TAXATION I Maria Theresa San Pablo - Llamado 2nd Semester, AY 2017-2018 De La Salle University College of Law
Part 1: General Principles Reference:
I.
Vitug, Jose C. and Acosta, Ernesto D. Tax Law and Jurisprudence. Manila: Rex Book Store, Inc. 2006. (Part I only, pp. 1-48)
CONCEPT A. Taxation and Tax Tax defined. B. Tax as distinguished from other forms forms of exactions (Vitug, p. 29-30) 1. Tax vs. Tariff 2. Tax vs. license fee
Case(s): Osmeña v. Orbos (220 SCRA 703) PAL v. Edu (164 SCRA 320) Progressive Progressive Development v. Q.C. (172 SCRA 629) Compania de Tabacos v. City of Manila (8 SCRA 367) 3. Tax vs. Toll Sec. 155 of LGC Case: Ferrer Jr. vs. Bautista (G.R. No. No. 210551, June 30, 2015) 2015) 4. Tax vs. Special Assessment
Sec. 240 LGC Case(s): Republic v. Bacolod Bacolod Murcia Murcia (17 SCRA 632) 5. Tax vs. Ordinary debt
Case(s): Philex Mining Corporation v. CIR (294 SCRA 687) Caltex v. COA (208 SCRA 755) Air Canada vs. CIR CIR (G.R. No. 169507, 169507, January January 11, 2016) II.
THEORY AND BASIS OF TAXATION A. Lifeblood Theory B. Necessity Theory
Case(s):
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Phil Guaranty Co., Inc. v. CIR (13 SCRA 775) Ferdinand R. Marcos II v. CA (273 SCRA 47) NPC v. City of Cabanatuan (401 SCRA 259) C. Benefits-Protection Theory (Symbiotic Relationship)
Case(s): Commissioner v. Algue (158 SCRA 9) D.
III.
Jurisdiction over Subject and Objects
PURPOSES/OBJECTIVES OF TAXATION A. Revenue-raising B. Non-revenue/special or regulatory
Case(s): Caltex v. Commission on Audit (208 SCRA 726) IV.
GENERAL PRINCIPLES OF A SOUND TAX SYSTEM (Vitug, pp. 2-3) A. Fiscal adequacy B. Theoretical justice C. Administrative feasibility
V.
SCOPE AND LIMITATIONS OF TAXATION (Vitug, pp. 3-24) A. Inherent Limitations 1. Public Purpose Case(s): Pascual v. Sec. Public Works (110 Phil. 331) Planters Products, Inc.v. Fertiphil Corporation Corporation (548 SCRA 485) 2. Inherently Legislative General Rule: Power to tax may not be delegated
Case(s): Tio vs. Videogram Regulatory Board (151 SCRA 208) Commissioner Commissioner vs. Santos (277 SCRA 617) Kapatiran v. Tan (163 SCRA 372) Exceptions from prohibition against delegation of power to tax:
a) Delegation to Local Governments Sec. 5, Art. X, Philippine Constitution Local Government Code (RA 7160), Book ii
Case(s): 2
Phil Guaranty Co., Inc. v. CIR (13 SCRA 775) Ferdinand R. Marcos II v. CA (273 SCRA 47) NPC v. City of Cabanatuan (401 SCRA 259) C. Benefits-Protection Theory (Symbiotic Relationship)
Case(s): Commissioner v. Algue (158 SCRA 9) D.
III.
Jurisdiction over Subject and Objects
PURPOSES/OBJECTIVES OF TAXATION A. Revenue-raising B. Non-revenue/special or regulatory
Case(s): Caltex v. Commission on Audit (208 SCRA 726) IV.
GENERAL PRINCIPLES OF A SOUND TAX SYSTEM (Vitug, pp. 2-3) A. Fiscal adequacy B. Theoretical justice C. Administrative feasibility
V.
SCOPE AND LIMITATIONS OF TAXATION (Vitug, pp. 3-24) A. Inherent Limitations 1. Public Purpose Case(s): Pascual v. Sec. Public Works (110 Phil. 331) Planters Products, Inc.v. Fertiphil Corporation Corporation (548 SCRA 485) 2. Inherently Legislative General Rule: Power to tax may not be delegated
Case(s): Tio vs. Videogram Regulatory Board (151 SCRA 208) Commissioner Commissioner vs. Santos (277 SCRA 617) Kapatiran v. Tan (163 SCRA 372) Exceptions from prohibition against delegation of power to tax:
a) Delegation to Local Governments Sec. 5, Art. X, Philippine Constitution Local Government Code (RA 7160), Book ii
Case(s): 2
LTO v. City of Butuan (322 SCRA 805) Basco v. PAGCOR (197 SCRA 52) Ferrer Jr. vs. Bautista (supra) b) Delegation to the President President Sec. 28(2) Art. VI, Constitution Sec. 401, Tariff and Customs Code
Case(s): Garcia v. Executive Secretary (210 SCRA 219) ABAKADA v. Ermita Ermita (469 SCRA 1) 1) c) Delegation to Administrative Agencies Case(s): Maceda v. Macaraig (197 SCRA 771) 771) Osmeña v. Orbos (220 SCRA 703) Commissioner Commissioner v. CA (261 SCRA 236) 3. Territorial
Case(s): Iloilo Bottlers v. City of Iloilo (164 SCRA 607) Smith vs. CIR (CTA Case No. 6268. Sep. 12, 2002) 4. International Comity Sec. 2, Art. II Philippine Constitution Case(s): Tañada v. Angara (272 SCRA 18) CIR vs. Pilipinas Shell Petroleum Corporation (G.R. No. 188497, February 19, 2004) Air Canada vs. CIR CIR (supra) 5. Exemption of Government Entities, Entities, Agencies, and Instrumentality Sec. 27(C), NIRC
Case(s): Manila International International Airport Airport Authority Authority v. CA (495 SCRA 591) 591) Macta-Cebu International International Airport Authority vs. City of Lapu-Lapu (G.R. No. 181756, June 15, 2015) Philippine Fisheries Development Development Authority v. CA (528 SCRA 706) B. Constitutional Limitations [Note that the Constitution does not grant the power to tax on the State, since the power is inherent. Rather, it regulates and defines, rather than grant, grant, the power.]
