
they’re doing is that the lessor would be the
A: lessee, expenses man na ni lessee. so, ang one to withhold and remit it to the BIR but he
mu-claim sa deduction is si lessee, siya ang would provide a proof of the withholding. So
mu-withhold so kung dili niya ma-withhold, ang buhaton…pagbayad ni lessee, hatagan
puwede ma-disallow ang deduction. siya ni lessor official receipt. Si lessee sad,
naay BIR Form—Ang 2307, as proof na
Q: So, if madisallow siya, [inaudible] nagwithhold siya sang 500 [referring to
illustration earlier]. So in some transactions,
A: Let’s first clarify. Nganong disallow? So considering agreement between the lessee
meaning maka-claim na jud siya? The answer and the lessor, the one who will prepare the
is yes because the assessment or the audit of 2307, the one who will remit the withholding to
the BIR happens after you file your tax return. the BIR is si lessor na mismo. But dapat, ang
So meaning, kung 2020 na, dako na jud ka ma-sign sa 2307 is the lessee. But of course,
expense—10k. Unya pag-2021 gi-audit ka ni ideal thing is OR comes from the lessor, 2307
BIR and nakit-an ni BIR ngaa way man ka or the proof of withholding comes from the
nag-withhold sa 2020 nimo na expense? So lessee. The risk here is you wouldn’t know if
idisallow niya kani [referring to the illustration the lessor really remitted the payment. And this
on the board]. Unsa mahitabo sa taxable will lead to a delinquency on the part of the
income nimo? So dira masulod ang deficiency lessee.
income tax. When we say such, pabayron na
additional income tax ni BIR. Now, if you don’t Q: in the OSD, is the 40% a cap or is it really a
want this to happen, it was stated in a fixed 40%?
memorandum circular, pay na lang ang
withholding tax na 500 plus interest, penalties, A: Yes. 40% that’s the amount. Dili puwede na
and surcharges para madeduct gihapon nimo 30% for example. Depende man na, kung
ang 10k. corporae or individual. But in the new law, this
will change. But kung corporate ka, let’s say
Q: What if si lessor ang mu-ingon dili lang for example your gross income is 1M. Ang ma-
magwithhold? deduct nimo is 400k, ang ma-subject into
TAXATION 1 - ARANAS 80 EH 306, A.Y. ’19-‘20
income tax is 600k. So still beneficial, 4. Premium paid on any life insurance
ginansya gihapon and dili pa mu-hassle ang policy covering the life of any officer or
government magcheck. EE or of any person financially
interested in any trade or business
Pero you might ask, why go for OSD if the directly or indirectly a beneficiary
taxpayer will be automatically taxed 60%? under such policy.
5. GR: Losses from sales or exchanges
This is beneficial for entities na dili daghan of property directly or indirectly: [FC2
gastos. If there’s not much expenses and BF GF FF]

outflows, the ideal thing is OSD; or if daghan (XPTs)
ka underground na dili supported by proper 1. Between members of a family
substantiation, go for OSD. Example of a (brother, sister of half or full
business na dili daghan gastos is leasing kay blood, spouse, ascendants,
kinsa man gabayad kuryente, tubig, ang tenant lineal descendants)
man. So if mag-ID ka, not beneficial. But If 2. Except in case of distributions
your business is into buying-selling or in liquidation between an
manufacturing and Daghan ka individual and a corporation –
ginasuwelduhan, go for ID. more than 50% in value of the
outstanding stock of which is
Q: Are there instances that OSD will be owned directly, by or for such
disallowed? an individual
3. Except in case of distributions
A: I haven’t yet encountered that one because in liquidation, between 2
the OSD is up to the taxpayer always but you corporations – more than 50%
must already inform the government na mag- in value of the outstanding
OSD ka 1st quarter filing pa lang because if stock of each of which is
you don’t, default is the ID. Dili puwede na owned, directly or indirectly, by
pag-3rd quarter, mukalit ka OSD. Dapat 1st or for same individual, if either
quarter filing palang, you inform already one of such corporation is a
because OSD will be applicable for the whole personal holding company or a
taxable year. foreign personal holding
company
Or even exercise of profession, wala daghan 4. Between the grantor and a
gastos. Unsa man, puhunan sang lawyer, it is fiduciary of any trust
just laway and brain. Kung ikaw lang usa then
office nimo naa pa sa balay, wala jud ka XPT to XPT: When the entity is in the process
daghan expenses. of liquidation (clearancing; dissolution); thus go
back to the GR.

