Bepitel, Breylle L.

Taxation Law Review Notes

(March 2, 2024)

II. NATIONAL TAXATION

A. TAXING AUTHORITY

Jurisdiction, Power, And Functions of the BIR (Sec. 2, NIRC)

1. To assess and collect all national internal revenue taxes, fees, and charges;
2. To enforce all forfeitures, penalties and fines connected therewith;
3. To execute judgment in all cases decided in its favor by the CTA and the ordinary courts;
and
4. To give effect to and administer the supervisory and police powers conferred upon it by
the Tax Code or other special laws.

Powers of the Commissioner of Internal Revenue (CIR)

1. Power to interpret tax laws and decide tax cases (Sec. 4)
2. Power to obtain information and to summon and take testimony of persons (Sec. 5)

a) Interpreting Tax Laws and Deciding Tax Cases

The power to interpret provisions of the NIRC and other tax laws shall be under the exclusive
and original jurisdiction of the CIR, subject to review by the Secretary of Finance. [Sec. 4, NIRC]

A ruling by the CIR that interprets provisions of the NIRC and other tax laws shall be presumed
valid unless modified, reversed or superseded by the Secretary of Finance. A taxpayer who
receives an adverse ruling from the CIR may, within thirty (30) days from the date of receipt of
such ruling, seek its review by the Secretary of Finance. The Secretary of Finance may also
review the rulings motu proprio.

Revenue Issuances
Those issuances officially released by the CIR.

Different kinds of revenue issuances:

1. Revenue Regulations (RRs) - formal interpretations of the NIRC signed by the
Secretary of Finance upon the recommendation of the CIR; have the force and effect of
law and can only be repealed, modified or amended by another regulation or law;
specify, prescribe or define rules and regulations for effective enforcement of the
provisions of the NIRC and related statutes
2. Revenue Memorandum Orders (RMOs) - directives outlining procedures which are
necessary to carry out programs or to achieve policy goals and objectives
3. Revenue Memorandum Rulings (RMRs) -rulings affecting certain significant tax
matters affecting groups of taxpayers or an industry that are issue without any request
by the taxpayers, for the guidance and compliance of the revenue personnel
 4. Revenue Memorandum Circular (RMCs) - issued to amplify the rules, precedents,
laws and other orders issued by agencies other than the BIR, for the guidance and
compliance of the revenue personnel
5. Revenue Bulletins (RBs) - periodic issuances, notices and official announcements of
the CIR that consolidate the BIR’s position on certain specific issues of law or
administration in relation to the provisions of the NIRC, relevant tax laws and other
issuances for the guidance of the public
6. Rulings - less formal interpretations by the CIR or his authorized representatives
involving tax provisions and regulations; include:
 BIR Rulings;
 VAT Rulings;
 Rulings issued by International Tax Affairs Division (ITAD); and
 Rulings issued thru delegated authorities or unnumbered rulings

b) Non-Retroactivity of Rulings

General Rule: Any revocation, modification, or reversal of (1) rules and regulations
promulgated in accordance with the NIRC, or (2) any rulings or circulars promulgated by the
CIR shall not be given retroactive application if the revocation, modification, or reversal is
prejudicial to the taxpayers.

Exceptions:
1. Where the taxpayer deliberately misstates or omits material facts from his return or any
document required of him by the BIR;
2. Where the facts subsequently gathered by the BIR are materially different from the facts
on which the ruling is based; or
3. Where the taxpayer acted in bad faith.

In Cir V. San Roque, G.R. No. 187485 (2013), the Court ruled that Taxpayers acting in good
faith should not be made to suffer for adhering to general interpretative rules of the
Commissioner interpreting tax laws, should such interpretation later turn out to be erroneous
and be reversed by the Commissioner or this Court. Indeed, Section 246 of the Tax Code
expressly provides that a reversal of a BIR regulation or ruling cannot adversely prejudice a
taxpayer who in good faith relied on the BIR regulation or ruling prior to its reversal.

2. Rule-Making Authority of the Secretary of Finance

The Secretary of Finance, upon recommendation of the CIR, shall promulgate all needful rules
and regulations for the effective enforcement of the provisions of this Code. (Sec. 244)

The power of the Secretary of Finance to review rulings issued by the CIR, which includes the
power to reverse, revise or modify, is limited only to rulings that are adverse to the taxpayers.
 B. INCOME TAX

1. Definition, Nature, And General Principles

Definition
Income Tax is defined as a tax on all yearly profits arising from property, professions, trades, or
offices, or as a tax on the person’s income, emoluments, profits and the like. It may be
succinctly defined as a tax on income, whether gross or net, realized in one taxable year.

Nature
Income tax is generally classified as an excise tax. It is not levied upon persons, property, funds
or profits but upon the right of a person to receive income or profits.