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1. Provisions directly affecting Taxation a. Prohibition against imprisonment for non-payment of poll tax: No person shall be imprisoned for non-payment of a poll tax. (Sec. 20, Art. III, Constitution) Community tax v. Poll tax Sec. 156 – 164, Local Government Code (LGC) (RA 7160) b. Uniformity and Equity in Taxation: The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. (Sec. 28(1), Art.VI, Constitution)
Case(s): Uniformity in Taxation City of Baguio v. de Leon (25 SCRA 938) Commissioner v. Lingayen Gulf Electric (164 SCRA 27) Valid Classification of taxpayers/subject matter to be taxed Pepsi Cola v. City of Butuan (24 SCRA 787) c. Grant By Congress Of Authority To President To Impose Tariff Rates: The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions and as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues and other duties or imposts within the framework of the national development program of the Government. d. Prohibition Against Taxation Of Religious, Charitable Entities And Educational Entities: Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and non-profit cemeteries, and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes shall be exempt from taxation. (Sec. 28(3), Art. VI, Constitution)
Case(s): Abra Valley College v. Aquino (162 SCRA 106) Lung Center of the Philippines v. Quezon City (433 SCRA 119) e. Prohibition Against Taxation Of Non-Stock, Non-Profit Institutions: All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. (Sec. 4(3) and (4), Art. XIV, Constitution; Sec. 28(3), Art. VI, Constitution) Secs. 27(B) and 30(H) of NIRC Revenue Memorandum Circular (RMC) No. 76-2003
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Revenue Regulations No. 13-98 (Deductibility of Contributions or Gifts Actually Paid or Made to Accredited Donee Institutions in Computing Taxable Income) f. Majority Vote Of Congress For Grant Of Tax Exemption: No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of the Congress. (Sec. 28(4), Art. VI, Constitution) g. Prohibition On Use Of Tax Levied For Special Purpose: All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government. (Sec. 29, Art. VI, Constitution)
Case(s): Osmeña v. Orbos (220 SCRA 703) Gaston v. Republic Planters Bank (158 SCRA 626) h. President’s Veto Power On Appropriation, Revenue And Tariff Bills: The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object. (Sec. 25(2) and Sec. 27(2), Art. VI, Constitution)
Case(s): Gonzales v. Macaraig (191 SCRA 452) Araullo v. Aquino III (G.R. No. 209287, 209135 etc. February 3, 2015) i. Non-impairment of Jurisdiction of the Supreme Court: The Supreme Court shall have the power to review and revise, reverse, modify or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final judgment or decrees of lower courts in all cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto. (Sec. 2 and 5(b), Art. VIII, Constitution) j. Grant Of Power To LGUs To Create Its Own Sources Of Revenue: Each local government unit shall have the power to create its own sources of revenue and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments. Local government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them. 2. Provisions indirectly affecting Taxation a. Due Process. Sec. 1, Art. III, Constitution
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Case(s): Tan v. Del Rosario (237 SCRA 324) Sison v. Ancheta (130 SCRA 654) b. Religious Freedom. Sec. 5, Art. III, Constitution
Case(s): American Bible Society v. City of Manila (101 Phil 386) Tolentino vs. Sec. of Finance (235 SCRA 630) c. Non-impairment of Obligations of Contracts. Sec. 10, Art. III, Constitution Sec. 11, Art. XII, Constitution
Case(s): Tolentino v. Sec. of Finance (235 SCRA 630) VI.
STAGES OF TAXATION (Vitug, pp. 25-26) A. Levy B. Assessment and Collection C. Payment D. Refund
VII.
KINDS OF TAXES (Vitug, pp. 26-31) A. As to Object 1. Personal, capitation or poll tax (e.g. basic community tax) 2. Property tax (e.g. realty tax) 3. Privilege tax (e.g. internal revenue taxes, customs duties)
Case(s): Villanueva v. City of Iloilo (26 SCRA 578) Ass. of Customs Brokers v. Municipal Board (93 Phil 106) B. As to Burden or Incidence 1. Direct (e.g. income, estate and donor’s tax) 2. Indirect (e.g. excise, VAT)
Case(s):
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Tolentino v. Secretary of Finance (235 SCRA 630) Philippine Acetylene v. Commissioner (20 SCRA 1056) Maceda v. Macaraig (197 SCRA 771; 223 SCRA 217) Comm. v. John Gotamco (148 SCRA 36) CIR v. PLDT (478 SCRA 61) C. As to Tax Rates 1. Specific tax 2. Ad valorem 3. Mixed D. As to Purposes 1. General or Fiscal (e.g. income taxes) 2. Special, Regulatory or Sumptuary (e.g SEF under the LGC) E. As to Scope or Authority to Impose 1. National – internal revenue taxes 2. Local – real property tax, municipal tax F. As to Graduation 1. Progressive (e.g. income tax) 2. Regressive 3. Proportionate (e.g. real estate tax (Sec. 233 Local Government Code))
VIII.