NON-DEDUCTIBLE ITEMS TN: The one who can deduct the loss is the
seller.
NON-DEDUCTIBLE ITEMS (ND)
(from powerpoint)
Personal living or family expenses
When we talk about the 1st one, this is not
1. Personal living or family expenses;
your business expenses; has nothing to do
2. Amount paid for new buildings or
with the exercise of profession or conduct of
permanent improvements, or
trade or business. If you’re an individual
betterment to increase the value of
taxpayer, you’ll be subjected to rates from
any property or estate;
0-35% but the first 250k is subjected to 0%. It’s
3. Any amount expended in restoring
like the government saying na equivalent na
property or in making good the
na sa personal living & family expenses nimo.
exhaustion thereof for which an
Mao na nga if empleyado ka, and you’re just
allowance is or has been made
earning compensation without [inaudible], it’s
TAXATION 1 - ARANAS 81 EH 306, A.Y. ’19-‘20
just 25% gross income kay ang ma-deduct thereof for which an allowance is or has
lang nimo are your contributions to SSS, been made
Philhealth, union dues and the PAG-IBIG but This is more or less related to the 2nd class, it
not your expenses for your family or your kids is also considered as a capital expense. But to
because that is considered as personal living be specific, if you say restoring the property,
& family expenses. Dili mo ma-deduct ang we’re referring here to major repairs. Let’s say
diaper sang anak nimo. for example, building construction after an
earthquake. But if for example, you just fix the
Unsa pag-identify? aircon, it’s only minor repair. It doesn’t
increase the value of the property and so it is
If kaning expenses is used for the exercise of deductible. If it’s a major repair, it forms part of
profession or conduct of business and your the cost of the asset thus same as the second
answer is yes, then that is deductible. Next class, you just subject it to depreciation.
question is properly substantiated ba na siya?
If it has nothing to do with your profession, with The allowance referred to in the rule is the
your business, then it’s personal living & family allowance for depreciation. Naa man may
expense. ginatawag na depletion. We will discuss later
unsa difference between the two.
Amount paid for new buildings or
permanent improvements, or betterment to Premium paid on any life insurance policy
increase the value of any property or estate covering the life of any officer or EE or of
This is ND because duha man ni—permanent any person financially interested in any
improvement or construction of new buildings. trade or business directly or indirectly a
For the 2nd class, these are considered ND beneficiary under such policy
because they are capital expenses. Enters Q: Unsa pagsabot ani?
here capitalization. If we say we have to
capitalize, it will be recorded first as an asset. S: It is considered ND because it’s just mere
transfer of funds.
Unsa pagkahibaw na capital expense ni siya?
Q: Unsa man na insurance ang covered?
It will be considered as such if it will increase
the value of the property materially and if it will S: Life insurance.
increase the useful life of the asset; which
means na ang use Niya dili lang good for one When we discussed exclusion, unsa ang first
taxable year. If you see na magamit pa na exclusion? Proceeds from life insurance.
nimo for several years, then record it first as There we said it is excluded because it is more
an asset. of an indemnity because of the death of the
insured. In this case, what is ND is the
Example of this is a building. premium made.

Example: Building construction, you will record Q: What do you mean by premium?
this as a capital asset. Laptops bought by the
company, kay dili man sya good for one year A: Premium is the amount of insurance that
lang. you’re paying monthly or depending on the
plan.
Wha tif magnguba? Diha masulod ang
[inaudible] loss which we will discuss in ID. Sa Yes, it is the consideration for the insurance
office supplies naman, it will become as an company to insure you. But of course, the
expense the moment that you use it. premium is weighed through the promised
proceeds of the insurance.
Any amount expended in restoring
property or in making good the exhaustion (Succeeding discussion comprised of board
computations)
TAXATION 1 - ARANAS 82 EH 306, A.Y. ’19-‘20