General Principles [Sec. 23, NIRC]

1. A resident citizen of the Philippines is taxable on all income derived from sources within
and without the Philippines;
2. A nonresident citizen is taxable only on income derived from sources within the
Philippines
3. An individual citizen of the Philippines who is working and deriving income from
abroad as an overseas contract worker is taxable only on income derived from sources
within the Philippines: Provided, That a seaman shall be treated as an overseas contract
worker if he (1) is a citizen of the Philippines, and (2) receives compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in
international trade;
4. An alien individual, whether a resident or not of the Philippines, is taxable only on
income derived from sources within the Philippines;
5. A domestic corporation is taxable on all income derived from sources within and
without the Philippines; and
6. A foreign corporation, whether engaged or not in trade or business in the Philippines,
is taxable only on income derived from sources within the Philippines

a) Criteria in Imposing Philippine Income Tax

Citizenship
A citizen of the Philippines is subject to Philippine income tax:
 On his worldwide income, if he resides in the Philippines; or
 Only on his income from sources within the Philippines, if he qualifies as a non-resident
citizen.

Residence
A resident alien is liable to pay Philippine income tax only on his income from sources
within the Philippines but is exempt from tax on his income from sources outside the
Philippines.

Source
An alien is subject to Philippine income tax because he derives income from sources within the
Philippines. Thus, a non-resident alien or non-resident foreign corporation is liable to pay
Philippine income tax on income from sources within the Philippines, such a dividend, interest,
rent, or royalty, despite the fact that he has not set foot in the Philippines.
 b) Types of Philippine Income Taxes
There are several types of income tax under the NIRC, namely:
 Graduated income tax and fixed tax on gross sales or receipts for individuals;
 Normal corporate income tax on corporations;
 Minimum corporate income tax on corporations;
 Special income tax on certain corporations;
 Capital gains tax on sale or exchange of unlisted shares of stock of a
domestic corporation classified as capital assets;
 Capital gains tax on sale or exchange of real property located in the
Philippines classified as a capital asset;
 Final withholding tax on certain passive investment income paid to residents;
 Final withholding tax on income payments made to non-residents;
 Fringe benefits tax on fringe benefits of supervisory or managerial employees;
 Branch profit remittance tax;

Income Tax can also be simplified into three (3) kinds:

1. Net Income Tax – certain deductions and/or exemptions are deducted from the gross
income and the tax iscomputed based on the resulting net income or taxable income,
2. Gross Income Tax – no deductions and/or exemptions are allowed to be deducted,
hence, the tax is computed based on the gross or the aggregate amount earned.
3. Final Income Tax – no deductions and/or exemptions are allowed to be deducted.
Hence the tax is computed based on the gross or passive income but as a distinction, it
is subject to the withholding or final tax as provided under Section 57(A) of the Code

c) Taxable Period

 Calendar Year – An accounting period of 12 months ending on the last day of

December.
 Fiscal Year – An accounting period of 12 months ending on the last day of any month
other than December [Sec. 22(Q), NIRC].
 Short Period – An accounting period which starts after the first month of the tax year or
ends before the last month of the tax year (less than 12 months). Instances whereby
short accounting period arises:
 When a corporation is newly organized.
 When a corporation is dissolved. [Sec. 52(c), NIRC]
 When a corporation changes its accounting period. [Sec 46, NIRC]
 When the taxpayer dies.

General rule: Taxable income shall be computed based on the taxpayer’s annual accounting
period, which may be fiscal year or calendar year

Exception: Taxable income shall be compute based on the basis of calendar year only:
a. If the taxpayer's annual accounting period is other than a fiscal year;
b. If the taxpayer has no annual accounting period;
c. If the taxpayer does not keep books of accounts; or
d. If the taxpayer is an individual [Sec. 43, NIRC].
 d) Kinds of Taxpayers

For income tax purposes, taxpayers are classified generally as follows:

 Individuals
 Corporations
 Estates and Trusts
 Partnerships (General Partnership and General Professional Partnerships)

In Fisher V. Trinidad, 43 Phil 973, the Court ruled that the "stock dividends" in this case, is not
an "income" and not taxable as such under the provisions of section 25 of Act No. 2833.

Sec. 25 of Act 2833 states that the term "dividends" as used in this Law shall be held to mean
any distribution made or ordered to be made by a corporation, out of its earnings or profits
accrued since March 1, 1913, and payable to its shareholders, whether in cash or in stock of
the corporation, Stock dividend shall be considered income, to the amount of the earnings or
profits distributed.

2. Income

Definition and Nature

Income means all wealth which flows to the taxpayer other than a mere return of capital. Income
is a gain derived from labor or capital, or both labor and capital; and includes the gain derived
from the sale or exchange of capital assets.

Income includes earnings, lawfully or unlawfully acquired, without consensual recognition,

express or implied, of an obligation to repay and without restriction as their disposition. Income
may be received in the form of cash, property, service, or a combination of the three.

The essential difference between capital and income is that capital is a fund; income is a flow. A
fund of property existing at an instant of time is called capital. A flow of services rendered by
that capital by the payment of money from it or any other benefit rendered by a fund of capital in
relation to such fund through a period of time is called an income. Capital is wealth, while
income is the service of wealth.