DOCTRINES IN TAXATION (Vitug, pp. 39-48) A. Prospectivity of Tax Laws
Secs. 203, 222, NIRC Sec. 1603, TCC Secs. 222, 225, LGC B. Imprescriptibility C. Situs of Taxation (Vitug, p.10)
Case(s): Wells Fargo v. Collector (70 Phil 325) Commissioner v. BOAC (149 SCRA 395) CIR vs. Japan Airlines (202 SCRA 450) Tan v. Del Rosario (237 SCRA 324)
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D. Double Taxation 1. Strict Sense
Case(s): Alcan Packaging Starpack Corporation v. The Treasurer Of The City Of Manila (C.T.A. AC NO. 17. September 11, 2006) 2. Broad Sense
Case(s): Villanueva v. City of Iloilo (26 SCRA 578) Commissioner Of Internal Revenue vs. Solidbank Corporation (416 SCRA 436) 3. Constitutionality of Double Taxation
Case(s): China Banking Corporation v. Court Of Appeals, Court Of Tax Appeals, and CIR (403 SCRA 634) 4. Tax Treaties (as Relief from Double Taxation)
Case(s): Commissioner Of Internal Revenue v. S.C. Johnson And Son, Inc. (309 SCRA 87) Air Canada v. CIR (supra) E. Escape from Taxation 1. Shifting of tax burden a. Ways of Shifting the tax burden b. Taxes that can be shifted c. Meaning of impact and incidence of taxation
2. Tax avoidance
Case(s): Delpher Trades Corp. v. IAC (157 SCRA 349) Yutivo v. CTA (1 SCRA 160) 3. Tax evasion
Case(s): Republic v. Gonzales (13 SCRA 633) CIR v. Estate of Benigno Toda (438 SCRA 290) 4. Exemption from Taxation
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a.
Meaning of Exemption from Taxation
b.
Nature of Tax Exemption
Case(s): Tolentino v. Sec. of Finance (235 SCRA 630) CIR v. PLDT (478 SCRA 61) CIR vs. John Gotamco and Sons, Inc. (148 SCRA 36) c. Kinds of tax exemption i. Express ii. Implied iii. Contractual d. Nature of the power to grant tax exemption e. Rationale/grounds for tax exemption f. Revocation of tax exemption
F. Compensation and Set-Off (Vitug, p. 43)
Case(s): Philex Mining Corp. vs. CIR (294 SCRA 687) CIR vs. ESSO Standard Eastern, Inc. (172 SCRA 364) Air Canada v. CIR (supra) G. Taxpayer’s Suit
Case(s): Pascual v. Sec. of Public Works, 110 Phil. 331 Dumlao v. Comelec (95 SCRA 392) Lozada and Igot v. Comelec (120 SCRA 337) Gonzales v. Marcos (65 SCRA 624) Osmena v. Abaya (G.R. Nos. 211737 and 214756, January 13, 2016) H. Compromises
Sec. 204, NIRC Sec. 709, Sec. 2316, TCC I.
Tax Amnesty 1. Definition 2. Distinguished from tax exemption
IX.
CONSTRUCTION AND INTERPRETATION OF TAX LAWS A. Tax Laws
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1. General Rule 2. Exception B. Tax Exemption and Exclusion 1. General Rule
Case(s): CIR v. YMCA (298 SCRA 83) 2. Exceptions
Case(s): Maceda v. Macaraig (197 SCRA 771) Maceda v. Macaraig (223 SCRA 217) C. BIR Rules and Regulations (Secs. 4 and 244 of the NIRC) 1. Administrative rules and regulations are intended to carry out not to modify the law.
Case(s): CIR v. C.A., R.O.H Auto Prodcuts Phil., Inc., et.al. (240 SCRA 368) 2. Interpretative regulations need not be published and neither is hearing required if intended only to clarify statutory provisions for proper observance.
Case(s): CIR vs. CA, CTA and Fortune Tobacco (261 SCRA 236) 3. BIR Rulings and circulars, rules and regulations promulgated by the Commissioner of Internal Revenue would have no retroactive application if to so apply them would be prejudicial to the taxpayers.
Sec. 246, NIRC Case(s): CIR v. Telefunken Semiconductor Philippines, Inc. (249 SCRA 401) CIR v. Mega General Merchandising Corp. (166 SCRA 166) CIR v. Burroughs (142 SCRA 324) ABS-CBN v. CTA (108 SCRA 142) 4. Any revocation, modification, reversal of such rules/regulations including rulings of the CIR shall not be given retroactive effect except in case of rulings (a) where taxpayer deliberately misstates or omits material facts; (b) where facts subsequently gathered materially differ from the facts on which rulings are based; and (c) where taxpayer acted in bad faith.
Case(s): CIR v. Benguet Corporation (463 SCRA 28)
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5. There is requirement of notice and hearing when promulgated rules substantially adds to or increases the burden of those governed.
Case(s): CIR vs. CA, CTA and Fortune Tobacco (261 SCRA 236) 6. Tax regulations differentiated: Interpretative v. Legislative
Case(s): BPI Leasing Corporation v. CA, CTA and CIR (416 SCRA 4) D. Penal Provisions of Tax Laws
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Part 2: Income Taxation
References: 1. Mamalateo, Victorino C., Philippine Income Tax. Manila: Rex Bookstore, Inc. 2010 Edition. 2. National Internal Revenue Code of 1997. Mandaluyong City: National Book Store, July 2009 Edition. I.
INTRODUCTION (Mamalateo, pp. 1-10) A. Income Tax Systems 1. Global Tax System 2. Schedular Tax System 3. Semi-schedular or semi-global tax system B. Features of the Philippine Income Tax Law 1. Direct tax 2. Progressive tax 3. Comprehensive 4. Semi-schedular or semi-global tax system C. Criteria in Imposing Philipppine Income tax 1. Citizenship principle 2. Residence principle 3. Source principle D. Types of Philippine Income tax E. Taxable Period (Mamalateo, pp. 345-350) 1. Calendar Year 2. Fiscal Year
Secs. 46, 47, NIRC 3. Short Period
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II.
CONCEPT OF INCOME A. Income Tax Defined
Madrigal v. Rafferty (38 Phil 414) Fisher v. Trinidad (43 Phil 973) B. When is income taxable? (Mamalateo, pp. 11-12) 1. Existence of income 2. Realization of income a. Tests of Realization
Fisher v. Trinidad (43 Phil 973) b. Actual v. constructive receipt
Limpan v. CIR (17 SCRA 703) Republic v. dela Rama (18 SCRA 861) 3. Recognition of Income 4. Methods of accounting for taxable income and deductible expenses
(Mamalateo, pp. 335-345; pp. 350-354) a. Cash v. accrual method of accounting
Secs. 43 – 45, 50, NIRC Sec. 51- 53 Rev. Reg. No. 2 (RR 2) b. Installment v. deferred payment v. percentage of completion (in long term contracts)
Sec. 44, RR 2 c. Distinction between tax accounting and financial accounting C. Tests in determining income (Mamalateo, pp. 79-81) 1. Realization Test
Eisner v. Macomber (252 US 189) Fisher v. Trinidad (43 Phil 973) 2. Claim of Right doctrine or Doctrine of ownership, command, or control 3. Economic benefit test / Doctrine of proprietary interest 4. Severance Test
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III.
KINDS OF TAXPAYERS A. Individual Taxpayers (Mamalateo, pp. 21-37) 1. Citizens a. Resident citizens b. Non-resident citizens 2. Aliens a. Resident aliens b. Non-resident aliens i.
180 – day rule
ii. NRA engaged in trade or business in the Philippines iii. NRA not engaged in trade or business in the Philippines c. Special Class of Individual Employees d. Estates and Trusts e. Co-ownerships f. General Professional Partnerships i.
GPP is not taxable entity
ii. Professional fee of GPP exempt from expanded withholding tax iii. Share of partners in partnership profit deemed distributed to partners in year profit earned B. Corporations (Mamalateo, pp. 37-59) 1. Domestic corporation, defined 2. Partnership taxable as corporation 3. Joint Venture (JV) and Consortium a. Exempt JV and consortium b. Taxable JV consortium 4. Foreign Corporations a. Resident foreign corporation
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b. Non-resident foreign corporation c. Subsidiary v. branch of a foreign corporation
IV.
GROSS INCOME (Mamalateo, pp. 60-148) A. Gross Income Defined B. Gross Income v. Net Income v. Taxable Income C. Sources of Income Subject to Tax 1. Compensation income
Sec. 32(A)(1), NIRC Sec. 2.78 RR 2-98 Convenience of the Employer Rule Collector v. Henderson (1 SCRA 649) 2. Fringe Benefits
Sec. 33, NIRC RR 3-98 as amended by sec. 2 of RR 01-2015 3. Income from Business
Sec. 32(A), NIRC 4. Professional Income 5. Income from dealings in property (Mamalateo, pp. 302 – 333)
Sec. 32 (A, 3) NIRC Rodriguez v. Collector (28 SCRA 1119) Gonzales v. CTA (14 SCRA 71) Gutierrez v. CTA (101 Phil 173) i.
Type of properties aa. ordinary assets bb. capital assets
What is capital asset
Sec. 39 (A), NIRC Rev. Regs. 07-03
Distinction between ordinary and capital asset
Long term (capital) asset v. short term (capital) asset
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Sec. 39 (B), NIRC ii. Types of gains from dealings in property aa.
Ordinary income v. capital gain
Sec. 39, NIRC and Sec. 22 (Z), NIRC bb. Actual v. presumed gain
Sec. 6 (E), NIRC Sec. 24(D), NIRC Sec. 27(D)(5), NIRC Sec. 100, NIRC cc.
Net capital gain (loss)
Sec. 39 (A), NIRC Tuason v. Lingad (58 SCRA 170) Ferrer v. Collector (5 SCRA 1022) Calasanz v. Commissioner (144 SCRA 664) Gonzales v. CTA (14 SCRA 79) iii. Special rules pertaining to income/loss from dealings in property classified as capital asset aa.
Computation of the amount of the gain (loss)
Sec. 40 (A), NIRC
Cost or basis of the property sold
Sec. 40 (B), NIRC
Cost or basis of property exchanged in corporate readjustment
Sec. 40 (C) (5), NIRC
Recognition of gain/loss in exchange of property General rule
Sec. 40 (C, 1), NIRC Exceptions: *
Where no gain/loss shall be recognized
Sec. 40 (C)(2), NIRC RMO 17-2016 Meaning of merger/consolidation/control securities
Sec. 40 (C) (6), NIRC
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Com. v. Rufino (148 SCRA 42) Revenue Memo Order 26-92 Rev. Regs. 18-2001 Rev. Memorandum Ruling No. 01-01 Rev. Memorandum Ruling No. 01-02 *
Transaction where gain is recognized but not the loss Exchange not solely in kind
Sec. 40 (C)(3), NIRC Wash sales/compared with short selling
Sec. 38, NIRC Sec. 39 (F), NIRC Transactions between related taxpayers
Sec. 36 (B) Illegal transactions
Sec. 96, RR 2 *
Gains and losses attributed to exercise privilege or options to buy/sell property
Percentage of gain or loss taken into account (note: for individuals only)
Sec. 39 (B), NIRC bb.
Income tax treatment of capital loss Capital loss limitation rule (applicable to both corporations and individuals)
Sec. 39 (C), NIRC
Net loss Carry-Over Rule (applicable only to individuals)
Sec. 39 (D), NIRC iv. Income from dealings in capital asset subject to special rules aa.
Dealings in real property situated in the Philippines
Rev. Regs. 07-03 Rev. Regs. 13-99 bb.
Dealings in shares of stock of Philippine corporations
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Definition of “shares”
Sec. 22 (L), NIRC Sec. 24(C), NIRC Sec. 27(D)(2), NIRC Sec. 28(A)(7)(c), NIRC Sec. 55, RR 2 Rev. Regs. 6-2008
shares listed and traded in the stock exchange shares not listed and traded in the stock exchange
cc. Other capital assets v. Sale of Principal Residence
Rev. Regs. No. 13-99 Rev. Regs. No. 14-2000 6. Passive investment income a. Interest income
Sec. 32(A)(4) NIRC Sec. 24(B)(1) NIRC Sec. 22(Y) NIRC Sec. 22(FF) NIRC Sec. 28(A)(4), NIRC Sec. 27(D)(3), NIRC Sec. 57 RR2 b. Dividend income i.