Classification of Income
1. Compensation Income
Means all remuneration for services performed by an employee for his
employer under an employer-employee relationship, unless explicitly
excluded by the Tax Code of special law.

2. Profession or Business Income

The value derived from an exercise of profession, business or utilization of
capital including profit and gain derived from sale or conversion of assets.
 Examples are net income from business and gain from the sale of assets
used in trade or business.

3. Passive Income
An income in which the taxpayer merely waits for the amount to come in.
Examples are royalty, interest, prizes, and winnings.

4. Capital Gain
An income derived from sale of assets not used in trade or business.
Examples are sale of family home and other capital assets.

In Madrigal V. Rafferty 38 Phil 14, G.R. No. 12287 (1918), the Court highlighted that the
essential difference between capital and income is that capital is a fund; income
is a flow. A fund of property existing at an instant of time is called capital. A flow
of services rendered by that capital by the payment of money from it or any other
benefit rendered by a fund of capital in relation to such fund through a period of
time is called income.

When Income Is Taxable

In Section 31 of the NIRC, as amended by TRAIN, taxable income means the pertinent items of
gross income specified in this Code, less the deductions, if any, authorized for such types of
income by this Code, or other special laws

Requisites for income to be taxable

 There is INCOME, gain or profit
 RECEIVED or REALIZED during the
taxable year
 NOT EXEMPT from income tax by law or treaty.

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not
income. In other words, it is income, no capital, which is subject to income tax.

In Limpan Investment Corp. V. Cir, G.R. No. L-21570 (1966), Constructive receipt of income
—The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is not
sufficient justification for the non-declaration of said income in 1957, since the deposit was
resorted to due to the refusal of petitioner to accept the same, and was not the fault of its
tenants; hence, petitioner is deemed to have constructively received such rentals in 1957. The
payment by the sub-tenant in 1957 should have been reported as rental income in said year,
since it is income just the same regardless of its source.
 C. Tests in Determining Whether Income Is Earned for Tax Purposes

(1) Realization Test

While not new in Philippine jurisprudence, courts have not fully adopted the doctrine.

(2) Economic Benefit Test, Doctrine of Proprietary Interest

The Economic Benefit Theory provides that anything, which benefits a person materially
or economically in whatever way, is taxable under the law. (BIR Ruling No. 123-97)

As a general rule, in this jurisdiction, mere increase in the value of property without
actual realization, either through sale or other disposition, is not taxable, the only
exception being that even without sale or other disposition, if by reason of appraisal, the
cost basis of property is increased and the resultant basis is used as the new tax base
for purposes of computing the allowable depreciation expense, the net difference
between the original cost basis and new basis due to appraisal is taxable under the
economic-benefit principle. (BIR Ruling No. 029-98)

(3) Severance Test

Under the Severance Theory Test, income is recognized when there is a separation of
something which is of exchangeable value.

The annual increase in value of an asset is not taxable income because such increase
has not yet been realized. The increase in value i.e., the gain, could only be taxed when
a disposition of the property occurred which was of such a nature as to constitute a
realization of such gain, that is, a severance of the gain from the original capital invested
in the property. The same conclusion obtains as to losses. The annual decline in the
value of property is not normally allowable as a deduction. Hence, to be allowable, the
loss must be realized. (BIR Ruling No. 206-90 citing Surre Warren, Federal Income
Taxation)

In Anderson V. Posadas, G.R. No. 44100 (1938) - Goodwill is defined as the advantage or
benefit which is acquired by an establishment, beyond the mere value of the capital stock,
funds, or property employed therein in consequence of the general public patronage and
encouragement which it receives from constant or habitual customers on account of its local
position or common celebrity or reputation for skill, affluence, punctuality, or from other
accidental circumstances or necessities, or even from accident partialities or prejudices.

If the good will, that is, the good reputation of the business is acquired in the course of its
management and operation, it does form part of the capital with which it was established. It is an
intangible moral profit, susceptible of valuation in money, acquired by the business by reason of
the confidence reposed in it by the public, due to the efficiency and honesty shown by the
manager and personnel thereof in conducting the same on account of the courtesy accorded its
customers, which moral profit, once it is valuated and used, becomes a part of the assets.

In Commissioner V. Javier, 199 SCRA 824 - Fraud must be actual and constructive. This
means that there must be intentional wrongdoing in order to evade taxes. Not declaring a
certain income but indicating it in a footnote for the BIR to investigate and determine if it is
taxable is clearly not fraudulent.

D. Tax-Free Exchanges
Tax-free exchanges refer to those instances enumerated in Section 40(C)(2) of the NIRC of
1997, as amended, that are not subject to Income Tax, Capital Gains Tax, Documentary Stamp
Tax and/or Value-added Tax, as the case may be.

In general, there are two kinds of tax-free exchange: (1) reorganization; and (2) transfer to a
controlled corporation.

E. Situs of Income

Factors that determine the situs of income tax (Sec. 23)

1. Nationality
2. Residency
3. Source of Income