Dividends, defined
ii. Kinds of dividends aa. Cash dividend bb. Stock dividend cc. Property dividend dd. Liquidating dividend
Sec. 73, NIRC Sec. 59, NIRC Commissioner v. Wander Phils. (160 SCRA 573) ee. Disguised dividend
Sec. 32 (A)(7), NIRC Revenue Memo No. 31-90 Secs. 250-253, 58, 71 RR 2 CIR v. Manning (66 SCRA 14) Republic v. de la Rama (18 SCRA 861)
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c. Royalty income
Sec. 32(A)(6) Sec. 42(A)(4) d. Rental income
Sec. 32 (A)(5) NIRC Sec. 74, 79, 58 RR 2 Limpan v. CIR (17 SCRA 703) i.
Lease of Personal Property
ii. Lease of real property iii. Tax Treatment of aa. Leasehold improvements by lessee bb. VAT added to rental/paid by the lessee cc. Advance rental/long term lease 7. Annuities/Proceeds from life insurance/other types of insurance
Sec. 32(A)(8), NIRC Sec. 48 RR 2 8. Prizes and awards
Sec. 32(A)(9), NIRC 9. Pensions/retirement benefits/separation pay
Sec. 32(A)(10), NIRC 10. Income from any source whatever a. Forgiveness of indebtedness
Sec. 30, RR 2 b. Recovery of accounts previously written off
Sec. 34(E)(1), NIRC c. Receipt of tax refunds or credit
Sec. 34(C)(1), NIRC d. Income from any source whatever D. Situs/Sources of Income (Mamalateo, pp. 64-74) 1. Meaning of situs of income 2. Classification of income as to source
Sec. 42, NIRC Sec. 152-165, RR2 a. Gross or taxable income from sources within the Philippines
Sec. 42(A), (B), NIRC Sec. 28(A)(3)(a)(b), NIRC Commissioner v. JAL (202 SCRA 450) 19
Commissioner v. BOAC (149 SCRA 395) NDC v. Commissioner (151 SCRA 472) Howden v. Collector (13 SCRA 601) Air Canada v. CIR (supra) b. Gross or taxable income from sources without the Philippines
Sec. 42 (C) and (D), NIRC c. Income partly within/partly without the Philippines
Sec. 42 (E), NIRC 3. Source Rules in determining income from within and without a. Interests – residence of debtor b. Dividends – residence of corporation paying dividend c. Services – place of performance of service d. Rentals and royalties – location of property or interest in such property e. Sale of real property – location of real property f. Sale of personal property g. Shares of stock of domestic corporation
V.
EXCLUSIONS FROM GROSS INCOME AND EXEMPT CORPORATIONS A. Exclusions From Gross Income (Mamalateo, pp. 149-170) 1. Rationale of the exclusions 2. Taxpayers who may avail of the exclusions 3. Exclusions distinguished from deductions and tax credit 4. Under the Constitution a. Income derived by the government or its political subdivision from the exercise of any essential governmental function
Sec. 32 (B)(7), NIRC Sec. 4 (3) Art. XIV Constitution Sec. 4 (4) Art. XIV, Constitution Sec. 28 (3) Art. VI, Constitution 5. Under the Tax Code a. Proceeds of Life Insurance Policies
Sec. 32(B)(1), NIRC Sec. 62 RR 2 b. Return of premium paid
Sec. 32(B)(2), NIRC Sec. 48 RR 2
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c. Amounts received under life insurance, endowment or annuity contracts d. Value of property acquired by gift, bequest, devise or descent e. Amounts received through accident or health insurance
Sec. 32(B)(4), NIRC Sec. 63 RR2 f. Income exempt under tax treaty
Sec. 32(B)(5), NIRC g. Certain passive income of foreign governments from their Philippine investments
Section 32 (B)(7,a) NIRC as amended by RA 8424 Com. V. Mitsubishi Metal (181 SCRA 214) h. Interest income from long term deposit or investment
Sec. 22 (FF), NIRC Sec. 24 (B)(1), NIRC Sec. 25 (A)(2), NIRC Note: Exemption applies only to individual taxpayers except nonresident alien not engaged in trade or business. They are taxed at 25%. For corporate taxpayers no exemption i.
Retirement benefits, pensions, gratuities, etc.
Sec. 32(B)(6), NIRC i.
Retirement benefits received under R.A. No. 7641, 4917 and Sec. 60(B) of Tax Code
ii. Separation pay for causes beyond control of employee iii. Retirement benefits from foreign government agencies iv. Payments under US Veterans Administration j. Winnings/Prizes i.
Philippine Charity Sweepstakes and lotto winnings
Sec. 24 (B)(1), NIRC ii. Prizes and awards in sports competition
Sec. 32 (B)(7,d), NIRC Reference: RA 7549 iii. Prizes and awards / religious / charitable / scientific / artistic / literary
Sec. 32 (B)(7,c) - Requisites for exclusion
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k. Gain derived from buying and selling shares of stocks classified as capital asset listed and traded in the local exchange excluded/exempt from income tax but subject to percentage tax
Sec. 127, NIRC RR 6-08 dated April 22, 2008 6. Under a Tax Treaty 7. Under special laws B. Exempt Corporations (Mamalateo, pp. 170-177)
VI.
COSTS, DEDUCTIONS AND PERSONAL EXEMPTIONS (Mamalateo, pp. 178-277) A. Deductions from Gross Income, General Rules 1. Deductions construed strictly against taxpayers claiming it 2. Deductions must be paid or incurred in connection with the taxpayer’s trade, business or profession 3. Deductions must be supported by adequate receipts or invoices (except for optional standard deduction) B. Return of Capital (Cost of Sales/Services) 1. Sale of inventory of goods by manufacturers and dealers of properties 2. Sale of stock in trade by a real estate dealer and dealer in securities 3. Sale of Services C. Itemized Deductions 1. Business expenses (Sec. 65, RR 2) a. Requisites for Deductibility
Nature: Ordinary and necessary
CIR v. General Foods (Phils.), Inc. (401 SCRA 545)
Paid and incurred during taxable year
CIR vs. Isabela Cultural Corporation (515 SCRA 556) b. Salaries, wages and other forms of compensation for personal se rvices actually rendered, INCLUDING the grossed-up monetary value of the fringe benefit subjected to FBT which tax should have been paid
Sec. 34(A), NIRC Secs. 70-73 RR2 Kuenzle & Streiff, Inc. v. CIR (16 Phil 670) C.M. Hoskins v. Commissioner (30 SCRA 434) Aguinaldo Industries v. Com. (112 SCRA 136) c. Traveling/Transportation expenses (Sec. 66 RR2; RR 3-98) d. Cost of materials (Sec. 67, RR 2)
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e. Rentals and/or other payments for use or possession of property (Sec.
74, RR 2) f. Repairs and Maintenance (Sec. 68, RR 2)
Com. V. Soriano Cia (38 SCRA 67) Gutierrez v. Collector (14 SCRA 33) g. Expenses under lease agreements (Sec. 74, RR 2) h. Expenses for professionals (Sec. 69, RR 2) i.
Entertainment expenses (RR 3-98)
RR 10-2002 (Ceilings for entertainment, amusement and recreational expenses (July 10, 2002) j. Political campaign expenses k. Training Expenses 2. Interest
Sec. 34 (B), NIRC RR 13-00 Secs. 78-79 RR2 a. Requisites for deductibility
Com. v. Prieto (109 Phil 592) Kuenzle v. Coll (28 SCRA 365) b. Non-deductible interest expense c.
Interest subject to special rules
Sec. 34(B)(2), NIRC aa. Interest paid in advance bb. Interest periodically amortized
Sec. 34(B)(3), NIRC cc. Interest expense incurred to acquire property for use in trade/business/profession 3. Taxes
Sec. 34(C), NIRC RMC 13-80 Sec. 80-83, RR2 a. Requisites for deductibility b. Non-deductible taxes c. Treatments of surcharges/interests/fines for delinquency d. Treatment of special assessment e. Tax Credit v. Deduction
CIR v. Lednicky, et al. (11 SCRA 603)
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CIR v. Bicolandia Drug Corp. (496 SCRA 176) 4. Losses
Sec. 34 (D), NIRC Sec. 93-101 and 104, RR2 RR 12-77 Plaridel Security v. Com (21 SCRA 1187) Com. v. Priscilla Estate (11 SCRA 130) Fernandez Hermanos v. Com (29 SCRA 552) a. Requisites for deductibility b. Other types of losses i.
Capital losses
ii. Securities becoming worthless iii. Shrinkage in value of stocks iv. Losses on wash sales of stocks or securities v. Wagering losses vi. NOLCO 5. Bad Debts
Sec. 34(E), N IRC Secs. 102-103, RR2 RR 25-2002; RR 5-99 a. Definition b. Requisites for deductibility
Collector v. Goodrich (21 SCRA 1336) PRC v. CA (256 SCRA 667) 6. Depreciation
Sec. 34(F), NIRC Sec. 110-115, RR2 a. Definition b. Requisites for deductibility c. Methods of computing depreciation allowance i.
Straight-line method
ii. Declining-balance method iii. Sum-of-the-years-digit method
Basilan v. Com (21 SCRA 17)
24
7. Depletion
Sec. 34(G), NIRC Sec. 3, RR 5-76 a. Definition b. Requisites for deductibility 8. Charitable and Other Contributions
Sec. 34(H), NIRC RMC No. 88-07 EO 720 dated 11 April 2008 a. Definition b. Requisites for deductibility
Roxas v. CTA (23 SCRA 276) 9. Contributions to Pension Trusts
Sec. 34(J), NIRC a. Definition b. Requisites for deductibility D. Optional standard deduction 1. Sec. 34(L), NIRC 2.
RR 16-08 dated Nov. 16, 2008 RR 2-2010 dated Feb. 24, 2010 The following may claim OSD in lieu of itemized deductions a. Individuals i.
Resident Citizen
ii. Non-resident citizen iii. Resident Alien iv. Estates and Trusts b. Corporations E. Personal and additional exemptions (R.A. 9504, Minimum Wage Earner Law) 1. Basic personal exemptions 2. Additional exemptions for taxpayer with dependents 3. Status-at-the-end-of-the-year rule F. Items not deductible 25
1. Personal, living or family expenses 2. Amount paid for new buildings or for permanent improvements (Capital expenditures) 3. Amount expended in restoring property 4. Premiums paid on life insurance policy covering life or any other officer or employee financially interested 5. Interest expense, bad debt and losses from sales of property between related parties Sec. 36 NIRC
VII.
TAX BASE AND TAX RATES (Mamalateo, pp. 278-300) A. Computation of Tax Tax payable by a taxpayer is computed as follows:
Applicable Tax Base Multiplied by:
Applicable Tax Rate Income Tax
Less:
Any Tax Credit (either creditable withholding tax or foreign taxes paid) Tax Payable
B. Tax Base 1. Taxable income a. Compensation Income, Business and Professional Income, Capital gain not subject to Final Tax, Passive income not subject to final tax and other income LESS b. Deductions c. Exemptions (in case of individuals) 2. Gross Income a. Under NIRC - Generally, passive income subject to final tax b. Under special laws – PEZA, SBMA registered entities 3. HIGHEST between Gross selling price, fair market value per tax declaration and zonal value per BIR in case of capital asset Section 6(E), NIRC 4. Gain from sale of Real property
26
5. Net capital gain – in case of sale of shares not listed and traded in the stock exchange C. Tax Rates 1. Individuals a. Graduated income tax rates on taxable inc ome b. Capital gains – Flat rate i.
on sales of shares of stock of domestic corporation (except dealers in securities aa.
½ of 1% Gross selling price – listed shares
bb.
5% for 1 st 100,000 and 10% in excess of 100,000 of Net Capital Gains – shares not listed and exchanged in stock exchange
ii. on sale of real property classified as capital asset by individual – Flat rate of 6% c. Passive income subject to final tax at preferential rates 2. Corporations a. Domestic i.
Regular of normal income tax rate – flat rate (30% starting 2009)
ii. MCIT
Sec. 27, NIRC RR 9-98 RR 12-07 iii. Domestic corporations entitled to preferential tax rates aa.
Proprietary educational institutions – 10% of taxable income
bb.
Foreign Currency deposit unit of local universal or commercial bank – 10% final tax
cc.
Firms taxed under special income tax regimes (e.g., registered entities under PEZA law (RA 7916) and Bases Conversion and Dev’t. Act (RA 7227) – 5% final tax on gross income
iv. Resident Foreign Corporations (RFC) aa.
General Rule: 30% of net taxable income from sources within the Philippines
bb.
Exempt entities 1. Regional Area Headquarters 2. Representative Office
cc.
RFCs subject to preferential tax rates 1. International Carrier – 2 ½% on Gross Philippine billings 2. Offshore banking units (OBUs) – 10% final tax
27
3. Regional Operating Headquarters – 10% net taxable income 4. Foreign currency deposit unit in Philippines of foreign bank – 10% final tax 5. Branch of foreign corp. registered with PEZA, SBMA, CDA, etc. – 5% final tax on gross income 6. Qualified Service Contractor and sub-contractor engaged in petroleum operations in the Philippines
P.D. 87 P.D. 1354 dd. Branch profits remittance tax v. Non-resident Foreign Corporations (NRFC) aa. General Rule: 30% of gross income bb. NRFCs subject to preferential tax rates
VIII.
TAXATION OF INDIVIDUALS (Mamalateo, pp. 23-37)
A. Classification of Individual Taxpayers 1. Citizens of the Philippines a. Resident Citizen (RC) b. Non-resident (NRC)
Sec. 22(E), NIRC Sec. 23(C); 24(A.1,b) 2. Aliens a. Resident Alien (RA)
Sec. 22(F), NIRC b. Non-resident alien (NRA) Sec. 22(G), NIRC i.
NRA-engaged in trade or business (NRA-TB) 180-day test
Sec. 25(A.1), NIRC ii. Non-resident alien not engaged in trade or business (NRA-XTB) iii. Aliens employed by regional headquarters of multinational/by offshore banking units/petroleum service contractors
Secs. 25 (C), 22 (DD) and 22 (EE), NIRC iv. Aliens employed by OBUs
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Sec. 25 (D), NIRC v. Aliens employed by petroleum contractors/subcontractors
Sec. 25(E), NIRC B. Taxation of Income of Resident Citizens: 1. General Rule: a. Residents who are Citizens – Taxable on income from ALL sources (within and without the Philippines) b. Resident Aliens - taxable on income from sources WITHIN the Philippines
2. General: Taxation of Compensation Income a. Inclusions i.
Monetary compensation
Regular salary/wage
Separation pay/retirement benefit not otherwise exempt under Sec. 32(B), NIRC
RR 1-68 as amended by RR 1-83 and RR 10-83
Bonuses, 13th Month Pay and other benefits unless exempt under Sec. 32(B), NIRC
Director’s Fees
RMC 34-08 ii. Non-monetary compensation income
Fringe benefits not subject to fringe benefits tax (FBT)
Sec. 33, NIRC RR 2-98 RR 3-98 b. Exclusions i.
Fringe benefits already subject to FBT RR 3-98, as amended by RR 8-00; RR 10-00; RR 5-08
ii. De Minimis Benefits
RR 3-98, as amended by RR 10-00 dated Dec. 14, 2000 RR 5-08 dated April 17, 2008 RR 010-08 dated July 8, 2008 RR 001-15 dated Jan 5. 2015 iii. 13th month pay and other benefits and payments specifically excluded from taxable compensation income
29
Sec. 32(B)(7,e), NIRC; amended by RA 10653 c. Deductions
Sec. 35, NIRC i. Personal Exemptions and Additional Exemptions Sec. 35, NIRC RA No. 9504 RR 10-2008 Pansacola vs. CIR (507 SCRA 81) ii.
Health and hospitalization insurance
Sec. 34(M), NIRC 3. Taxation of Compensation Income of a Minimum Wage Earner Republic Act No. 9504 Definition of Statutory Minimum Wage Definition of Minimum Wage Earner Income also subject to tax exemption: h oliday pay, overtime pay, night shift differential, and hazard 4. Taxation of Business Income/Income from the Practice of Profession Formula: (pure business/professional income)
Gross Business Income &/or Income from Practice of Profession
xxx
Less: (a) Allowable Deduction (itemized or optional deduction)
(xxx)
(b) Personal & Additional Exemptions and hospitalization/health insurance premium
(xxx)
Total Taxable Income
xxx
Multiplied by: Tax Rate
xxx
Income Tax
xxx
Less: Creditable Withholding Tax on Compensation Income / Other Allowable Tax Credit Tax Payable
(xxx) xxx
a. Gross Income – includes all income from business or practice of profession during the taxable year (whether accrued or actually received, depending on the accounting method used)
Refer to Part IV of Outline b. Allowable deductions from Gross Income
Refer to Part VI (C) – (E) of Outline 5. Income from dealings in properties other than capital assets (e.g. sale of office equipment)
30
-
Included as part of business income or income from the practice of profession
6. Taxation of Passive Income a. Passive income subject to final tax (withheld at source and remitted to the BIR by the payor of the income: no longer to be reported in the ITR) i.
Interest income
Sec. 24(B), NIRC
Interest from ANY CURRENCY bank deposit/any other monetary benefit from deposit substitutes/trust funds / similar arrangements
Interest income received by a resident individual taxpayer from a depository bank under the FCDU System RR 10-98
Interest income from long-term (5-yr) deposit / investment evidenced by certificates prescribed by BSP
ii. Royalties
Sec. 24 (B), NIRC RMC 44-05 RMC 77-2003 iii. Dividends from domestic corp.
Sec. 24(B), NIRC iv. Prizes (except prizes amounting to ten thou sands pesos (P10,000.00) or less which shall be subject to tax under Sec. 24(A) of the Code)
Sec. 24(B), NIRC v. Other winnings (except PCSO / lotto winnings) derived from sources within R.P.
Sec. 24(B), NIRC b. Passive Income NOT Subject to Final Tax (to be reported in the taxpayer’s ITR)
Sec. 24(A)(1), NIRC 7. Taxation of Capital Gains a. Income from sale of shares of stock of a Philippine corporation i.
Shares traded and listed in the stock exchange
Sec. 24(C); Sec. 127, NIRC RR 6-08 dated April 22, 2008 RMC 73-07 ii. Shares not listed and traded in the stock exchange
Sec. 24(C), NIRC
31
RR 6-08 dated April 22, 2008 b. Income from the sale of real property situated in the Philippines i.
General rule
Sec. 24(D.1), NIRC RR 8-98 ii. Exception
Sec. 24 (D,2), NIRC RR 13-99, as amended by RR 14-00 RMC 45-02 c. Income from the sale / exchange / other disposition of other capital assets i.
Special rules to be applied
Sec. 39 (B) – (D), NIRC
Loss limitation rule Loss carry-over rule Holding period rule
ii. Taxation of capital gain
Sec. 24(A), NIRC C. Taxation of Non-resident Citizens
Secs. 23(B) and 24(A), NIRC 1. General Rule: Income from sources within the Philippines are taxed exactly as income of resident citizens, except as indicated below. 2. Exceptions: a. Taxation of interest income from depository foreign currency deposit system
banks under the expanded
RR 10-98 b. Income from sources outside of the Philippines – not subject to Phil. income tax D. Taxation of Non-resident Aliens Engaged in Trade or Business in the Philippines
Sec. 25(A), NIRC 1. General Rule: They are taxed exactly as resident citizens but only on their income from sources within the Philippines., except as indicated below. Their income from foreign sources are exempt from Philippine inc ome tax. 2. Exceptions:
32
a. Limitation on deductible tax credit
Sec. 34(C)(2), NIRC b. Interest income from foreign currency-denominated deposits with FCDUs – EXEMPT from tax
Sec. 24(B), NIRC RR 10-98 c. Amount of deductible personal exemption
Sec. 35(D) E. Taxation of Non-resident Aliens NOT Engaged in Trade or Business in the Philippines 1. General Rule: Gross income (i.e. WITHOUT deductions) from Philippine sources shall be taxes at the fixed FLAT rate of 25%. Sec. 25(B), NIRC 2. Exceptions: a. Capital gain from sale of shares of stock – exactly the same as resident citizens b. Capital gain from sale of real property situated in the Philippines exactly the same as resident citizens c. Interest income from foreign currency-denominated deposits with FCDUs – EXEMPT from tax
Sec. 24(B), NIRC RR 10-98 F. Individual Taxpayers Exempt from Income Tax 1. Senior citizens
RA No. 7432 as amended by RA 9994 RR 07-2010 as amended by RR 11-15 and RR 8-2010 Carlos Superdrug v. DSWS (526 SCRA 130) 2. Exemptions granted under international agreements
Reagan v. Com. (30 SCRA 968) Com. v. Robertson (143 SCRA 397) Tax treaty provision G. Individuals Subject to Special Rates 1. Aliens employed by regional headquarters of multinational / by offshore banking units / petroleum service contractors
33
Secs. 25(C), 22(DD) and 22(EE), NIRC 2. Aliens employed by OBUs
Sec. 25(D), NIRC 3. Aliens employed by petroleum contractors / subcontractors
Sec. 25(E), NIRC IX.
TAXATION OF CORPORATIONS (Mamalateo, pp. 37-59) A. Classification of Corporate Taxpayers (Recall: Part III(B)) 1. Domestic corporation, defined a. Partnership taxable as corporation Test whether an entity is a taxable partnership
Ona v. Commissioner (45 SCRA 74) b. Joint Venture (JV) and Consortium i.
Exempt JV/consortium
ii. Taxable JV/consortium 2. Foreign Corporations a. Resident foreign corporation (RFC) b. Non-resident foreign corporation (NRFC)
Marubeni v. Com. (177 SCRA 500) c. Subsidiary v. branch of a foreign corporation 3. Tax-exempt corporations
Sec. 30; 27(C), NIRC RMC 76-2003 Review: Exemption under the Constitution Hospital de San Juan de Dios v. Pasay City (16 SCRA 226) B. Taxation of Domestic Corporation 1. Taxation of Business Income a. Computation of Allowable Deductions i.
Itemized Deduction (Refer to VII (C))
ii. Optional Standard Deduction (Refer to VII(D)) b. Computation of Tax Payable i.
Regular Tax: Section 27, NIRC
ii. MCIT (Mamalateo, pp. 445-463)
34
Section 27(E), NIRC RR 9-98 RR 12-07 RMC 30-08 2. Taxation of Passive Income a. Passive Income Subject to Final Tax b. Passive Income NOT Subject to Final Tax 3. Taxation of Capital Gains a. Income from sale of shares of stock
RR-6-08 b. Income from the sale of real property situated in the Philippines c. Income from the sale / exchange / other disposition of other capital assets 4. Other Taxes Imposed on Corporations: Improperly Accumulated Earnings Tax (IAET) (Mamalateo, pp. 463-470)
RR 2-2001 Cyanamid Phils., Inc. v. CA (322 SCRA 639) C. Taxation of Resident Foreign Corporations with respect to their income from sources WITHIN the Philippines 1. Definition
Section 22(H), NIRC Includes: Offshore Banking Units (“OBUs”) Regional Operating Headquarters (“ROHQs”) 2. Taxation of RFCs:
Section 28(A), NIRC 3. Taxation of Branch Profits Remittance Tax a. Entities exempt from BRFT: PEZA, SBMA-registered enterprises b. Not deemed remittance of branch profit: remittable profits transferred to a Philippine corporation; remittance of assigned capital c. Deemed Branch Profit Remittance: see Revenue Memorandum Ruling 1-2001 (IV)
Marubeni vs. CIR 177 SCRA 500 D. Taxation of Non-resident Foreign Corporations with respect to their income from sources WITHOUT the Philippines 1. Definition:
Section 22(1), NIRC
2. Taxation of NRFCs:
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